One Sign of Deflation

I’m not ready to commit myself yet to one side or the other of the inflation/deflation argument. Part of me thinks that we are heading for a massive dollar depreciation, which would lead to an inflationary squeeze. Another part of me thinks that we are short short short on consumer demand.

Here’s a data point in favor of the deflation argument. As part of my previous post, I calculated personal consumption expenditures, subtracting out education, health, and housing. Education and health have big government support. Housing also has government support–in addition, much of housing PCE is imputed rent on owner-occupied housing, so does not reflect actual out-of-pocket outlays.

So this chart shows the 10-quarter percentage change in PCE, ex health, education, and housing.

Consumer spending today is *lower* than it was at the beginning of the recession, outside of education,healthcare, and housing. What’s more, the growth rate has been on a steady downward trend.

This is not simply an artifact of population growth. The per-capita graph looks just the same.

What does this all mean? Just as the government-supported health and education sectors have been the main source of new jobs since 2000, so has health and education (and housing) been the main support for consumer spending.

Ladies and gentleman, we’re at a turning point. Assume for the moment that we need to combat deflation. Should we accept the long-term trend, where the government becomes the main driving force for the economy? Or should we do everything we can to revivify innovation and private sector growth, and fight deflation in that way? Are Keynesian policies the only way to deal with deflation–or can we leverage new technological capabilities and innovation to create demand a different way?