Posted by Jay Livingston
Are lower prices bad? In Monday’s Times, David Leonhardt explains the dangers of consumer thinking.
There is good reason to fear deflation. Once prices start to fall, many consumers may decide to reduce their spending even more than they already have. Why buy a minivan today, after all, if it’s going to be cheaper in a few months? Multiplied by millions, such decisions weaken the economy further, forcing companies to reduce prices even more.”This seemed reasonable to me. Then I thought about all those digital cameras and flat-screen TVs and computers and flash drives and all other electronic gadgetry. People buy this stuff even though they know that in a few months they’ll be able to get either the same thing for less money or a better version for the same money.
With all the doubt cast recently on economic rationality, it would be nice to have some evidence on what really happens during deflation. Do economists have such evidence, and if so, where did they get that evidence? How many deflationary periods are there for us to sample?
Does consumer spending rise in tandem with inflation? And even if it does, there are two possible explanations. One is the flip side of the deflation mentality Leonhardt mentions: buy it now before the price goes up. The other is that inflation means higher wages, and people with increased incomes feel they have more money to spend.
I should know this, but I don't. Economic sociologists, please speak up.