Deflation Is Bad, Man

Don Surber decides deflation is good.

Falling prices reflect demand. If supply costs remain below the price, no problem.

Computer users learned this in the last 20 years. New computers (which were slower and had less memory) cost $2,000 in the 1990s. The one I just bought cost $300. Computer companies are fine with it because as the prices have dropped, productivity for computers and their component parts has increased and costs have gone down. As long as cost is below price, no problem.

Deflation today is caused by two things: The burst of the housing bubble and the precipitous drop in the price of oil.

The housing price drop slowed production of new homes because productivity is not improving fast enough to keep pace. The upside is construction is less expensive and this helps public works projects.

The downside is that property values are dropping and with them the property tax revenues, which largely go to support schools.

Housing prices likely will drop further as the supply of mortgages has fallen due to a variety of factors, mainly interventionist government. Stopping foreclosures is breaking the Rule of Law, which hurts any economy by introducing instability. This scares off investors.

The drop in the price of oil — and with it energy — helps all other producers by cutting their costs. They may or may not pass those savings on to consumers.

If I can figure this out, a Nobel-winning economist should.

Somebody should tell Don there that allowing massive housing deflation to continue unchecked would be a hell of a lot worse than "government intervention" because unchecked foreclosures would be putting people out of ther homes and into the streets, making them more dependent on the government services that are paid for by the same property tax revenues he notes are falling. It squeezes everybody. People have to live somewhere, and if entire neighborhoods are being wrecked by plummeting housing values, those neighborhoods turn into urban blight and empty subdivisions. And these property taxes pay for a lot more than schools: witness the plethora of local and state governments having to slash expenditures due to lost revenue.

If I can figure that out, certainly a newspaper columnist should be able to...