Cassandra takes what she admits to be a flier at a topic worthy of deeper examination:
Do you think The People are less discontented under an inflationary regime or a deflationary regime?
She reaches a conclusion, no doubt colored by her deep association with Japan, that deflation is not as bad as it is touted to be. If she is right, that thought has some pretty ugly implications for Dr. Bernanke. All he should be worried about is preventing a depression, not mere deflation.
To get the discussion going, I will put to you that under an inflationary regime the vast majority of the people suffer from Hamster Syndrome whereby they are running inside the wheel faster and faster but never getting anywhere, or worse from “Up the Down-Escalator Dilemma” (Do you remember the Chameleons?) where it feels like (or IS) almost impossible to make any headway in the direction one desires. This is because real wages are falling whether people consciously know it, and income inequality and Gini’s are growing. On the other hand, unemployment IS [temporarily?!?] lower than it otherwise would be, which is a high-intensity diminishing of the downside to those that otherwise wouldn’t be employed. In sum, most people feel worse off with low intensity, whereas a few people feel better off with high intensity.
Under a deflationary regime by comparison, I will put to you that the vast majority of people don’t feel as worse-off as they would under an inflationary regime, since real wages tend to be more stable, and income inequality and Gini’s tend towards diminishment making one feel less worse off (relatively speaking) – and importantly it is the relative that counts most in human behaviour with respect to contentedness. However, the downside is that unemployment tends to be higher than otherwise would prevail under an inflationary regime, and so a smaller minority percentage of the workforce feels [rightly] to be worse-off and feels so with a high intensity.
Let me say first off that none of my assertions have been researched or proved. Secondly, I am aware of some economists’ arguments that, for purely behavioural reasons, mild inflation is deemed positive for economic growth. I have tended to accept these arguments, though they too are mere assertions, like mine. Thirdly, there ARE externalities under both regimes, and we cannot ignore them for they are integral to the feedback loop of happiness or less discontentedness (note: these are NOT the same thing) and future well-being. Lastly, IF this were – more or less – true, then does it mean we, as a society, are better-off in terms of GNH (Gross National Happiness) by choosing the less-inflationary route, and redistributing to cushion the downside of those unfortunate high-intensity displaced souls, than conferring a dull ache upon the majority?
One final thought: Might globalization have an unspoken role here? “Up the Down-Escalator Dilemma” is a reflection of global wage convergence, while inflation is the political way of attempting to fight or mask an otherwise unpleasant reality: if you want to go upstairs, you might have to expend some reasonable energy and take the steps…
The amusing bit is that politicians are in the business of getting reelected, and one would think that unwittingly promoting policies that make people as a whole unhappy is not in their best interest. But if they are under the sway of the idea that high employment is always and ever better than the alternatives, you can get choices that are suboptmal.
Note that Cassandra mentions in passing that more equal income distribution makes people happier. That happens to be a reasonably well supported view, despite America’s almost doctrinaire acceptance of Calvinist “the more you make, the better a person you must be.” And in keeping, the reporting on this overseas sees that notion as not terribly controversial, while it is contested in the US.
Indeed, more even income distribution leads to longer lifespans. Note that finding is pretty robust, and comes from public health researchers, not left-leaning economists. That too doesn’t get reported much in the US.
But let’s consider the other aspect. I would submit that high inflation, although it may initially lower unemployment, cannot do so in the long run. There is good reason for Volcker having had to inflict as much pain as he did to wring it out of the US. and economists remaining leery of creating an inflationary spiral (note that caution is being thrown to the winds a generation and a half after the last episode. No doubt that reflects fading to non-existent personal and institutional memories).
Having suffered briefly from learning inflation accounting, inflation leads to underinvestment. High inflation leads to high discount rates and very high uncertainty as to what your financial statements mean, in particular whether you are making money on a real basis (the problem is that many line items inflate at different rates; how finely do you adjust? And what do you do about depreciation, when your book values of assets are far lower than replacement values?). Both problems discourage investment. They also happen to suppress equity prices, which makes capital raising more costly, and debt by definition is expensive in nominal terms (and often in real terms too, since fixed income investors demand high spreads to compensate for the very real possibility that inflation can get even worse). And underinvestment saps growth.
As for deflation, the topic seems to be taboo and therefore may not have been considered with sufficient rigor. Yes, the Depression has been studied ad nauseum, but less severe versions of deflation do not appear to have not been considered as policy options (for instance, the US experienced mild deflation during most of the 1800s). Western economists look at Japan’s lost decade with horror, yet the Japanese themselves do not appear to have fared badly in terms of quality of life. And note that it is in Japan’s interest to portray itself as a basket case. Unlike China, no one is going after Japan demanindg that it do something about its trade surpluses.
Yes, Japan no longer has lifetime employment, many young people work for companies in temporary jobs (not as ephemeral as US temps, but they are second class citizens with an uncertain tenure). But that was almost certain to be a casualty independent of the deflation.
Cassandra admits to not having the answer, and I certainly don’t have one either, but the subtext of her post is that the example of Japan has been misunderstood and therefore bears further examination.