Zero rates from Bernanke, zero raises from Paterson

| NY Torch

Gov. Paterson has released the state budget on a history-making day. For the first time ever, the Federal Reserve has cut the interest rate at which it lends to banks to as low as zero (and as high as a quarter of a percentage point). This action puts Paterson’s proposal that state workers give up a scheduled 3 percent salary hike in perspective.

Absent productivity gains, the state raises salaries and wages so that workers’ pay can keep up with the cost of living. Next year, though, there’s a grave risk that the cost of living will go down instead of up. Indeed, the federal Labor Department has reported that consumer prices were down 1.7 percent in November from the previous month, the “second consecutive record decrease,” according to the Wall Street Journal. Without volatile energy and food costs, prices were flat, after a decline the previous month.

These statistics are why Bernanke & co. have slashed interest rates to the very lowest they can go. They want to push money and credit into the economy to keep prices from falling further.

If the Fed fails here — or, rather, if it just turns out that the government is less powerful than market forces — continued price declines will mean that state employees are aleady getting a “real” raise even if their salaries stay flat.

It would be misguided for them to expect more in such a turbulent environment.