It seems that I caused a bit of confusion with what I thought was a simple comment that was, for all intents, rhetorical. I suppose that after all of my years as a Reaganite, Supply-sider Republican, I took for granted that what I said would be understood as the real way to get deflation – lowering the cost of doing business in supply side reforms which includes breaking down barriers to competition. Here is my comment regarding a post by Marcus Nunes about Plosser’s proposal for the Fed to target mild deflation:
Depends on the source of the deflation on whether good or bad. The good deflation doesn’t come from monetary policy, and so the central bank doesn’t really have a reason to target it.
In another discussion on Scott Sumner’s blog about Thomas Sargent, Mark Sandowski brought it up, to which George replied that it is a non sequitur mentioning something about productivity.
I disagree – at least it makes perfect sense to me because buried in the cost of each good are the costs of regulation, lack of competition, taxes, etc… I am somewhat surprised that the concept would be attacked in such away. Perhaps George isn’t interested in supply side economics?
As a side note, the Fed controls nominal factors only and a nominal deflation would have to be rather large and pesistent before it started impacting prices (sticky prices) – notice that prices generally kept rising after the brief period of deflation experienced in 2009, except for things that are sensitive to demand shocks – and so I think it would be a huge challenge for the sadomonetarists to explain how the Fed could target even mild deflation without causing another financial crisis and the deflation spinning out of control. They would have to take us down again and target from the bottom up. Most of us already know how well that worked out for Japan…
And of course they don’t really want to say what life would be like for people who would have to live through it. Take the Great Recession and multiply it by at least a factor of ten. That certainly isn’t what we want to be doing as it won’t increase competitiveness or any other positive thing among the mass of heartbreak and misery. It isn’t worth watching my neighbors starve in the street or having to do so myself.
Both Plosser and Sargent can take a long hike off a short pier.
PS: Here’s some fun supply side inflation economics: