znet/weisbrot on deflation - critique?

Craven, Jim jcraven at clark.edu
Fri Jul 11 11:11:31 MDT 2003


Gary wrote:

I too would be interested in a response from the economically literate as
well.

Well as someone who has taught economics some 27 years and as someone who
was asked to look at Mark Weisbrot's Ph.D. dissertation as well (I liked it
a lot) perhaps I can comment.

There are several reasons why deflation, especially sustained, may cause
some problems for capitalism that monetary policies or indeed fiscal
policies cannot fix. First of all deflation, or sustained decreases in the
general price level (as opposed to disinflation or decreases in a positive
rate of inflation) can produce dislocations in the following ways:

A) Because some business costs are relatively fixed and locked-in in the
short-run (e.g. interest rates fixed for terms of loan agreements, rents
fixed for terms of rental agreements, wage rates fixed for terms of
empoyment agreements) sustained deflation can cause a profits squeeze
leading to cumulative and self-reinforcing downward effects: e.g.  Deflation
leads to disinvestment or putting off planned investment, leading to more
layoffs, leading to falling real incomes leading to falling aggregate demand
leading to more deflation and falling aggregate supply (partially cushioning
the fall in the general price level) and even further rising unemployment...

B) Deflation can lead to expectations effects on the demand side (when
people expect lower prices or lower future incomes they decrease present
demand in anticipation of the future low incomes and/or future even lower
prices thus creating feedback and self-fulfilling/reinforcing effects on the
demand side leading to the same on the supply side;

C) Everybody wants to go to heaven but nobody wants to die. Everbody wants
the prices of what they sell to go up while the prices of what they buy to
go down but deflation doesn't work that way often. When the general price
level is falling, or better the weighted-average price level (itself a
highly suspect construct), it does not mean that every and all prices are
falling. Often businesses may find that prices of what they sell are falling
while input prices are not falling as fast, not falling and/or even rising
causing profits squeezes and or on the worker side even more dramatic
decreases in real wages thus feeding into the cumulative and
self-reinforcing spiral downward;

D) Falling general prices might stimulate some sales (in the conventional
models, a falling general price level stimulates increases in Aggregate
Quantities Demanded leading to increases in real GDP and employment, leading
to increases in employment and real incomes, leading to increases in
aggregate demand, profits, investment and ultimately  short-run aggregate
supply--the anti-Keynesians start out with supply-led growth) depending upon
the overall domestic and global contexts operating. For example, with
widening income/wealth inequalities (U.S. is number one out of 22
industrialized nations in wealth/incomes inqualities), with masses of people
maxed-out on their credit cards, with real tax burdens being increasingly
dumped on the so-called middle-class and below, with increasing uncertainty
about the future (employment, real incomes, prices, interest rates, costs of
education, globalization effects, downsizing, outsourcing etc) among the
general mass-demand-producing segments of the population, tax cuts,
expansionary monetary policies leading to even lower interest rates etc may
not and will likely not have the usual intended effects of stimulating
employment, output, investment, savings, moderate/necessary increases in
prices, increases in aggregate demand and short-run aggregate supply etc.
For example, with the last supposed "tax cuts" and rebates, only about 17%
of those who got them spent them; the rest went into drawing down debt not
into spending as predicted.

E) Often deflation is portrayed as having some positive effects on
international trade side and making prices of exports more competitive
globally and making imports relatively more expensive and less competitive;
this is supposed to simulate net exports and even reverse some slides in the
general exchange rate of the dollar. This assumes that prices and relative
prices are the only or even significant basis for global demand for exports
and imports. In the context of global recessions and widening global
inequaltiies in wealth/incomes, no matter how far prices fall, they may well
not have any stimulative effects on net exports--especially in the context
of nations, like U.S. citizens, maxed-out with their own credit cards;

F) Deflation can have effects on preventing future investment, business
start-ups, etc; plus, deflation is usually associated with the most extreme
troughs of a typical business cycle (in most recessions at most we find
disinflation but actual deflation is rare since the Great Depression) thus
having negative effects on both investor and consumer--and
saver--expectations and psychology; Further, even those deflation,
especially unexpected, favors lenders at the expense of borrowers (at least
in theory), and helps to lower real interest rates, the bottom line is the
bottom line and now matter how much taxes are cut, no matter how low real
interst rates go, this willnot likely simulate significant investment in
real plant and equipment, output and jobs in the context of global and
domestic masses suffering falling real incomes and increassing debt and
unable/unwilling to demand any real output that could be produced; this will
but stimulate more welath/income inequalities and the increased hegemony of
financial capital over industrial and agricultural capital--more paper
chasing and short-run speculation.

I could go on, and notice I am looking only from the standpoint of
contradictions in bourgeois economic theory, when we bring in a full-blown
Marxist analysis, departing from the linear and unidirectional "chains of
causality" and ultimate "independent/dependent" variables of bullshit
neoclassicism, it gets even worse--or better from the standpoint of
destabilizing the whole system.

Got to run, more later, this is just for openers.

Jim C.



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