So What's the Big Whoop about Deflation?

So Canada has registered it first “technical deflation” in 15 years in June 2009. More than a few people are having a very quiet freakout about this. A few, like Ken Rogoff (former research director at the IMF, now Harvard economics professor), John Makin (economist with the American Enterprise Institute, a hard-right conservative outfit) and Paul McCulley (portfolio manager at Pimco—who run the world's largest bond mutual fund) suggesting that this might be the time to bring back inflation—perhaps as high as 6% for a couple of years.
The spark behind this is the release of the consumer price index for the last couple of months, showing that in May and June, prices for consumers fell for the first time in years. While you and I might think this is good news, economists and businesses think differently about this. If the CPI is dropping, it begins to make sense, as a consumer, to put off spending money on anything. Why buy now, if in a month the price will have dropped? Does it make sense to spend 20K on a car if, by waiting a year, you can save $1100 (assuming an annual 6% deflation rate)? Of course not, particularly when not buying accelerates the deflation rate.
Again, as a consumer, this sounds great. Prices falling, money worth more instead of less (inflation eats away at the value of the dollar, making it worth less. Deflation reverses that), it sounds like good times for all. But with everyone sitting on their money, businesses find no reason to stay in business, or if they do, they certainly don't need to be as big. So as consumer spending falls, unemployment rises and the economy contracts. And if nothing kicks this pattern apart, it stabilizes into a long-term nation-crippling problem. Just ask the Japanese, who have been grappling with a structural deflation problem for over a decade now, since the collapse of the commercial real estate bubble.
We're not necessarily in that position here in Canada, as the major reason for our fall in the CPI is primarily the result of a 19% fall in gasoline prices. Although, nationally, prices increased at the pump 6.8% from May to June, prices have dropped 24.3% since this time last year. It should be noted that natural gas, car, and house carrying costs have all fallen over the last year as well, helping drive the CPI into negative territory. Phillip Verleger, a U of C professor and energy economist, is now forecasting a drop in the price of oil to $20/barrel (as predicted by peak oil theory, which forecasts a series of spikes and slumps in oil prices), which will hammer Oilberta—not so much in resource revenues, but in cancelled oil sands projects, unemployment, and concurrent collapse in consumer spending which will ripple out through the economy—and will continue to push the CPI into negative numbers. But, if you strip out the effect of oil/energy pricing from the current numbers, inflation is still tripping along at 2.1%, which is why this period is referred to as “technical deflation.”
So this is why our governments are all Keynesian now. The possibility of structural deflation is scaring the hell out of all of them and the corporate community. The system we live under is predicated on continual growth, and stabilizing that growth (removing the bubbles and crashes, inflationary and deflationary cycles) has been made job one for governments. Both corporations and the public dislike uncertainty, so uncertainty must go.
From an environmental point of view, a sustained period of deflation might be just the thing we need. But a deflating economy will have more trouble making the shift to a green(er) future than one that is growing. An expectation of profit is essential for businesses in order to get them to make changes in their business models.

Stewart/Cramer--The Brit Reaction

For the past 10 days the US has been gripped. Even President Obama tuned in as the country's foremost TV comic, Jon Stewart, unleashed an extraordinary broadside against TV's top financial commentators for their part in the unfolding economic crisis.


Jon Stewart recording an episode of The Daily Show. Photograph: Evan Agostini/AP

The review of Stewart/Cramer from The Guardian.

Bailing out the Big Three

There's a lot of grief about bailing out the Big Three automakers in North America. Some of it centres on the fact that they've been making vehicles no one wants anymore (think about the Hummer and the F-series (200 and up) trucks. But most of the rage is based on the deals that the UAW have extracted from the Big Three; vacation time, overtime, and base-rates all seem to be freaking people out.

The problem with this rage is that it's seriously misplaced. Yes, there is a cost associated with building automobiles, and the numbers I've seen range from $65-$80/hr. Now that's all the labour associated costs related to auto manufacturing, although the people doing the screaming seem to think that this is $/hr in the worker's own pockets. It's not. And while the hour costs of car assembly are high, they are not really that far out of line.
Margret Wente in her Globe and Mail column of 12 March 2009 (p. A15), actually acknowledges her bias against the autoworkers--as well as health workers and municipal workers with the GTA--its that they get more than she does, that their union has extracted significant gains for their workers and hers hasn't. This seems to be common to most of the people doing the yelling about what autoworkers get paid--"they're just assembly plant workers and they get paid way more than me, get better pensions than me, get more vacation time than me, and I deserve better than them!"
Maybe they do. But from the quality of their analysis, I doubt it.

We acknowledge that manufacturing has been the way out of the working class and into the lower middle class for millions of working people--we just hate to acknowledge that a great deal of that social mobility has been because of a strong union movement. One of the most significant engines of Canadian prosperity has been the gains made by the UAW--because they spill over into the rest of the workforce. The Postal workers did the same, as well as the rest of the union movement in North America. Envy of these gains, as in Margret Wente's column, is an ugly thing, but its still easier than actually doing something to improve your own lot--like organizing, taking the beatings and killings from the owner-hired Pinkertons, and fighting for tomorrow even more than fighting for yourself. That's what the union movement has done, and all workers are the beneficiaries of their work.

Are cars more expensive than they need to be? Yes. And are the Big Three in trouble? Yes. But is it the fault of the unions? Not really. Assembly line workers build cars, they don't get the chance to design them, decide on profit margins, or decide which models will go into production. And let's be frank, for every stupid thing the UAW has done, the Big Three have made a couple of hundred stupid decisions--usually driven by short-term ROI needs rather than long-term sense.

Because it hasn't been the Detroit automakers that have driven the general rising level of prosperity in North America, its been the guys and gals making the damn cars, earning a decent buck, that have gone on to spend those dollars on other things like houses, furniture, food, vacations, and the like, that have spread the money around. Decently paid workers can afford to pay other workers decently.

Many of the Big Three's problems stem from other sources. For example, Saturn showed that it was going to be nearly impossible to rebuild car manufacturing in North America under the current financial/trade/political regime. Setting up a new line was simply too expensive compared to what could be done in other parts of the world under an aggressive free trade structure. So the assembly lines have aged, become less efficient, and are too expensive to upgrade at his point. Big capital doesn't see the return on investment (ROI) necessary to fix the problem--particularly with a global free trade environment. This parallels the problems faced by the British Empire at the end of its globe-spanning life. The wealth-generating heart of the empire had aged and become less productive and with free trade, the investment paid better if made overseas rather than at home. So big money made the sensible decision and Britain watched its trade deficit increase yearly and the country collapsed on on itself, hollowed out and emptied of wealth. The logic was unassailable--and unavoidable.