CNNMoney.com has an informative piece on the deflation threat today, featuring quotes from economists familiar to readers of various econ blogs. Why do many economists believe deflation is a bad thing? Because,
While spending less on purchases may sound appealing to consumers, falling prices and wages can cause much more economic pain than rising prices. Businesses respond to declines in prices for their goods or services by cutting output and jobs. That, in turn, further cuts demand, which feeds into a downward spiral that can bring about a depression in a worst case scenario, or a prolonged period of economic stagnation, in the best case.
For more on deflation, check out John H. Makin's economic outlook for AEI. And here's David Frum:
As awful as double-digit inflation was, single-digit deflation is worse. As triumphant as the victory over inflation was, we can't always be re-fighting the last war.
This is a country deeply in debt. Inflation reduces the burden of debt -- anonymously, impersonally, and across the board. I hope I don't sound too nationalistic when I note that a lot of that debt is held by our Chinese friends. They ran huge trade surpluses with the United States when times were good. Time now for them to contribute a little back.
Nobody wants to see wheelbarrows of money at the grocery store. But 3 percent inflation? Four percent? There are worse things.
Finally, Tyler Cowen argues here that a "helicopter drop" of money could boost growth more effectively than fiscal stimulus.
Needless to say, an expansionary monetary policy would not be without costs. But we have reached the political and economic limits of fiscal policy without returning to robust, broad-based, private-sector-led growth, and seem to be on our way to Japanese-style Lost Decades of high debt, high taxes, and falling prices. Is that really the economic future we want?