Imagine a world in which prices went down over time, rather than up. Every year, the cost of food, clothing and shelter went down. Even without a pay raise, your material well being improved.
The price reduction would be due to increased productivity; like a dividend for living in modern economy. And it would be every year.
No more fighting about minimum wage or cost of living adjustments.The rent would cease being too damn high in no time. Everyone would just get wealthier by default. And the people living on a fixed income or wage would benefit the most. Salaries are sticky especially on the way down, meaning that your boss would have a hard time adjusting your salary down. So your salary would go farther every year.
The deflationary bogey-man
Its fair to say that the belief that deflation is desirable is not widely held by economists. These are some of the arguments against deflation.
No one will buy anything
This is not true. And I know this because we already have deflation, in one of the hottest selling product segments: cars and electronics. This years flagship phone will drop in price considerably in the next few years. But people still buy electronics today. Same is true about new cars. You can buy last years model for considerably less money, but car companies don’t worry that car deflation will result in people not buying anything.
Debt deflation
The idea is that the real value of debt would increase. For instance if you buy a home for $500,000 and you get a mortgage out for $400,000, if that home drops in value next year your debt relative to your home value would be deflated. This is especially true if its unexpected.
But most things get whacky when its unexpected. If your home doubles in value in two years, then that causes issues like we saw in the 2008 home bubble. People take out bigger loans on their equity and extend themselves too far. But if people anticipate the price drop, then its not an issue. When you get a car loan, you understand that you’re financing the full price while the value of the car drops every year.
Deflationary spiral
Lower prices would lead to lower production which would lead to lower wages and demand, and result in a deflationary spiral.
That sounds fine, but again, that’s not what we’re seeing with products that are deflationary today. Lower chip prices don’t lead to no one producing chips. It leads to more investment to push down the costs or increase performance.
Historical examples
There aren’t many, but one example often brought up is 1930-1933 in the US where prices fell 10% a year. Economists point to deflation as a contributing factor to the Great Depression, rather than the deflation being a natural byproduct of 25% unemployment and people not being able to afford things.
Things got cheaper which is a big problem apparently. But don’t worry, politicians fixed it by introducing The Federal Farm Loan Board. The board would help farmers stabilize prices by buying and holding surplus grain and cotton in storage. Let them eat cake. The Agricultural Adjustment Act also allowed the government to buy livestock and paid farmers not to plant food on their land.
All these actions eventually got challenged and went to the Supreme Court after the federal government went after a farmer, growing food on his own land to feed his livestock.
Ah yes, people are going hungry. Too much cheap food must be the problem.
Why economists like inflation
The prevailing wisdom among mainstream economists is that slight to moderate inflation is good. This has the added benefit that the federal bank can print money and give it to banks as needed. Oh wait, I mean “repurchase assets to stabilize markets”.
But I think economists should reconsider their opposition to deflation. Primarily because there has been so few cases of large scale deflation and they all coincide with extreme events. If you see deflation in an economy where the money supply is growing 10% a year, something else is going wrong. But if we just kept a stable money supply such that gains in productivity would result in lower prices across the board, then we wouldn’t have many of the hypothetical negative consequences of deflation. We would just have every day people benefiting from the national wealth.