The Danger of Deflation

Why Lowering the Cost of Living Makes Nothing Affordable

Don’t Hold Your Breath

If you are expecting either Republicans or Democrats to lower the cost of living, you will be waiting a very long time or you will regret your wish. Over the past 100 years there have been several periods when prices fell substantially—a phenomenon economists call deflation. They include the periods following World War I and World War II, during the Great Depression, during the Great Recession, and at the very start of the pandemic. Which type of global catastrophe would you like to accompany the price deflation you’re hoping for?

Letting the Air Out

Deflation is bad for everyone. People lose their jobs or their wages get cut. People and businesses default on their debts. Interest rates go to 0% so you won’t earn interest on your savings…if you have any. People postpone purchases because they expect the price to be lower in the future. It doesn’t matter that prices are down because people have less money. Lower demand leads to lower production and job losses. It’s a vicious cycle.

Inflating the Economy

The economic consequences of sustained deflation are so bad that the Federal Reserve wants to have modest price inflation, about 2% annually. It’s a buffer against deflation. It gives the Federal Reserve and the government an opportunity to act to prevent a looming recession.

High inflation occurs when demand exceeds supply. It’s too much money chasing too few goods. That’s why prices soared 21.4% during the Biden administration. The stimulus checks and other government spending poured trillions of dollars into the economy when supplies and services were diminished by pandemic closures. Though inflation has come down from the 9.1% peak year-over-year mark in June 2022, prices have not come down, nor will they, barring another global catastrophe.

Making Life Affordable

Since 1955, prices have risen every year except for 2009 during the Great Recession. No one can make life more affordable by lowering the cost of living. The trick is to keep inflation low and to grow the economy at the same time. Growing the economy means increasing production of goods and services, which means more jobs and higher wages to offset inflation. The government can help by incentivizing businesses to expand and protecting them from unfair foreign trade practices. The Trump administration has done both through business tax reductions, deregulation, and the use of tariffs to broker fair trade deals and encourage foreign investment.

Another way to make life more affordable is to let people keep more of the money they earn. The Trump administration did that too by lowering personal income tax rates and offering income tax deductions. Assuming $2,400 in annual tax savings, a household earning $112,000 would keep approximately as much additional money as it would from a $3,000 pay raise—about 2.7%.

From Prices, to Production, to People

Democrats have opposed all of the Trump administration’s efforts to make life more affordable. But, what have they offered as an alternative? Kamala Harris proposed price controls and regulation which lead to supply shortages. When producers can’t make a profit, they stop making the product. When shortages become severe, the government steps in to “seize the means of production” or to “de-commodify” housing. Democrats offer enormous spending programs like Medicare-for-all with government mismanagement and little or no oversight. Paying for enormous spending programs will require equally enormous tax increases for middle-class families. Instead of incentivizing work by not taxing overtime, Democrats incentivize freeloading by offering freebies. Who needs to work when the government offers free food (SNAP), free housing and free healthcare?

When people are dependent upon the government, they can be controlled by the government. Every Democrat proposal leads to the same destination - power over you. When the government controls healthcare, it decides if, when and where you receive treatment. When it controls housing, it decides where you live and what size apartment you need. Recall how Democrats tried to control you during the pandemic: vaccination cards, restrictions on gatherings, work restrictions, business closures, school closures and social distancing. It starts with controlling prices, progresses to controlling production, and ends with controlling people.