Today’s Journal contains a sobering economic report suggesting that the December producer prices report contains further evidence of a deflationary trend. (If you thought inflation was bad, deflation is its evil twin — a descending spiral of prices and wages that economists have very little clue how to end once it’s begun.) While prices for energy and services are up, manufactured goods continue to drop.
Now, I’m no macroeconomic expert, but there’s one confusing aspect to all this. The month-to-month price-report stories that tend to deal with these matters never bring up what I can’t help imagining is the elephant in the room: China. In the past few years Chinese manufacturing has gone global in a huge way. When you walk into your Costco, your Home Depot, any store that sells large quantities of manufactured goods, virtually everything for sale is now manufactured in China. China has an enormous labor force and, by Western standards, extremely low labor costs. The result: cheap goods.
I can’t help thinking that the long-term downward pressure on manufactured-goods prices comes from the simple fact that the Chinese economy is now plugged into ours. What I would love to have a thoughtful economist explain (wave arms in Brad DeLong‘s direction) is whether deflationary trends caused by such low-priced imports and competition are to be feared as greatly as other kinds of deflation that we’ve been reading about — the “Japan trap” that Paul Krugman and others have warned about. Are these phenomena similar or different?
From the consumer-in-the-street perspective, you think, hey, this is great — my furniture, tools, DVD player and so forth all cost less than they used to! Then you start wondering whether those low prices mean that your neighbor — or the entire population of the Midwest — now faces unemployment, and it doesn’t feel as good.
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