Monday, March 09, 2009

Sticky prices

Way, way back, a good eight months ago, when oil was $145 a barrel and various econobloggers were arguing that the Fed needed to raise interest rates to pop the commodity bubble, the price of wheat also zooomed up, and of course the price of energy for businesses did too.

So every pizzeria within my walking area of Manhattan raised its price per slice by about 50 cents, typically from $2 to $2.50 for a plain cheese one ... a good 25%! And they all told everybody and had signs up saying "due to the higher price of wheat and of gas for the ovens..."

Having three kids and being of the beer-and-pizza generation myself, pizza plays a big part in my life. So I know the people who run all these local places and as the recession has run on I've asked them, "How's business?"

Every answer is, "It's awful, we're getting killed."

Yet even with the price of wheat and energy for the ovens now way back down, far down, not one of them has reduced its price. Not one!

However, over on Sixth Avenue between 17th and 18th streets, a new pizzeria has just opened charging only $1 per slice ... the guys in there have a high speed assembly line going that deals out slices like Vegas blackjack dealers deal cards "whap whap whap" ... and the line to buy often runs out onto the street.

Keynesian economists will tell you that recessions are caused in large part by "sticky prices and wages" -- that people who are always happy to raise their prices (including for their labor) whenever they can strongly resist lowering their prices when the demand for what they have to sell falls. Since they won't lower their prices to maintain sales and employment, sales and employment fall and the economy shrinks, until firms restructure in the new situation.

I don't know if John Maynard got his ideas from buying pizza in the hard times of the 1930s, but this was pizza night for my kids ... and here we are.