Current crisis & employment ...the good, the bad and the ugly

The current economic recession, like others in the past, can fundamentally alter the economic fabric. Often a benefit is created but it involves pain and suffering. Here is a good example of a situation where the good, bad, and ugly all happen at the same time:

The New York Times has a very good story on how the economic recession is resulting in employment contracts being torn up.

The depth of the recession and the use of taxpayer dollars to bail out companies have made it politically acceptable for overseers to tinker with employment agreements.

So federal and local governments are looking for ways to pare payouts, endangering the promises made before the financial storm to people like Wall Street traders, automobile workers and garbage collectors.

...

The Treasury Department is seeking broad powers to seize troubled companies and rewrite contracts like the ones promising bonuses at the American International Group. Some A.I.G. employees, meanwhile, have been pressured by officials into repaying their bonuses to the giant insurance company rescued by the government.

Across the country, Vallejo, Calif., just got permission in bankruptcy court to tear up its contracts with firefighters and other workers. In Stockton, the city manager is studying whether to follow Vallejo’s lead.

In Michigan, Gov. Jennifer M. Granholm just ordered the city of Pontiac put under emergency financial management, after it failed, among other things, to rein in the cost of police, fire and trash collection services.

And President Obama’s auto task force, after replacing the top management at General Motors, is looking for ways to overhaul the contracts that G.M. and Chrysler have signed with unionized workers.

As far as I'm concerned, some of this was inevitable. A lot of financial workers are overpaid and it was ridiculous that bonuses for AIG employees at AIG Financial Products were paid (it's ok to pay bonuses to other divisions of AIG but AIGFP seems like a dubious choice.) I'm also disgruntled somewhat that Ambac paid $2.5 million to its CEO. He certainly had a tough job but it's debatable if it required such a large sum, especially for someone who was part of the whole apparatus that led to the collapse of the company. Similarly, a lot of government employees, particularly police officers, fire officers, and politicians, are overpaid in my eyes. All these employees and many more, in other areas, will likely end up getting paid a lot less. I'm not wishing pain upon others, and this isn't something out of jealously, but I just don't see how the situation justified such compensation schemes.

The fact that contracts are being torn up is not something to celebrate; however, at the same time, it was inevitable. It made no sense, for instance, for some police officers or politicians in some small towns in California to be paid more than similar jobs in larger cities in California or elsewhere.

Here's how I see the situation:

The Ugly - Clearly the decline in salaries or potential job losses will be painful. It'll be tough for those impacted. If leveraged, the affected employees may declare bankruptcy and cause losses for lenders. There could be negative social cost with confrontations, legal battles, and so forth.

The Bad - Declining wages will be deflationary. If done on a large scale, this is going to set off a huge deflationary shockwaves. Businesses, citizens, and others who depend on high income from these employees will suffer.

The Good - Re-structuring compensation schemes will benefit governments and businesses in the long run. A lot of what was happening was unsustainable and would have eventually bankrupted the businesses and governments in question.