Mark Thoma gives Us a good Explanation of why falling Wages actually increase Unemployment–I would read everything twice if I were a Student, and outline the 2nd Generation effects. A simple economic model would be to establish the basic Household Expenditures under the current Wage, and the basic Household Expenditures of a Household drawing a Wage similar to the Wage Cut; then add an Average $300 per year for Debt Service from the original Household Expenditure Pattern to the reduced Income Expenditure. You can add in the Inflation rate expected, if one wants to finesse the model. The frightening thing is the absolute rigidity of both Debt Service and Inflation. The compiled economic model gives the impression that a 3-5% cut in nominal Wages will evolve in a 10-12% Cut in real Wages. Most Economists would claim that my model reflects only a nominal Wage reduced by the factor of Inflation, but they never had to scramble to pay their bills like most Households. One has to start with brand-new entrant Households, to achieve the economic effects which Economists expound. Economic policy of Wage Cuts to incite Employment seem outright Wrong to me, but what do I know?
I find this Post to be most amusing, because of the structural difference between the OMB and the CBO. The OMB is a What-If organization, while the CBO is legislatively limited to current enactments, no matter How Likely they are to be changed. The CBO cannot legally envision alteration of the federal government, so they must base their predictions on current and future legislated Expenditure patterns. The OMB can run free, and dream of Cuts in federal spending without proving those Cuts are realistic, and even suggest that future federal spending could be more economically effective than is the current mess; which they can suggest may be an improved pattern over the general run of federal involvement. The Reader should understand that the Founding Fathers sought to limit excesses in Spending coming from Politics, by limiting Enabling Acts to Congress, without President or Department able to announce their own budget. No Decision-making process will ever survive independent of Politics–your basic Corruption process; at which time any Savings go out the Window.
I cannot argue with this Post by Mark Perry, the information is relatively correct in all parts ( I have not checked it). The Question to be asked is not concerning the data, but How the inequality in Income developed which led to this Tax placement scenario. It was not a vast increase in taxes–either on the Rich or Poor. This means it had to be a vast acceleration in Income growth for a specific segment of the Population, while Everyone else remained static in Income. Study indicates a culprit totally unrelated to economic efficiency; specifically, the defeat of regulatory controls at all levels of Government. Business adherence to regulation by Government is as low as it has even been since the Continental Congress, and the Appeals process has been deformed in the Courts, to assure this continued independence. There will not be much Change in the current matrix, until a solid Regulatory Reform system is implemented; and I feel so sorry for those One-Percenters, who make so much money that they have to pay for the Government (of course, they did buy it!). lgl