Deflation is coming and Americans should be alarmed.
Many, though hardly all, prices are falling.
Government regulations, subsidies and sanctioned monopolies make some price increases inevitable—the world may end before doctors’ visits, prescription drugs, college tuition, and cable TV rates stop rising. For now, President Obama has legislated higher car prices and profits by removing large amounts of capacity at GM and Chrysler, offering subsidies for hybrid and electric vehicles, and imposing tougher fuel economy standards.
Even with those industries pulling up inflation, prices outside the erratic energy and food sectors—so called core inflation—have increased less than one percent over the last year.
Prices are falling for many discretionary items like furniture, apparel, personal computers and electronics, recreational and communications services, and personal care products. Real estate prices and rents remain in the pail.
Some deflation may not be bad if accompanied by decent growth—4 to 5 percent a year until unemployment comes down and 3 percent over the business cycle. That would discourage reckless lending better than any regulator. Treasury securities could still pay 1 to 2 percent a year, real interest commercial and mortgage rates at 3 or 4 percent would be aligned with long term growth, and borrowers hardly would be victims.
However, deflation is spreading, because Americans have been sold a false idea by Treasury Secretary Geithner: High unemployment and tepid growth are the new normal and desirable.
For the 24 months prior to the Great Recession, unemployment was less than 5 percent and optimism abounded that new technology would carry Americans into an age of cleaner energy, higher productivity and plenty.
If ineffective regulation caused the financial crisis, President Obama’s reforms should have fixed the problem, and the economy should be able to grow fast enough to pull down unemployment to acceptable levels.
Americans are not wandering fools, heirs to a lost civilization. They can still make goods and services but demand for what they make is inadequate.
Consumers are buying again but not enough, because housing prices are depressed and many homeowners, crushed by high-interest mortgages, simply cannot refinance with prices depressed. Credit card companies are becoming the last refuge of the financial flimflam man.
Baby boomers are trimming spending and postponing retirement, because the stock market and their retirement accounts have not gained much value in more than a decade.