(02) Automatic wage indexation system, should it be stopped?
I do not understand humans anymore, and especially those who earn lots of money, often the so called bankers and economics. I will explain this via the automatic wage indexation system, something that we still use in Belgium but a growing number of politicians, business people and some ordinary people are saying it should disappear as it is damaging the economy.
In this article I will try to explain why I think it is wrong to stop this system, and why I believe it is one of the best systems ever. But, indeed, there is one system that should disappear: the bonus system as that destroys the whole financial system because it blinds people.
In Belgium, the automatic wage indexation system is used to calculate and changes our salaries. This is a system whereby the wages and salaries are automatically adjusted according to inflation (or deflation). This means that the price evolution of a number of products (but not all) determine the evolution of wages and salaries. Whenever changes in the price of products reach a certain threshold, automatically there will be a change in peoples wages and salaries. Until now I lived in a society with inflation, therefore prices of products increases on average, and thus the automatic wage indexation system results in increased salaries. (I am not sure what would happen when product prices would go down (thus deflation); I would expect this means salaries should go down but I don't think many politicians would allow this to happen as it would be the end of their political career).
The changes in salaries and wages are always behind the price changes in society: first the prices of the products change significantly enough before salaries are affected. If all useful products were taking into account, I would prefer the indexation not to change as this would mean stable prices on the markets. Still, many people hope the index will be reached as their salary or wages will increase, without realising this mostly means prices of products went up even more than the increase in their salary.
Therefore, as the changes in wages and salaries are behind the real price changes, I think employers should embrace this system (they will sell their products at a higher price before having to pay their employees higher salaries). Only when the prices of products go down the system is temporarily a disadvantage for employers because the decrease in wages and salaries would follow the decrease in the price of products (thus people would be temporarily richer).
In Belgium, politicians from the liberal parties Open-VLD and MR want to abolish the automatic wage indexation system, arguing that it is too expensive during bad economical times. Of course, most people are against abolishing the automatic wage indexation system. This is normal as it is the only system left for ordinary people to have a (small) increase in income while life becomes more expensive. But, I wander how many people would defend the system when it would result in a lowering of their income due to deflation. In that case I think most people would not mind dropping the indexation system.
And still, I would defend this automatic wage indexation system. Indeed, when prices go down, salaries would decrease within the indexation system but people would still be able to buy everything they did before without changing much of their lifestyle. And as explained above, for a short time people would be richer than before because the drop in their salaries (due to the nature of the indexation system) would be slower than the changes in the prices of goods. And while the system would result in income cuts when the price of products decreases, it would also results in increases in our salaries when product prices would rise again. Therefore, the system would prevent big fluctuations in our ability to buy products.
There is one big problem: some people earn too much money, and this is particularly a problem when they receive big bonuses. These people earn so much money their money doesn't stimulate the economy. Some people earn lots of money but they reinvest their money in the economy, thus stimulating the economy. But most people earning lots of money, especially via enormous bonuses, do not deserve to get this money. They work for themselves and not for the benefit of the company and society and often they only spent the money for their own pleasures, pleasures that do not stimulate the economy much (e.g. drinking expensive champagne in stead of (cheap) wine: spending lots of money on the same number of bottles of champagne as other people do on wine will (indirectly) employ the same number of people for both products (I know champagne needs more care than wine, therefore a few extra people will be employed)). These bonuses are independent from the indexation system, so when salaries go up due to the indexation, they will receive the same bonus (although their salary will change). For this reason, many of these people are not interested in the automatic wage indexation system as it has only a small effect on their wages. When some people claim we should abolish the indexation system because it damages our economy, these people (often working for financial institutions) fear for their bonus as the system might damage the economy (and thus their bonuses). Therefore, they agree this system should be finished.
Because ordinary people see some people get large amounts of money on top of their salaries, they are asking their unions to negotiate for extra pay on top of the automatic indexation of their salaries to compensate a little for the big bonuses their bosses pay themselves. This is only logical, but it can break the indexation system (especially when the bosses are telling their employees are asking too much). Another problem is that other countries dropped this system (because the politicians were convinced by employers that the system was too expensive and bad for the economy). As a result, each time people get a small increase in salaries in Belgium, employees in our neighbouring countries don't get this increase, therefore causing a disadvantage for our economy. Therefore, Belgium will probably have no other choice than to follow the other countries in ending the indexation system. In the meantime, people in the surrounding countries are having it more and more difficult to live as their wages do not increase at the same speed as food and other prices (thus increasing the chances for unrest).
The indexation system should be the only system that affects the wages while bonuses should be abolished. People should be happy with the earnings they get for their job. If not, they can always try to work somewhere else for more money. (Of course, I don't say people can't ask for a pay increase for the work they are doing. And people can climb the career ladder within a framework and without the excesses as a result earn (slightly) more). And sometimes the government should allow an adjustment of the wages outside the indexation system because each system has its own flaws that needs corrections from outside.
In summary, a major government (the EU) should stop the payment of major bonuses, especially in banks that made major errors. The EU should not stop countries having the automatic wage indexation system. On the contrary, the EU should reintroduce this system in all European countries, therefore removing the argument it causes false competition between European countries.
However, I think the EU will force countries in difficulties to stop the indexation mechanism, arguing it will save their economy. In the meanwhile, financial institutions will continue betting against countries. Thus, more people will become angry with economists. Finally, politicians will realise the problem are the financial institutions because they think they can do as they please as they are untouchable, "Masters of the Universe". Then, an important person might loose lots of money and punish the bankers. But first he might have sustained them.
And so, history might repeat itself: the same things might happen as happened at the end of the 18th and beginning of the 20th century. That is why I do not understand these people who earn so much money. If they would only share some of their earnings, even if it would be to give the illusion they are on the side of ordinary people.
---------------------------------------------------------------------------------------------------------------
I think I understand some of the principles of indexation and inflation/deflation. However, you might notice major errors. In that case I would like to learn more about the principles. But keep it simple as our very complicated system only resulted in collapse.
In this article I will try to explain why I think it is wrong to stop this system, and why I believe it is one of the best systems ever. But, indeed, there is one system that should disappear: the bonus system as that destroys the whole financial system because it blinds people.
In Belgium, the automatic wage indexation system is used to calculate and changes our salaries. This is a system whereby the wages and salaries are automatically adjusted according to inflation (or deflation). This means that the price evolution of a number of products (but not all) determine the evolution of wages and salaries. Whenever changes in the price of products reach a certain threshold, automatically there will be a change in peoples wages and salaries. Until now I lived in a society with inflation, therefore prices of products increases on average, and thus the automatic wage indexation system results in increased salaries. (I am not sure what would happen when product prices would go down (thus deflation); I would expect this means salaries should go down but I don't think many politicians would allow this to happen as it would be the end of their political career).
The changes in salaries and wages are always behind the price changes in society: first the prices of the products change significantly enough before salaries are affected. If all useful products were taking into account, I would prefer the indexation not to change as this would mean stable prices on the markets. Still, many people hope the index will be reached as their salary or wages will increase, without realising this mostly means prices of products went up even more than the increase in their salary.
Therefore, as the changes in wages and salaries are behind the real price changes, I think employers should embrace this system (they will sell their products at a higher price before having to pay their employees higher salaries). Only when the prices of products go down the system is temporarily a disadvantage for employers because the decrease in wages and salaries would follow the decrease in the price of products (thus people would be temporarily richer).
In Belgium, politicians from the liberal parties Open-VLD and MR want to abolish the automatic wage indexation system, arguing that it is too expensive during bad economical times. Of course, most people are against abolishing the automatic wage indexation system. This is normal as it is the only system left for ordinary people to have a (small) increase in income while life becomes more expensive. But, I wander how many people would defend the system when it would result in a lowering of their income due to deflation. In that case I think most people would not mind dropping the indexation system.
And still, I would defend this automatic wage indexation system. Indeed, when prices go down, salaries would decrease within the indexation system but people would still be able to buy everything they did before without changing much of their lifestyle. And as explained above, for a short time people would be richer than before because the drop in their salaries (due to the nature of the indexation system) would be slower than the changes in the prices of goods. And while the system would result in income cuts when the price of products decreases, it would also results in increases in our salaries when product prices would rise again. Therefore, the system would prevent big fluctuations in our ability to buy products.
There is one big problem: some people earn too much money, and this is particularly a problem when they receive big bonuses. These people earn so much money their money doesn't stimulate the economy. Some people earn lots of money but they reinvest their money in the economy, thus stimulating the economy. But most people earning lots of money, especially via enormous bonuses, do not deserve to get this money. They work for themselves and not for the benefit of the company and society and often they only spent the money for their own pleasures, pleasures that do not stimulate the economy much (e.g. drinking expensive champagne in stead of (cheap) wine: spending lots of money on the same number of bottles of champagne as other people do on wine will (indirectly) employ the same number of people for both products (I know champagne needs more care than wine, therefore a few extra people will be employed)). These bonuses are independent from the indexation system, so when salaries go up due to the indexation, they will receive the same bonus (although their salary will change). For this reason, many of these people are not interested in the automatic wage indexation system as it has only a small effect on their wages. When some people claim we should abolish the indexation system because it damages our economy, these people (often working for financial institutions) fear for their bonus as the system might damage the economy (and thus their bonuses). Therefore, they agree this system should be finished.
Because ordinary people see some people get large amounts of money on top of their salaries, they are asking their unions to negotiate for extra pay on top of the automatic indexation of their salaries to compensate a little for the big bonuses their bosses pay themselves. This is only logical, but it can break the indexation system (especially when the bosses are telling their employees are asking too much). Another problem is that other countries dropped this system (because the politicians were convinced by employers that the system was too expensive and bad for the economy). As a result, each time people get a small increase in salaries in Belgium, employees in our neighbouring countries don't get this increase, therefore causing a disadvantage for our economy. Therefore, Belgium will probably have no other choice than to follow the other countries in ending the indexation system. In the meantime, people in the surrounding countries are having it more and more difficult to live as their wages do not increase at the same speed as food and other prices (thus increasing the chances for unrest).
The indexation system should be the only system that affects the wages while bonuses should be abolished. People should be happy with the earnings they get for their job. If not, they can always try to work somewhere else for more money. (Of course, I don't say people can't ask for a pay increase for the work they are doing. And people can climb the career ladder within a framework and without the excesses as a result earn (slightly) more). And sometimes the government should allow an adjustment of the wages outside the indexation system because each system has its own flaws that needs corrections from outside.
In summary, a major government (the EU) should stop the payment of major bonuses, especially in banks that made major errors. The EU should not stop countries having the automatic wage indexation system. On the contrary, the EU should reintroduce this system in all European countries, therefore removing the argument it causes false competition between European countries.
However, I think the EU will force countries in difficulties to stop the indexation mechanism, arguing it will save their economy. In the meanwhile, financial institutions will continue betting against countries. Thus, more people will become angry with economists. Finally, politicians will realise the problem are the financial institutions because they think they can do as they please as they are untouchable, "Masters of the Universe". Then, an important person might loose lots of money and punish the bankers. But first he might have sustained them.
And so, history might repeat itself: the same things might happen as happened at the end of the 18th and beginning of the 20th century. That is why I do not understand these people who earn so much money. If they would only share some of their earnings, even if it would be to give the illusion they are on the side of ordinary people.
---------------------------------------------------------------------------------------------------------------
I think I understand some of the principles of indexation and inflation/deflation. However, you might notice major errors. In that case I would like to learn more about the principles. But keep it simple as our very complicated system only resulted in collapse.
Comments