Deflation is good for you and here’s why

by Jehu

I had a short exchange with someone last night about this tweet on deflation:

@davidkorowicz: Deflation [here] we come, and though not polite to say in civilized conversation, the limits to growth are shadowing our present moment

The conversation the tweet sparked reproduced some of the most often made arguments for why deflation is an unwelcome development in a capitalist economy. Among the most important arguments was the assertion deflation will cut wages and increase debts.

The alleged mechanism of the negative effects of deflation on the working class are these:

  • Your company gets less income so they lay you off or cut your wages.
  • With lower wages or no job, your outstanding debts become harder to repay — which is a big thing if, for instance, you have a mortgage on a house or a car loan.

On the other hand, with inflation you get many of the opposite problems.

  • Inflation constantly increases your real cost of living.
  • With prices rising, you either have to get more frequent raises or work longer hours just to remain at your present standard of living.
  • With rising prices, you tend to become increasingly dependent on debt to make up the shortfall between your wages and prices at the checkout counter.

So which is worse? Losing your job and  facing wage cuts? Or working more hours just to keep your head above water?

For one thing this is a false choice: with either inflation or deflation wages and jobs are cut. One thing capitalism does very well is reduce labor costs — it is the only thing it does well. It does not matter to the capitalist whether prices are generally rising or generally falling;  he can always increase his profits by reducing his labor costs.

Since the 1930s, almost all economies have suffered uninterrupted secular inflation. In the US, at least, industrial and agriculture jobs have been drying up the entire time, despite almost uninterrupted inflation. The loss of these jobs have nothing at all to do with inflation or deflation, but with the mode of production that always reduces  the labor time required for production of commodities.

It is wrong to think deflation causes job losses while inflation prevents jobs losses, because this is just not consistent with the data. Economists who make this argument are being deliberately misleading on the subject and are not to be trusted. It is also wrong to think falling wages have anything to do with inflation or deflation. Again, the capitalists are always trying to reduce labor costs and will take any opportunity to cut wages.

In the United States, the period of the largest fall in wages is exactly the period of the highest inflation: the 1970s. The empirical data shows conclusively that since the 1970s real wages have been falling. This fall has not appeared in the actual nominal wages paid out — the actual quantity of dollars. In terms of nominal dollars wages have been rising since the 1970s, but this is an illusion of paper currency. While the dollars in your wallet have indeed been increasing, their purchasing power has been falling faster, meaning it takes more dollars to buy everything

Everyone knows an increase in nominal wages is not the same thing as an increase in real wages. Real wages, what your paycheck can buy, the only real measure of wages, have been generally falling since 1971. This is because while your nominal wages have been rising, prices of the things you buy have been generally rising faster.  Thus, inflation neither prevents your jobs from being eliminated nor does it prevent your wages from falling. It is not true in the least that deflation will cut your job and wages, while inflation will protect your job and wages.

To be completely frank about this: If you need a job and a wage, you are fucked no matter if there is inflation or deflation.

If inflation and deflation makes no difference to you as a worker, why is this an issue? Why are economists so concerned about the prospects of a global deflation cycle? The concern has nothing at all to do with you. Let me let you in on a big secret: No one gives a fuck about you, your miserable job and your wages. The only persons on this planet who cares about your job and your wages are you and the people who you support — your family.

When economists or government officials worry about deflation, it is not because they are worried about you. Of course, they will always put this in terms you can understand — your job and your wages — but this is just marketing. They know you are concerned about your job and your wages, so they frame the problem in such a way as to evoke fear.

“If deflation breaks out, you proles are all going to die! Millions will be without jobs and people will be starving in the streets!”

This is just the way the sell their policies to you and they have been doing it since the 1930s. Roosevelt used it to justify cutting wages by 40% in 1933 under Executive Order 6102. It was an emergency, he said. The only way to end the depression was to cut everyone’s wages.

Guess what? It is likely you never heard of EO-6102, or know that is what ended the depression. No one even acknowledges it happened today. And no economist talks about it. But go to any chart of the Great Depression and you will see it bottomed in 1933, when Roosevelt cut our wages by 40%. He did this to everyone by cutting the purchasing power of the currency, i.e., through inflation.

Roosevelt’s Executive Order 6102 stops the further contraction of the US economy in 1933

Since Roosevelt cut wages to end the depression, he could not have done this to protect your wages. Inflation doesn’t protect your wages, it reduces your wages. And Roosevelt could not have intended to save your jobs. In fact, employment continued to fall for another year, bottoming out in 1934. Cutting wages in 1933 had no direct effect on job creation and could not have saved a single job in the economy.

If cutting wages didn’t create jobs, what did it do? Why, in other words, is it so important to create inflation? Simple: cutting wages boosts profits — it only boosts profits. There is no reason whatsoever to cut wages unless you want more of the firm’s income to go to the owners. If a firm wants to forcibly increase its profits, it can do this by slashing the wages of its workers. Roosevelt just did the same thing for the entire economy at once with EO-6102.

Today, Roosevelt is celebrated as a working class hero by people too ignorant of their own history to know how he ended the depression. The state has been using inflation to steadily cut your wages and boost the profitability of invested capital ever since then. This is why the prospect of a global deflationary cycle causes such consternation among economists and government officials.

Deflation very likely means the fascists will be unable to automatically reduce your wages every year to prop up profits.

If deflation actually emerges, you can stick a fork in capitalism because, in this mode of production, nothing runs unless it’s profitable. The fear of deflation is not the least bit concerned about your job or your wages. It is all about profits. If you want to fix capitalism, deflation will be a big problem for you. But if you want to see it die, deflation should cheer you up.

The only people who should be afraid of rampant deflation are the capitalists and their paid and unpaid agents.