IS-LM curves in economics, and its validity today.

[Swamp Fox]

When I was an undergrad, studying economics, the IS-LM curves were the staple of macroeconomics. But that model assumed price stability, which means that, when inflation shot up after the oil shock of 1973, it became invalid and needed serious work. Today, it's become valid again, because China and other low-wage countries have held down prices.

I've said this before, and some of you have argued that there must be a better way to fight inflation without sacrificing wages. Well, in the 1970's, when there was inflation, people's wages went down in real terms, because they needed more dollars to buy the same amount of goods and services, and they weren't getting enough of those more dollars.

Now, at least we have the same problem, stagnant wages, but at least we can deal with it in an environment of price stability, which means we've onbe less problem to solve.

Thank God for price stability. (http://economist.com/finance/displayStory.cfm?story_id=4274896)

[Swamp Fox]

Aha, now that I know how to paste text with links, I'll continue - thanks, Coot.

I accept that wages are stagnant or may even fall, but that's doesn't mean they won't rise again. (http://economist.com/World/na/displayStory.cfm?story_id=4275114)

[tke711]

Stanley, I thought you would like the following article, since you are now an economic hobbiest. ;)

Why a booming economy feels flat (http://www.csmonitor.com/2005/0822/p01s03-usec.html)

[Swamp Fox]

Thanks for the link, bud - I really appreciate it. :)

Normally, as employees are able to produce more in each hour of work, the result is greater cash flow that can be divvied up between workers and owners or investors. In the long run, rising productivity means rising wages and living standards.

But in the short run, "most of the gains in the economy have gone into profits rather than wages," says Mr. Behravesh.

But that's not true as of now, because wages aren't rising.

The divergence between productivity has sparked a debate among economists. Some say the gap is temporary, and will narrow as the labor market tightens and workers get more leverage to bargain. Others worry that it's a sign of new realities in the global marketplace that are pushing down US wages as workers compete with increasingly educated rivals in places such as India, China, and South Korea.

I'm with the first group and, in the long run, wages will rise. The same phenomenon happened in the 1980's, and the global expansion of the labor market led to the same thing, but it didn't stop the wage rises of the 1990's; today, wages are rising in China and India, and, even though there are billions more in the wings, that won't stop wages rising next decade. Ten years or even seven is a long time, but wages will rise again.