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Home Publications Blogs Beat the Press Not All Economists Expect Spain's Recession to Bring About Deflation

Not All Economists Expect Spain's Recession to Bring About Deflation

Thursday, 03 May 2012 05:27

In reference to the high unemployment rate in Spain the Post told readers:

"The recession also is expected to force down wages and prices and, over time, make Spanish exports more competitive and the country more attractive to investors and tourists."

Actually there are few, if any, examples of countries where high unemployment led to this process of falling wages and prices that in turn restored competitiveness. Wages tend to be very sticky downward, which is why prices in countries across the euro zone, even those with double-digit unemployment, continue to rise.

It's also not clear these economies would benefit even if they did have deflation. This would make real interest rates higher (borrowers would have to repay loans in money that is worth more than what they borrowed) and also increase the interest burden for homeowners with mortgages and other debtors.

Many economists have made these points. It is therefore misleading readers to imply that there is a simple story whereby Spain's high unemployment is a step in a process toward restoring prosperity.

Comments (2)Add Comment
written by Bloix, May 03, 2012 4:37
As the Irish know, long-term high unemployment leads not to prosperity, but to emigration. The healthy, young, intelligent, ambitious and educated leave. Historically this has been easy for the Irish because they can easily be absorbed into the much larger economies of England and the US. But with open employment borders among the EU countries, the Spanish are beginning to leave as well, many of them for Germany, see, e.g., http://www.virtuepolitics.com/...migration/

In Ireland, 150 years of emigration after the Famine gave it a depressed economy and the status of cultural backwater, plagued by poverty, alcoholism and religious obscurantism. It was the West Virginia of Europe. If Spain wants to go that way, it is heading in the right direction.

the government could do it
written by tew, May 04, 2012 12:22
If you're an advocate of government taking an active role in economic affairs and consider the sticky prices a form of market failure, then you should advocate the government mandate wage decreases across the board.

If you're in favor of government policies that support higher wages in good times, should you not support policies that demand lower wages to address imbalances?

What good are technocrats if they can't act to simply nudge wages to the correct level?

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.