Forty Euros for Paella!

Still, given the dire conditions in Spain or Greece, you might wonder why prices there don?t fall even in the absence of currency adjustments. Why don?t Spaniards and Greeks start charging a lot less for their goods and services? It turns out that prices are ?sticky? (i.e., resistant to change) and especially sticky in the downward direction. Some price stickiness derives simply from what are called ?menu costs,? in reference to the fact that it would be expensive for a restaurant to print up a whole new set of menus to reflect a minor shift in prices driven by a small increase in the price of food. And think about how you would act in your own life if you suddenly needed to decrease expenditures by 5 percent in response to some bad news. You couldn?t just phone up everyone to whom you owe a fixed sum?your bank or landlord, your cell phone company and cable provider, your auto and health insurers?and try to bargain them down 5 percent. Rather than diminishing expenditures proportionately, you just need to lop some stuff off. Brew your coffee at home instead of wasting money at Starbucks, start packing your lunches, and generally buy less stuff. The problem for an economy in which a whole bunch of people are doing this is that your spending is my income. Individuals cut off whole categories of purchase, and declining firms try to cauterize wounds by shutting entire factories. The growing army of the unemployed does tend to prevent wage increases, but in general the quantity of economic output declines much faster than the prices charged for the remaining output.

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