Posts Tagged ‘deflation’

History lesson: Recessions are modern

8 May 2010

Interesting just in its own right, this paragraph from Paul Krugman:

“… the 19th-century economy had much more flexible prices and wages than later came to be the case — not, primarily, because of different institutions, but because it was still largely an economy of small, self-employed farmers. More than half of US workers were in agriculture up until the 1880s. Peter Temin has told me — I can’t find it in a quick search — that the United States didn’t start having modern recessions, with large declines in real GDP, until the Panic of 1873; Britain started having them much earlier, because it became an industrial economy earlier.”

Or possibly not even until the Panic of 1893, which at the time was known as the Great Depression.  Some economic history research that I have not seen, but which is cited confidently in this compelling column by Charles R. Morris, concludes that the 1870s contraction was actually quite mild.

Which is not to see that genuine and widely felt “hard times” never occurred in our pre-industrial, pre-1870 economy.  Financial panics and deflations were common, and any big drop in farm price surely hurt the real incomes of many farmers, as long as their prices fell more than other prices and farmers had nominally denominated debts.  Many economic historians have even said that a “depression” in the early 1770s helped set the stage for the American Revolution.  But it does seem we need to have a better understanding of what those early “hard times” were like for the people who experienced them.


17 June 2009

For all the talking heads’ bloviating about the massive inflation to come from current Fed policies and the spending stimulus, as well as the media’s eagerness to pronounce the recession over, you can be forgiven for not noticing that deflation has not exactly gone away.  The Bureau of Labor Statistics announced yesterday that over the past 12 months wholesale prices dropped 5 percent and today that over the same span consumer prices dropped 1.3%; the respective declines were the largest since 1949 and 1950.

I said a few months ago that I was not particularly worried about deflation, and I’m still not, as it seems mild by historical standards and because expansionary Fed policies are making sure that money-stock growth is strong.  But an awful lot of people have assumed away the recession and are now wringing their hands about the threat of inflation, and these data suggest both impulses are premature.*


CPI: Energy fools the magician

15 April 2009

Today’s release of the March CPI figures brings the news that we had our first 12-month deflation, of 0.4%, since 1955.  Yikes, right?

Not really.  The deflation came mostly from lower energy prices.  The “core” inflation rate, which excludes food and energy prices, was 1.8%.

Likewise, the modest price dip of the past month (0.1% each month) was also driven by falling energy costs.   Non-energy prices rose slightly.

What is the source of these falling energy prices?  Some of it seems to be a function of the sagging economy (poorer people drive less), but I expect there’s favorable supply shock in there somewhere.  And I have to think it nets out to a favorable supply shock for consumers as a whole.

A dead economist for our time

16 February 2009

The new Economist has a great piece on Irving Fisher, the great American monetary economist who articulated the destructive aspects of deflation better than anyone before him.  Fisher was a weird dude — eugenics and Prohibition were among his passions — but his “Debt-Deflation Theory of Depressions” (the lead article in the first issue of Econometrica in 1933)  lives on.  Virtually every monetary economist since, from Milton Friedman to Ben Bernanke, has absorbed Fisher’s lessons.  So has the Federal Reserve.  Nobody tries to defend deflation anymore.

A fine piece in the new Forbes, “The Real Lesson of the New Deal,” by ex (in more ways than one) Reaganite Bruce Bartlett, complements it nicely.  Bartlett sketches the devastating effects of deflation in the early 1930s and throws in some sensible points about policy in the Great Depression.  (Hat tip: Jeff Sachse.)

What, me worry about deflation?

16 December 2008

OK, so we should worry about deflation.  Deflation is economically destabilizing and particularly destructive in a recession, as it raises the real burden of debt and the real interest rate, as well as inducing consumers to postpone purchases in the hope of future price decreases.  And in the current slowdown there’s already been considerable deflation here and abroad of housing, asset, and commodity prices.  But  . . .

The news that U.S. consumer prices just had their largest one-month drop in at least 61 years (the records only go back to 1947) does not look like a big deal to me.  Ditto the previous month’s near-identical news about a then-record drop in U.S. consumer prices in Oct. 2008.  The media seem to be trumpeting it as the latest sign of the apocalypse, but all of that 1.7% drop in the consumer price index (CPI) was due to a big drop in energy prices, and as a child of the 1970s I’m still inclined to think of any energy-price drop as a good thing, whatever the cause.  The “core” CPI (which excludes food and energy prices) was unchanged, and the CPI for food prices rose by 0.2%.

(The story was about the same in Oct. 2008:  the overall CPI fell by 1%, the food CPI rose by 0.3%, and the core CPI fell by only 0.1%.  Although the news reports noted that this was the first drop in the core CPI since the devastating recession of 1982, 0.1% is hardly a decline at all.  Considering the band of error that inevitably surrounds these figures, and considering the slight rise in food prices (the other excluded category from the core CPI) , I think it would be a lot more informative to say that Oct. 2008 was a month of falling energy prices and price stability otherwise.)

  • Also, Fed Chairman Bernanke is strongly anti-deflation, as this 2002 speech makes clear. The Fed’s current response to the crisis, whatever its defects, seem to reflect that stance.
  • Side note:  Experts are saying that the falling energy prices are directly due to the recession.  It does appear that the demand for gasoline (and by extension, the amount of driving we do) is a lot more cyclically sensitive than I ever would have guessed.  Especially considering how the demand for gas seems to be very price inelastic in the short run.  Maybe we simply cut back on a range of expenditures (travel, shopping, downtown entertainment) that entail driving, causing the demand for gas to drop?

(modified only slightly from a post on my old blog circa mid-Nov. 2008 )