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Thursday, June 26, 2003

Labour Surplus as the 'Buffer Stock'

Well I'm having a nice day, for once Joerg is happy with something. He liked Eddie's piece yesterday, so did I.

Good points from Eddie.

Did you catch the Economist´s latest recommendations for India? You guessed it: part of the package they propose is labour reform.

I just read an interesting piece of local news. The metal workers´ union organized a strike against Panasonic. Panasonic wants to keep up production. How do they go about it? They fly in workers from Japan. Germany seems to be tilting towards labour reform as the preferred strategy of dealing with the problems lying ahead. There are many proposals
being forwarded by industry associations that center around lengthening the workweek. While these meet with opposition from the unions, my perception is that the unions are rapidly losing influence.

Yesterday I listened to talk radio while driving. One doctor phoned in to say every German should donate eight hours per week to get the export machine moving again. Polls suggest that 45% of the population support reverting to longer work-hours. Industrialists claim Germans are not competitive with Americans because they work 20% less than Americans do. This argument is gaining traction.

Under the gold standard, the price of gold was the "fix" that all other economic variables were subjected to, i.e., gold served as a buffer stock commodity that dictated the direction of the real economy. While in principle other commodities could serve the same function, there doesn´t seem to be any advantage in returning to either a gold standard or
some other form of commodity standard. We could, however, come to the realization that labour should serve as the buffer stock. I am not sure we will ever arrive at a "knowledge economy" without promoting labour to this privileged status. Currently, however, many countries in the world operate on the principle of considering their export surplus as such a buffer stock. That surplus is the variable that they try to fix - to change into a constant -, i.e., they conduct monetary and fiscal policy such that the buffer stock remains reproducible (under a gold standard the operative term would have been "credible"). The tail - the export segment of the economy - gets to wag the dog.

Meanwhile, the deflation dominoes start falling: CPI data from Mexico, Chile and Argentina show prices are decreasing. In Israel, the cost of living dropped at a 5% rate in the last 3 months. If deflation arrives in the U.S., it is going to bury the debtors there.

I guess the part Joerg is referring to in the Economist is the following:

Policy changes could do much to help India catch up: cutting import duties; simplifying and cutting indirect taxes; reducing the list of industries “reserved” for small companies; easing labour laws to make hiring and firing and the use of contract workers easier. Indeed some of these reforms are already, slowly, under way, or at least under consideration.
Source: The Economist

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