And Now Deflation

Consumer prices fell by 1.7 percent last month, according to the Bureau of Labor Statistics. That’s the steepest drop in 61 years. Why? Because producers and sellers have discovered that consumers have just about stopped buying. The only way producers and sellers can shrink their inventories and pay their bills is to slash their prices low enough to get some consumers to buy. Automakers with acres of unsold cars are giving deep discounts. Retailers with piles of Christmas goods are holding “40-percent-off” sales. Cable-TV operators are cutting monthly fees.

The good news is that all this price cutting is helping average people at a time when wages and benefits, and jobs, are also being cut. The bad news is it’s also cutting deep into producer profits, causing them to cut even more jobs and wages. The big danger is it may cause some consumers to delay purchases, thinking they can get a better deal when prices drop further. That’s a self-fulfilling prophesy. If more and more consumers take this view, sellers will have to reduce prices further to get them to buy now. That may sound good until you realize it means more layoffs, and more cuts in wages and benefits.

Deflation is more vicious than inflation because it’s much harder to reverse deflationary expectations than inflationary ones. Japan’s “lost decade” is evidence. The last time America witnessed a fall in consumer prices as large as we have now was in 1947, when wartime mobilization and large-scale government spending were winding down, there was lots of underutilized capacity, and producers and sellers were trying to lure consumers back into the habit of buying. What producers and sellers didn’t know was that a whole new generation of returning GI’s and baby-booming parents were about to spend like mad.

Now, the situation is quite different. Rational consumers are starting to save whatever they can because they’re understandably worried about the future.

The sooner we have a major stimulus package, the better. The danger is that it will be too small.

About Robert Reich 542 Articles

Robert Reich is the nation's 22nd Secretary of Labor and a professor at the University of California at Berkeley.

He has served as labor secretary in the Clinton administration, as an assistant to the solicitor general in the Ford administration and as head of the Federal Trade Commission's policy planning staff during the Carter administration.

He has written eleven books, including The Work of Nations, which has been translated into 22 languages; the best-sellers The Future of Success and Locked in the Cabinet, and his most recent book, Supercapitalism. His articles have appeared in the New Yorker, Atlantic Monthly, New York Times, Washington Post, and Wall Street Journal. Mr. Reich is co-founding editor of The American Prospect magazine. His weekly commentaries on public radio’s "Marketplace" are heard by nearly five million people.

In 2003, Mr. Reich was awarded the prestigious Vaclev Havel Foundation Prize, by the former Czech president, for his pioneering work in economic and social thought. In 2005, his play, Public Exposure, broke box office records at its world premiere on Cape Cod.

Mr. Reich has been a member of the faculties of Harvard’s John F. Kennedy School of Government and of Brandeis University. He received his B.A. from Dartmouth College, his M.A. from Oxford University, where he was a Rhodes Scholar, and his J.D. from Yale Law School.

Visit: Robert Reich

Be the first to comment

Leave a Reply

Your email address will not be published.


*