Are wage and price controls a solution for Greece?

Larry Kotlikoff has an idea:

The government can implement wage and price controls for, say, the next three months, with these controls covering not just the growth in wages and prices over the next three months, but also their initial levels. Specifically, the Greek government would decree that all firms must lower their nominal wages and prices by 30 per cent, effective immediately, and not change them for three months. After three months, everyone would be free to put prices and wages back up.

I say it won't work, because the underlying problems of the Greek economy are real and structural and not just nominal.  (They do have a nominal problem, but they have a nominal problem in part because they have a structural problem.)  But if you think the inability to devalue is the overriding problem, it seems a (fairly) simple solution is at hand.  The fact that such "solutions" don't gain much political traction is one reason to think that pushing on aggregate demand is not the answer to all or even most macroeconomic problems.

That said, I still favor the Scott Sumner recipe over price deflation.


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