Sunday, March 3, 2013

The welfare costs of a 30% devaluation

When I meet a friend from another country, he or she lately asks me how are we coping with the current crisis in Spain. Well, I'm fine, thanks. But not everybody is an upper-middle class middle age academic with a permanent job. Spain is in the way to suffer a 30% internal devaluation, according to the forecast of two economists of almost opposite ideas, such as Krugman and Sinn. How does it feel to be approaching the mark of being 30% poorer? To answer this important question, two important things must be remembered:
-First, 30% is an average. Some of us, so far, have some flexibility to accept some more extra work (extra classes, extra projects, extra commitments), so that revenues stay at least so far not at a very different level than at the beginning of the crisis. We'll see if our purchasing power will be very affected at the end of the process. But those of us who are not unemployed and who have liberal jobs, from the point of view of private goods, I'd dare to say that we are not suffering much. Perhaps a little bit, but since the marginal utility of income increases at a decreasing rate, our welfare has not suffered a lot. But those that have gone unemployed, or that kept jobs that were already badly paid, they are suffering much more.
-Second, the 30% affects not only private goods, but also public goods. The ability to fund public goods and services suffers, and the strong distributive tensions (not only between income levels, but also between different types of groups and territories) mean that collective agreements are much more difficult because of distrust and institutional crisis. To the extent that public goods and services (not only health and education, but also politics) contribute to social welfare, and I think they do heavily, we are all worse-off and can still be much worse.

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