The exogenous driving force for this simulation is the price level p. A plot of 1/p, the purchasing power, is shown as the red line below. The principal events considered were:

  • The dollar devalution of 1933 from 1/20 oz gold to 1/35 ;
  • A constant 4% inflation rate from 1940 interrupted by
  • The Volcker credit squeeze from 1979-83 modeled here as 0% inflation for that interval.

The principal response outcomes were:

  • High employment levels starting in 1940
  • An oscillating decline in wage share since start of the inflation
  • A partial recovery bounce in the wage share starting in 1979
  • An employment recession starting in 1980 followed by recovery about 1992
  • A secondary bounce in wage share following the employment recovery
  • A monotonic decline in wage share since the housing bubble period 1997-2005
  • A monotonic collapse in employment starting in 2020

The turbulence in the wage share starting in 1979 is significant as it shows the system response to a deflationary shock. The wage share bounce which resulted caused an employment recession. The dynamics of this deflationary shock need to be understood in order to understand a recovery scenario.

The 3 figures below show wage share data from Europe and Australia. While different researchers define wage share in varying ways, the shape of the curves is the most important consideration. I haven’t yet come across wage share curves for the US. !! —> UPDATE!!

UPDATE!


As the 2 figures above show, real income starts to decline in 2020 and real output starts slowing at that point.

A Recovery Scenario

A useful question to ask is what would have happened if Volcker’s 1979 Fed policies had been maintained and the US reverted to a gold standard. After the start of Volcker’s high interest rate policy, the price of gold fell from its speculative value of $850/oz to a nonspeculative value of $300/oz. In order to maintain a fixed dollar at $300/oz with the workforce growing at %1.23/year, a deflation of %1.23/year would result for a fixed volume of gold. The figures below show this simulation.
Of course, if the tight credit were to cause bankruptcies of debt encumbered firms, the price level would fall until gold was at, say, $67/oz
In both cases the wage share recovers after a short, moderate recession. Whether gold is at $300 or $67/oz, the slight deflation necessary to maintain a fixed price would cause all goods to decline in price relative to gold. Economist George Selgin has written on why this would be good. Website
Converting back to a gold standard in 1980 would have been simpler than waiting until 2012 where gold would be at $400/oz (nonspeculative)
or at $67/oz
Of course, these would be preferable to waiting until 2020 where some truly ghastly recessions would follow a gold standard return.