I had a couple of followups to my message to my mom about deflation, since it seems to be on a lot of people’s mind. I sent these on to her also, so I’ll include them as an addendum to the previous post.
Has some numbers. Same upshot as me – only by boosting consumer confidence. This can really only be done by getting the people with jobs to spend money now. Which means they need to have jobs and feel comfortable that they will have one in the future.
Also, here is a great Forbes article about deflation that just came out:
He backs me up about the deflationary aspects of reducing government spending. The worst thing the government could do during deflation is to stop spending.
Lacy Hunt, in another article, talked about what we might do. He said we need a technological breakthrough. We broke the Deflation after the Civil War by a tremendous number of such (railroads, McCormick reapers, etc., telegraph). New technology might work if it can create jobs.
But normal companies just do not create enough jobs in deflationary periods.
Oh and he mentions something I am also coming around to. Just as the Republicans and Conservative Democrats are pushing cutting spending, which would be suicide during deflationary times, liberal Democrats want to allow the Bush tax cuts to go away. During normal times, I would be for this. Just as I would be for more responsible spending. You worry about debt during good times. Which is what we did in the 90s. The best economic times of the last 30 years. We actually had no deficit spending and reduced our government’s debt.
But during a deflation, any sort of tax raise of almost any kind will make things worse (see what I mean about solving deflation. Too much debt may be a problem but raising taxes or reducing spending will actually have no positive effect in deflationary times and would most likely be harmful.) So keeping the Bush tax cuts around for a while longer would be fine, as long as we do not also try to reduce spending.
The only thing worthwhile the government can do during deflation is to spend money creating jobs, not to simply stimulate the economy indirectly (as the guy said in the first article – the multiplier effect of a normal economy does not hold during deflation). They need to do anything to boost consumer confidence in order to break the deflationary cycle. Having a job is task number 1.
The party that solely focusses on jobs programs will be on the right track. But it will require some real education of the population. And it may require about faces of politicians (such as spending for NASA, etc.) which is never very likely.
I am not really very hopeful that we will actually do the right thing until after it is too late to prevent.These changes may not happen at all until our policies provoke real deflation. That is, America is much better dealing with emergencies after they have happened. There is still too much political capital on both sides to ignore the deflation warnings and keep pushing their current views, views from either party that will only make things worse.
That is why Krugman, and others, pushed so much last year for the stimulus program to not only be bigger but to really only focus on jobs, not lowering taxes. He may turn out to be very prescient but no one in politics really listened to him. The Dems used the money for Keynesian type stimulus and the Republicans got their tax cuts, and the final package was too small to stop what might be coming.
I’ve been hoping so much for the last year that Krugman was wrong, that he was a doomsayer and it would be okay. I have become more and more convinced that the political policies of both parties will drive us directly into the arms of deflation.
The key is doing anything and everything to create jobs directly, not relying on the invisible hand to do it. That will only happen when we return to economically normal times.
I also found a couple of recent articles – all from this week – that discuss deflation, stimulus and/or unemployment. Seems that it is on everyone’s minds.
Paul Krugman Permanently High Unemployment
Mark Thoma The Cost of Convenient Optimism
NYT In Study, 2 Economists Say Intervention Helped Avert a 2nd Depression (without the stimulus, we would already be in a deflationary spiral)