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?


  1. It really doesn’t matter if the govt pumps money into housing, education, and health because those sectors are dead men walking. Real estate was driven by the savings glut and govt subsidy through Fannie/Freddie, but most of the price increase consisted of speculation on land, particularly in certain in-demand areas, not through a rise in construction/materials prices. Excepting a one-time bump triggered by the beginning of the next boom, that’s never going to happen again as the internet decentralizes information work, so that it can be done from anywhere. Education is about to be devastated by online learning and they can’t do anything to fight back because they’re so bloated and corpulent after a century of feasting off the public trough, they don’t even know how. This is really the ultimate devastation of these publicly-financed sectors, that when new technology comes along they’ve become so big by doing worthless activity, they don’t even know how to compete anymore. Medicine is last and will be destroyed by online medicine and diagnostic software, it’ll take the longest because it’s the largest and most entrenched. But each will fall one by one, just like the record companies and newspapers are falling today. 🙂

  2. When you say government, do you mean fiscal policy, or are you referring to monetary policy and fiscal policy? Because, even though the fed is independent, in my mind it is part of the government, and so any drive to fight deflation will likely come from the government. Given the way the alternatives are presented, I assume that “revivifying private sector growth” would mean boosting nominal AD through monetary policy? I guess I agree with Matt Yglesias; there will be no growth in the private sector until there is AD growth, and since businesses as a whole won’t expand until that happens, either fiscal policy or monetary policy will have to do the heavy lifting. However, if it is monetary policy, that would probably be a whole lot better for the private sector than if it is through fiscal policy. Of course, if boosting nominal AD doesn’t work, it might just mean the fundamentals of the economy are lacking, and I am not sure that can be addressed without involving the governing bodies of the country in a major way.

  3. My goodness, what joy. Innovation provides the sustainable fix – if it can be ramped up before we fall into an economic abyss. I rather suspect that the policy response is not an either/or but something that is staged and transitions from temporary to long term fixes. The challenge is accomplishing this in the context of a suffering and panicking electorate.

  4. Here is a fix idea … add a $2/gallon tax on gas, phased in over 20 years (starting with $.05 first year, and getting to $.25 in last year) … call it the Medicare solvency tax, and have it directly fund Medicare and not accessible to the Senate or Congress.

    This will help do three things:
    1) Increase inflation by increasing price of energy
    2) Create/pay for healthcare demand from seniors
    3) Create a long-term price road map around which companies like Tesla, can plan … part of the problem with so many ‘fixes’ today is that they’re gimmicks … businesses, especially those that require long term investment, want long term policies they can plan around.


  1. roulette game first

    One Sign of Deflation – Mandel on Innovation and Growth

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