I've read arguments in response to Krugman's column this morning that wage deflation in Europe achieves the same effect as devaluation. Of course, one must keep an eye on the relationship between wage deflation in some classes versus increase in others. It's no secret that the very rich have a much greater concentration of wealth than they used to, and one could easily imagine scenarios in which wage deflation make the rich richer. The only natural way to address any of these imbalances is to tax the rich.

Here's an anecdote from my brother on Wall Street: because of the pressure from the US gov't on Wall Street, upper management has reduced the percentage of bonuses for all workers. But they have also reduced salaries which provided the base for most workers at the lower end of the pay scale (i.e. $100k to $250k). These workers are making half of what they used to, and they comprise the majority of the workforce on Wall Street. The logic behind their wage reductions is the horrid job market but also the political pressure to reduce mortgages. Now, when you look at the quarterly report of the banks, they are not only increasing revenue, but their margins are expanding. This is why they are making more money than ever before. And paradoxically, a smaller bonus % for the whole company yields bigger bonuses than ever before because at the end of the day, the margins have expanded. They are taking a smaller % of a much, much bigger pie, a pie created by the 50%-75% income haircut at the bottom of the payscale.

Now, how would you address this dynamic?