Puzzling Bernanke Quote

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Tony Lima
August 3, 2010

Headline from today’s New York Times: “Bernanke Says Rising Wages Will Lift Spending” (August 3, page B7).

“Will?”

Parsing this quote is a task probably left to Talmudic scholars or others wiser than me.  But let’s consider some possibilities.

1. “If wages rise, then spending will also rise.”  I don’t think there’s much doubt about that.  The only issue is the assumption that wages will rise.

2. “The Fed is forecasting that wages will rise.  That will cause spending to rise.”  This seems closes to Dr. Bernanke’s point.  And the Fed has very, very good economic forecasters.  But there are two factors weighing against an increase in wages.  First, the unemployment rate remains high.  Rising wages in the face of an excess supply of labor has happened before — notably during the Great Depression — but I don’t think it’s something that should be assumed to happen regularly.  Second, various government policies that mandate new benefits for employees are likely to keep unemployment high for a long time.

3. “I need to say something today to bolster confidence in the economy.”  Probably also true.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.