[lbo-talk] Krugman: Another comparative take on the risks of deflation

Michael Pollak mpollak at panix.com
Sat Jan 10 23:50:55 PST 2009


http://krugman.blogs.nytimes.com/2009/01/10/risks-of-deflation-wonkish-but-important/

Paul Krugman - New York Times Blog

January 10, 2009, 10:45 am

Risks of deflation (wonkish but important)

There's been some talk abut risks of deflation, but there's one

alarming comparison I haven't seen made. The figure above shows that

the CBO is currently projecting an output shortfall from the current

slump comparable to the slump of the early 1980s. Actually, it's very

close: if you compare the CBO's projections of unemployment from 2008

through 2012 with its estimate of the natural rate, we're looking at

cumulative excess unemployment of 13.9 point-years; that compares with

13.7 point years from 1980 through 1986. (If the natural rate -- the

unemployment rate that keeps inflation unchanged -- is 5 percent, and

the actual unemployment rate averages 7 percent over a year, that's 2

point-years of excess unemployment.)

Now here's the thing: the slump of the early 1980s produced the Great

Disinflation, which brought the core inflation rate down from about 10

to about 4.

This time, however, we entered the slump with a core inflation rate of

about 2.5 percent. If we experienced a disinflation comparable to that

of the 1980s, that would mean ending up with deflation at a rate of

-3.5 percent.

And bear in mind that neither the CBO nor the Obama team really

explains where recovery comes from; it's just assumed.

So tell me why we aren't looking at a very large risk of getting into a

deflationary trap, in which falling prices make consumers and

businesses even less willing to spend. Tell me why this risk wouldn't

remain high, though lower, even with the Obama plan, which as far as I

can tell is expected to reduce cumulative excess unemployment by about

a third.



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