An anonymous reader of this blog has suggested that we can ride out the current slump with pay cuts:

Seriously though, in disinflationary times like this it would really help to not have minimum wage laws, and we also need more flexible wages in general (sorry unions). That obviously doesn't solve the whole problem of recession, since the damage is already done to enough companies, but it could make recovery come sooner as those still in the black may have a better chance of weathering the storm if they can cut costs on labor.

With some implication that the drop in prices is an indication that labor is paid too much and we now have more labor and resources than society needs. For full text see here.

His suggestion is seconded, with considerably less smugness, by an Op Ed in today's NY Times. Wonks Anonymous expects that he is in numerous, if not good, company and would like to take some space to discuss the flaws in this reasoning.

This is an example of the fallacy of composition. That is the assumption that choices or situations that benefit individuals and firms, when they act alone, must benefit the economy as a whole when everybody does the same thing.

It is true that, when an individual industry or firm sees prices drop, this is a signal from the so called price system that society has too much of their output. In these circumstances it might be wise to cut prices, cut pay, cut output and consider finding a job elsewhere. When prices are more or less stable the amount of money that a good costs is a reliable indicator of the relative value of that good vis a vis other goods.

In inflation and deflation prices are no longer reliable signals. Producers quickly learn to discount inflation and do not respond to increasing prices with increased output.

In deflation producers try to cut prices and costs. To do so they follow the usual MBA approved methods. They lay people off, cut bonuses and go to the unions for concessions - for example cheaper health plans and lower retirement benefits. Everybody is doing it, right now, even as Wonks Anonymous writes this piece.

And people who see their incomes drop respond by cutting back on their purchases. Firms discover that the demand for their products has fallen still more. They cut production, prices and costs still more. Which cuts lead to further cuts in income and consumption. The cycle repeats. It will likely continue through the end of this year.

The cuts will cause further problems. Our money supply depends on loans. It increases if banks loan more and its continued health depends on repayment of these loans. As prices and incomes drop it becomes more difficult to repay old loans that were based on higher prices and higher incomes. Loans that were secure are transformed into junk. Cuts in the money supply lead to further cuts in demand.

Go up two paragraphs and repeat the process several times.

We cannot expect that wage and price cuts will lead us out of this one. Each time we cut output and wages, spending will drop. Lower spending will demand further cuts. We will never satisfy this monster.

Now it is obvious that the reader who made the comment and the writer in the Times both are college educated and have even taken some courses in economics. They could probably even talk at length about why increases in the supply of money in inflationary times are a bad idea. It is painfully obvious that they have never been introduced to Keynes General Theory which is a fine, readable exposition of how the economy works in a depression. It does, however, take some active thought and work to read and understand

Their class time was more likely taken up with general praise of the magic of the market, horror stories about hyperinflation and suggestions that tax cuts will cure all economic ills. These subjects can be easily taught without assigning or grading real homework etc. They are also more popular with deans students and parents.