Sunday, March 01, 2009

Beware!! Prices are falling

The Times has this front page news item. It is back to Keynesian Economics again, talking about deflation and unemployment. However here is something puzzling. The article mentions that prices will be 2% to 3% lower by September compared to a year before. Let me understand this right, the private sector is freezing and cutting salaries, and prices are falling at the same time and that is a cause of concern? Remember the basic budget equation I = PxX +PyY. I is falling, Px and Py are also falling and we are terribly concerned!! I don't get the logic. I understand that falling I is not that good, and my sympathies to those who have had to take a pay cut. But when your desk gets cluttered, you clear out the mess right!! You get rid of papers you do not need anymore and this is similar here. In basic positive economic terms, we are simply economizing. No reason to lament it. On a different note, I am glad to see the article report that the Public sector is doing nothing to cut salaries, and is in fact raising salaries. What does that tell us about efficiency and business savviness in the public sector?

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