Is Deflation Good For the Poor?

     I've had this discussion before, recently I had a discussion with Woj at Bubbles and Busts over it.

     http://diaryofarepublicanhater.blogspot.com/2013/02/is-inflations-social-menace-overrated.html

     http://diaryofarepublicanhater.blogspot.com/2013/02/more-on-macro-effects-of-inflation.html

     Some posts by Scott Sumner, Nick Rowe and Lars Christensen have put this question foremost on my mind again. Sumner and Lars have argued that what they see as crude Keynesianism-Lars calls it "Paleo Keynesianism"-ie, the Keynesianism prior to New Keynesianism which generally accepts the idea of fiscal ineffectiveness-a near zero multiplier-is that it fails to realize that roughly speaking the demand side of the economy is nominal while the supply side is real.

     http://diaryofarepublicanhater.blogspot.com/2013/03/sumner-on-supply-vs-demand-side-shocks.html

     That most New Keynesians believe in fiscal ineffectiveness-provided we're not near the Zero bound in nominal interest rates is crystallized by this recent paper by Lawrence Summers. The paper is meant to make the case for fiscal stimulus during this troubled time for the economy. Still he also emphasizes that the belief in a zero multiplier and that fiscal policy should normally focus on the supply side:

     "Economists’ views on the efficacy of discretionary fiscal policy have evolved substantially over the 75 years since the publication of Keynes’s (1936) General Theory."

     "The experience of the Great Depression, followed by the natural experiment
represented by World War II, led to near-consensus views holding that the fiscal
multiplier was substantial and that fiscal policy had an important role to play in
mitigating the business cycle by counteracting economic downturns. With the rapid
expansion of the mid-1960s fueled by the 1964 tax cut and subsequent Vietnam
war spending in recent memory, Richard Nixon echoing Milton Friedman was able
to assert at the end of the 1960s that “I am now a Keynesian in economics”.

     "This near-consensus was shattered by subsequent experience. The late 1960s and
1970s provided powerful demonstrations that monetary policy had major effects on
economic performance. The 1970s provided convincing evidence of the naturalrate hypothesis holding that in the medium and long runs demand-management
policy could affect levels of nominal but not real income. The late 1970s and the
1980s brought increased emphasis on the supply-side aspects of tax and expenditure policies. These three factors had led most economists by the 1990s to reject discretionary fiscal policy directed at aggregate demand as a tool of stabilization
policy."

  http://www.brookings.edu/~/media/Files/Programs/ES/BPEA/2012_spring_bpea_papers/2012_spring_BPEA_delongsummers.pdf

     Naturally, Summers then references the Clinton Administration of which he was the Treasury Secretary as  the apex of successful fiscal policy management.

     "Indeed, a central element of the economic strategy of the Clinton administration
was the idea that deficit-reduction policy was likely to accelerate economic
growth.Front-loaded deficit reduction, even with the unemployment rate less than
a year past its recession peak, would allow the Federal Reserve to maintain its
price stability objective with looser monetary policy. Moreover, front-loaded deficit reduction would reduce risk premia in long-term interest rates.

     "Thus reducing
the deficit would have no adverse short-term aggregate demand effect on production, and the reduction in long-term interest rates would have positive medium- and
long-run supply-side effects by improving business incentives to invest and so
boosting private capital formation. This strategy proved successful in both the
short-term business cycle and medium-term growth dimensions. Moreover, the
idea deficit reduction would be a source of stimulus by increasing “confidence”
has been a central part of European economic thinking for sometime now"

      While I'll always be a big Clinton supporter and admire Summers, I think Joe Stiglitz who was also on the Clinton economic team was much closer to the mark in accessing the Administration's fiscal policy.

       For more, see his book "The Roaring 90s."

       http://www.amazon.com/The-Roaring-Nineties-History-Prosperous/dp/0393326187/ref=sr_1_sc_1?s=books&ie=UTF8&qid=1362919035&sr=1-1-spell&keywords=the+roaing+90s

       I have no trouble with taking accolades in principle-really, I don't disapprove as many do. However, the problem is the wrong lessons were learnt from that decade. Stiglitz shows that much of what happened was in spite of austerity not because of it: in a word, he admits they got lucky.

      While superficially we can hold up the U.S. in the 90s as an example of successful austerity, what about all the examples of failure? Summers admits that European economic thinking has been based on this idea for sometime now. It's fair to say this is hardly a success story-to understate the point wildly.

      Regarding the title of this post, note that it's a little different from my previous posts in that it asks if deflation is good for the poor whereas my previous posts linked to above asked about the effects of inflation-'is inflation a social menace.'

      To ask whether inflation is a social and macro menace is a different question than whether the opposite is true: one could logically infer that if inflation is a social menace, then perhaps deflation is a social good or even a social panacea. While I ask in this post whether or not deflation is good for the poor, the question is more generally whether it's good for the non-wealthy consumer: ie, is deflation good for us?

      If inflation is a bad thing on the macro level is deflation a good thing? Sumner had a new post discussing the idea that there are two types of deflation: 'good deflation and bad deflation.'

      Here is Izabella Kaminska of the FT:

Robots, automation and technology may not be responsible for all the deflation experienced in Japan since 2000, but if they play a role — any role — is it really fair to call this deflation? Is there perhaps a difference between good deflation and bad deflation that we should now be differentiating?

     Yes there is.  Indeed there’s a pretty large literature distinguishing between good and bad deflation (George Selgin, David Beckworth, and many others.)

     Now what macroeconomic variable would allow us to distinguish between good and bad deflation?

Just one more reason to stop talking about inflation.  Kaminska continues:

Our crisis was very much Japan’s reflation opportunity. Yes a fair bit of the pick-up in inflation came from energy and food, but one does have to wonder if there is a bit of a whack-a-mole situation going on here. In other words, if Japan truly succeeds at reducing deflation (a.k.a importing inflation from abroad) then to what degree will this just resend deflation back abroad?

   The sensible policy would be for all countries (with demand shortfalls) to depreciate their currencies at the same time.  Not against other currencies, but against goods and services.  It’s not a zero sum game.

    http://www.themoneyillusion.com/?p=19923

    

    Sumner then clarifies-'for new readers'-that the variable he has in mind if NGDP. The distinction he has in mind is supply vs. demand side deflation. 

   The reason I ask about deflation being good rather than inflation being bad in this post is because in many ways this is what bothers me about seeing inflation as a unqualified evil: I don't think it's true but even worse, it might delude some into seeing deflation as an unmitigated good-which is surely false. 

     Part of the problem comes down to not distinguishing between the micro and macro levels of the economy. Here's an example: oil prices. No one likes it when oil prices rise-well, the oil companies do, but certainly you and I don't, certainly consumers don't welcome paying higher gas prices and businesses don't  welcome their costs going up. 

       However, the impact that higher gas has on consumers is the micro effects. The macro effects can be quite different. Also whether prices rise due to supply or demand reasons makes a big difference-during the 70s oil prices rose for supply side reasons which led to the gas lines, etc. 

         What's interesting is that in that over the last 12 years or so, high oil prices have been procyclical-that is to say, they have run concurrent with higher growth and more jobs, whereas when they have dropped-the only time they did, in late 2008 and early 2009-the economy has dropped with it. 

          That one period of huge oil price deflation was concurrent with the economy losing 750,000 jobs per month and a sharply contracting economy. 

           So aren't lower prices good for the consumer. Yes-all things being equal. However, in a complex macroeconomy this is rarely the case.