William Safire could be right that our new and sudden worries of US deflation could be unfounded or overblown. Still, his article tries to use a straw man concern about a weak dollar (most experts and even commentators seem to welcome it, at least in the States) to discredit concerns about a demand slump or a long-term budget problem. And his dismissals of the latter aren’t so convincing:
Deflation? In an economy that employs most workers in services, salaries would buy more. Modest deflation for a time is better for the burger-flipper than the executive. As Jodie Allen observes in U.S. News & World Report, fear of falling prices induces the Fed to keep interest rates very low. That makes home ownership more affordable.
For one thing, while lower prices might be a good thing for the wage worker (assuming the labor market doesn’t adjust in her/his field), deflation also raises the cost of debt she or he holds - we should remember that nominal and real interest rates are not the same. Secondly, the problem we face with deflation isn’t simply that it adjusts prices and redistributes income in unwelcome ways, it’s the possibility that a demand slump will move into a self-reinforcing liquidity trap (in which the lower bounds of the interest rate will tie the hands of the Fed in fighting a recession). In contrast to the prediction of government debt, this analysis is not especially partisan, so why some conservative commentators seem dismissive of it I don’t know. Maybe they just hate Paul Krugman so much, or simply don’t want the sheen to come off of the administration’s talking points.
As a side note, the low interest rate may make housing more affordable in open markets, but in eastern Mass. and other tight markets, it has driven up prices, as buyers can and apparently do factor in the lower interest rate into what they are willing to pay.
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