17 April 2009

You cursed brat! I'm melting!

As predicted in this blog, the monies dispensed by the government have not led to inflation. The just released consumer price index and producer price index both declined, again. That's deflation.

The reason is quite simple: none of these billions of dollars were sent into the consumer sector of the economy. The consumer sector, for purposes of this blog, means middle (and below) class households. It has long been known that savings (real savings) is limited to about the upper echelon of the middle class and higher. As a nation's median income doesn't grow, the saving cohort gets smaller, since incomes approach the minimum necessities. In the beginning of (political) economics, these were lumped into the phrase, "food, clothing, and shelter". We might include cable service today, although the principle remains; discretionary income is the source of savings and discretionary income is small to nonexistent near and certainly below median income.

The question to discuss is: who benefits from deflation, and why do even Wingnut economists consider it a worse fate than inflation?

The beneficiaries are debtors, since they get to repay debt with lower valued currency. Or so the theory goes. But this assumes that incomes are not decreasing. For wage earners, this is not likely to be the case. Current experience bears this out. In real currency terms, creditors are more than likely to be repaid on equivalent terms.

Deflation is a problem in the standard economic view because it is believed to lead to curtailment of investment and spending. Investment because of money illusion; the investment will yield not $10 worth of widgets next year, but $9 worth, so why invest the $100? This is money illusion because the widgets are the same next year as this (we'll assume that we haven't invented a new version of widget), so in context, the $100 has created 666 new widgets. Now, it is proposed that deflation leads to reduced spending because, it is assumed, the rational consumer will curtail purchasing a $10 widget today hoping that the widget will be $9 tomorrow. This, again, is due to money illusion. Only for those hoarding cash is the decision rational; and only then if the widget's purchase is truly postponable, is discretionary.

The real problem is that deflation is a symptom, or side effect, of the greater problem: wealth and income inequality. Periods of deflation have occurred during periods of large income/wealth shifts. Now, not all observers consider this condition to be a problem. Social Darwinists, in particular, are not bothered. However, in the context of maintaining a free and democratic nationhood, it is a problem.

Determining which is the chicken and which is the egg, from a policy point of view, matters. If deflation causes the shift, then one should attack deflation with monetary tools. If the shift causes the deflation, then one should attack with fiscal tools. My analysis leads me to believe that the shift is the cause, and fiscal tools the answer to the problem. That puts me in the Krugman camp(or he in mine, since I'm older and have been of this mind first), leaving the Wingnuts in the Friedman (Milton) camp.

Historically, autocracies, whether driven by hereditary aristocrats or economic plutocrats, are neither free nor pleasant to live in if one is not a member of the elite. History demonstrates that democracy and the presence of a broad middle class are found together, and neither prospers without the other. An economic elite finds repression necessary, as in present day India and China. A political elite does too, as did the Axis countries during the 1930's and 1940's or the British monarches when being a monarch meant something. In both cases it was necessary to use government repression to maintain the unlevel playing field.

In the USofA, the southern states have historically been politically and economically repressive. It should come as no surprise that these states have always scored at the bottom of measures of "goodness", whether income, education, intelligence, or job quality. The plantation mindset persists.

If the Obamanauts are really worried about a deflationary spiral, quit licking the boots of the Goldman Gang. That will not work. Only re-leveling the wealth playingfield will work, and that requires fiscal policy.

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