A reader asks whether inflation might be attenuated in a digital economy. If people spend more on downloading movies, the price charged by the streaming services does not have to rise, because they have high fixed costs but low marginal costs.
Suppose that the economy consists of food and movie downloads. As the government prints money, food prices go up. As the price of food goes up, the movie streaming services must raise their prices, or else their incomes will fall in real terms. So I think that money still causes inflation, even if some of the economy is digital.
So inflation is right around the corner then? I remember in 2009 runaway inflation was around the corner for the next five years which obviously never happened. In the 2010s United States was probably most flat inflation in our history.
Japan has printing money since 1992 and where is the is the inflation? And they don’t have a tech economy.
However, long term I do believe long term 1990 Keynesian basics of Macro for global economy:
1) Long term money printing is likely going to lead inflation and a run on a developed economy. I just don’t know when and where this will happen, (FYI I dont believe it will be the US and it will longer than you think.)
2) While tech and data has had influence on goods prices, Japan experience happened before tech late 1990s revolution.
3) The impact of outsourcing and global economy does a lot to control US inflation although it’s impact was heavier in 1980 – 2008.
First I do think the Inflationist Future has to explain why there has been minimal inflation the last 25 years and how it crop back up in the future.
(Note I think it is falling birth rates controls AD in the short run and then both AD-AS in the long run that is enforcing lower inflation.)
Collin, what do you mean by printing money? Please give references to support your statement that Japan has been printing money since 1992 (I assume you mean “a lot” of money, well beyond people’s “demand for money” at the 1992 price level and real income).
Also, since you refer to Japan 1992, let me suggest that you compare it with China 1992. The high inflation of 1992-93 precipitated radical changes in China’s monetary and banking system. You would be surprised to know how much the consolidated balance-sheet of China’s central bank and state banks increased and I bet that it increased much more than both the balance sheet of Japan’s central bank and the consolidated balance-sheet of Japan’s central bank and all commercial banks. China’s inflation rate has been low since 1994, however.
Arnold is right about the change in relative prices and the probability that his change will imply inflation (at least in the short-run). Arnold does not address what may happen with U.S. inflation, however. Your reference to what happened in 2009 is relevant but your interpretation is not. Since 2009, U.S. inflation has been low despite the large increase in the Fed’s balance sheet but that has been because the Fed has been intermediating funds from banks to purchase bonds and other assets. At the same time, the increase in the consolidated balance-sheet of the Fed and U.S. commercial banks has been much lower than the increase in the Fed’s balance sheet. In other words, the Fed has not been printing money.
We don’t know yet how the Fed will finance the new lending programs. Early on it will rely on intermediating funds from banks but the programs are too large and that intermediation may lead to increases in interest rates and this would press to print money.
Considering I did take upper class Marco in 1990, I am left wondering why Japan has pulled out every inflationary government policy, they have not faced high inflation at this time. In 1990 who would have believed that the highest flying economy 1990 Japan would spend next three decades pulling every Fed and government spending Keynesian program and end up with low inflation and low growth for 30 years. (I did have a later professor form India believe would have a labor supply problem in 1992 and nobody in the class believed it.)
Of course China inflation rate low since 1994 is a bit of wonder as well (although with Party control makes it easier) and Inflation will crop up in specific nations.
Oddly enough I agree with the Professor on potential inflation increases long term but it does not seem much of threat today. (I could be wrong here.)
In the 2010s United States was probably most flat inflation in our history.
I’m not sure how to interpret that statement but there have been numerous periods in American history when inflation was not just low but negative. The first years of the Great Depression saw large decreases in prices. The last decades of the 1800s had a chronic deflation, which was a major cause of the rise of Populism.
Wikipedia has a great graph of the official Consumer Price Index inflation rates from 1914-2017.
I did say flat here as there have lots of periods of deflation in our history. In fact before the 1929 Great Depression the US monetary system main goal 1873 – 1914 was a ~.5 – 1% deflation rate over the long run of the economy and we had flare ups of inflation during war crisis. (Note WW1 the high inflation started with 1913/1914 European tension not when US entered the war.)
1) The reality of US government reaction to the 1929 Great Depression with allowing failing bad assets and increasing tariffs while dealing with higher deflation rates was standard textbook economics with dealing with Depressions. But every time things appeared to hit bottom in 1930 – 1931, there would be another round bad assets and 5 – 10% deflation to deal with.
2) I remember after TARP the calls of high out of control inflation were huge from 2009 – 2014ish and it really never came true. And I never heard from writers of the time answer why there was no runaway inflation those years. It could have been tech improvements or China outsourcing or US Oil Drilling (Also Iraq after 2013!) I am not convinced those reasons as a lot tech and outsourcing had bigger impacts in prior decades as well.
Thanks for the clarification.
However, I think you are wrong about “standard economics” during the 1930s. See J. Ronnie Davis’ The New Economics and the Old Economists. They were nowhere near as hidebound as Keynes made them out to be.
My guess is that extra dollars as hot potatoes tend to land on the prices of the assets, goods, and services with the most inelastic supply and for which there are no adequate substitutes. Zero marginal cost digital items are very, very elastic.
Food is pretty elastic too – there is plenty of slack capacity to make a lot more at around current prices, though there is a growing season lag. Oil is so low right now, it makes even less sense than usual to divert agricultural capacity into ethanol production.
But houses in good neighborhoods are inelastic, so one might expect these prices to go up. That true even though millions of people aren’t paying their mortgages and are in forbearance arrangements at the moment to avoid simultaneous mass selloffs.
Anything that a machine/robot can make hasn’t experienced much inflation since Volcker. It would take a lot to change that.
Quite a bit of digital content (including this blog) is already nonscarce, free to anyone and everyone. I don’t think the concept of inflation, or even most concepts of economics in general, apply to nonscarce goods.
On the other hand, I can imagine the market for stuff-that-makes-toddlers-stay-still-for-two-hours experiencing a demand bump when schools closed. Toddlers are picky, and parents are willing to pay for relief. Not all digital content is equal.