No. of Recommendations: 1
The reason deflation is so hard to eliminate is that it trains people (or businesses) to delay purchases for as long as possible. If you are considering buying a new truck, if your delay the purchase a year, you can get the truck cheaper. It becomes a death spiral. Consumers delay purchases, so businesses cut back on production and lay people off, this causes consumers to buy even less (they need to save because they might lose their jobs). It feeds on itself.I've read this before as well but never found it super compelling. People and businesses have to spend money to live/function. They can't delay every purchase indefinitely waiting for lower prices. True, I could see moving away from an inflationary economy resulting in a step function where some level of production is cut back to reach a "new norm", but I struggle to see how it would lead to an unavoidable spiral. On the positive side, I could see it resulting in less impulsive spending and debt accumulation, since inflation incentivizes both today. And a bit less of that could be a pretty good thing given that both individuals and the government are as a whole deeply in debt today.
Also, imagine what regular deflation means for an economy? It means that every year, your boss calls you into the office and gives you a small pay DECREASE. Wages go down. Even though the relative spending power of your lower wages might stay the same (i.e. your lower wages buy the same number of Big Macs because the costs of Big Macs drop as well). That is not good for moral for workers to get pay cuts every year.I don't understand why companies would be required to pay their employees less each year in normal economic times. Wouldn't the main driver of deflation be productivity improvements allowing more goods to be produced for less, resulting in lower per unit prices? If a company is improving their productivity, they can increase their profits without cutting worker pay in normal economic times. In such an environment, it's not costing companies more to keep worker pay static in a low deflation environment, is it? (I understand recessions are a different story and the negative impacts of wage stickiness at those times). It seems like small yearly deflation could actually be a boon to workers, as static pay in an environment of small yearly price declines at a national level would result in an increase in purchasing power each year, even if an individual company's profits did not flow down to its workers.
Admittedly there's a lot of conjecture above, which is why I'd love to find a case study of a country actually trying this. One could argue that the fact it has rarely/if ever been done is enough testament in and of itself, but I'd still like to understand the rationale better.
An interesting aside - productivity increases on a nationwide level have been remarkably stable over time, averaging around 2%/yr since 1950 per
https://fred.stlouisfed.org/series/OPHNFB
