Austrians vs Keynesians: The Scoreboard

[After submitting this to a discussion group as my synopsis of the difference between those two schools of thought on monetary theory and policy, I decided to tweak it a little and post it here. If nothing else, it might clarify my stance on a few key issues for newer visitors to this blog.]

Keynesians 1, Austrians 0
The fundamental debate about monetary policy boils down to fiat money vs commodity money — and the question, "Which of those is a better system for ensuring a stable value of money?"

Before we can answer that, we need to agree on the definition of "stable money." In many minds, it means "money that does not suffer unanticipated inflation higher than 2-3%." In my opinion, that is only half of the proper definition; it should also include "money that also does not suffer deflation of any level." In short: Stable money is money that does not inflate or deflate.

Now, if you agree with my proposed definition, the flaw I see in the Austrian side of the monetary argument becomes easier to detect. As an experiment, try this: search any of their essays or texts on the subject, and count the number of occurrences of the word "inflation"; then count the number of occurrences of the word "deflation." I predict the ratio will be at least 100:1, if not 100:0 (infinite). Deflation is at best an afterthought in that ideology, even though it can produce worse consequences than inflation -- such as a downward-spiraling implosion of the real economy, which in the past has tended to end in the violent overthrow of governments.

An even harder-to-detect flaw in the commodity-money dogma (besides the "deflation? who cares?" attitude) is its shaky track record of actually preventing inflation itself, in spite of how plausible the theory sounds. As with any type of money, commodity money (eg, gold or silver) is inflationary whenever an increase in its supply outstrips the economy's ability to increase its production of real goods and services. The California gold rush produced inflation (arguably with excellent results for the real economy); on the other hand, Spain's obsession with bringing in silver from the new world caused a domestic inflation that removed Spain from the industrial revolution. In both cases, sudden increases in the supply of commodity money were inflationary — the same thing that happens to fiat money when its supply increases too quickly.

Moreover, some in the Austrian school define "inflation" differently from the way most people think of it these days. The (archaic, in my opinion,) definition is "any increase in the money supply." Contrast that with the way most people define inflation: "any increase in the general price level." To achieve stable prices, the money supply must increase roughly at the same rate as the supply of real goods and services. But to achieve the Austrians' version of "no inflation" the money supply must not increase -- which means prices and wages must fall as the real economy grows -- IF it grows *in spite* of the stagnant pool of money available to the economic participants. I have yet to see an essay proposing a politically-viable way of convincing the general public that falling nominal wages are no problem at all, because falling nominal wages are in fact constant or rising real wages in a real economy that's growing. And, as Lincoln said, "With public sentiment, nothing can fail; without it, nothing can succeed."

The Keynesians, in my judgment, have the upper hand in monetary theory: the proper goal is to prevent BOTH inflation AND deflation in the general price level. Deflation is partially-disguised as rising unemployment, but it is deflation nonetheless. (Reason it's disguised: When prices fall, businesses must reduce costs in order to survive. But hourly wage rates tend to be more rigid than prices; therefore, to reduce the cost of wages and salaries, businesses must reduce labor hours instead of labor $/hr. One full-time employee equals 2000 hrs/yr; you know the rest.) The Keynesians and neo-Keynesians seem to be the only ones genuinely concerned about preventing a deflationary spiral in unusual times like the ones we have been experiencing; the opposing viewpoint isn't much more than "Deflation? So what, who cares?" — and amounts to a hands-off policy of letting unemployment rise to whatever level we supposedly deserve because of prior excesses. I think that is an unacceptable mistake of ignoring money that's unstable in the downward direction.

Unanticipated inflation gives debtors an unfair advantage. Unanticipated deflation gives creditors an unfair advantage — that is, up until the debtors default, at which time everybody loses because of an accelerating downward spiral to oblivion. A "stable value of money" means preventing both inflation and deflation. The Keynesians have articulated both sides; the Austrian school has been vocal about inflation, but inexplicably silent about deflation. Makes me wonder if the Austrians could only see monetary theory from the creditors' viewpoint. In any case, on monetary theory, you can count me with the Keynesians, until something better comes along.

Keynesians 1, Austrians 1
That said, I must qualify my objections to the Austrian school of thought: My objections are strictly limited to their 19th century thinking regarding monetary theory and money mechanics. I am an enthusiastic advocate of Hayekian ideas regarding the growth and vitality of the real economy in a free society. The Hayekian model for the real economy (as oppposed to the monetary side) is market- and rule-of-law driven, analogous to the biological model of natural selection and adaptation. By contrast, the central planning, government-knows-best model is analogous to Intelligent Design in biology. I most definitely do not subscribe to Intelligent Design in biology, nor do I subscribe to it in economics; the evidence in both cases is overwhelmingly in favor of the evolution model employing selection and adaptation. Hayek's brilliant essay, The Use of Knowledge in Society, explains why the market-driven model of selection and adaptation creates growing prosperity, and why Intelligent Design (a.k.a. central planning) fails.

So, I keep the money side of the economy well separated from the real goods and services side in my thinking. Money flows the opposite direction from real goods and services. Stable money is one of government's responsibilities, according to Adam Smith and most subsequent thinkers (...the other responsibilities being defense, justice, education, and infrastructure). After providing those, the government is NOT responsible for the real goods and services side of the economy. [That's why I support the Fed's monetary initiatives, but oppose the GM bailout and life-support programs. Stable money is the government's responsibility; automobile manufacturing is not.]

In short: It's all tied up: Keynesians 1, Austrians 1.

That's my interpretation, anyway, after a couple decades of research into the subject. And it's the reason I think Reaganomics is far from "dead," in spite of the wishful thinking on the left these days. Reaganomics is growth economics; what we've had to switch to is stop-the-bleeding economics. It's not an either-or choice, as I explained in more detail in this article a few months ago.

That's it. Happy Independence day, and have a safe and fun weekend.

Comments

[prestopundit]

You are reading the wrong stuff.

Let me recommend Steve Horwitz' _Microfoundations and Macroeconomics_ or George Selgin's _Less Than Zero_.

Most of what you write here about deflation and Austrian economics is false. Read Horwitz and Selgin to provide yourself with competent background knoweldge on this topic.

[Mike H]

I suppose you would place protection of property rights under justice as a responsibility of the government, but I believe it deserves special mention. There are some who think justice means taking from those with and giving to those without, but the only way to stabilize the economy, is if there are set rules for everyone to live by. Without property rights, the economy couldn't have grown into what it is today.

[Optimist123]

presto:

Thanks. Your synopsis of the "correct" version would be helpful.

[beancounter]

Mike H.,

You say that property rights is a quintessentially American virtue. I would happen to agree, but I will point to another quintessentially American right; the right to a new start, the right for freedom. From the beginning America has been a land where you come for a fresh start and a new beginning. What would be justice in most other countries is one bad decision, one bad loan, one bad business venture ruining you for the rest of your life. Your wages could be garnished for life. Instead, a man in America can declare bankruptcy, lose everything and in most cases (other than child support and student loans) start fresh. He won't be able to get credit for seven years, but it is an American right to begin from nothing and work your way back up without the burden of a debt filled past.

This obviously violates the natural rights of creditors. After all, after a person is back on his feet shouldn't he pay everything back that he owed in his "past life?" Here you must make a choice; what is more important, the right to be born again or property rights.

So what say you Mike H., to the fact that inflation of 2-3% is a right and proper American approach to monetary policy? Debt is America's 21st Century slave whip, and I have no problems with a monetary policy which slowly destroys debt, just like I have no problem with a law which allows you to discard all your debt and start a new life. But mainly I want to make the point that property rights is not the pinnacle right of Americans, but liberty. And that means liberty from neverending debt along with liberty from taxes.

[Steve Clay]

Q (from a non-economist): in a commodity system, would the govt. be able to run deficits at all?

[timwalsh300]

I think that you are painting a false dilemma by just talking about Keynesians vs. Austrians.

What about Milton Friedman's Chicago School and Monetarism? I think he got both issues right: he believed that (1) a central bank should print fiat currency and expand/contract the money supply as needed to keep prices stable, and that (2) we should choose the free market over central planning as much as possible.

A fellow libertarian once asked me how I could call myself a libertarian while supporting the existence of the Federal Reserve and fiat currency. I reminded him that not all libertarians are deflation-loving, central-bank-hating "gold bugs." Milton Friedman and Alan Greenspan best represent my brand of libertarianism.

[Optimist123]

Tim,

I agree with most of what Friedman advocated; the few exceptions have to do with monetary theory, and even he admitted that the idea of controlling the money supply is problematic given that we can't even measure the money supply -- as Friedman said in this interview:
http://tinyurl.com/newszb

The Volcker Fed was the last one that targeted the money supply; since then, the target has been the short-term interest rate. (It's an either/or choice: controlling one requires letting the other float freely.)

And even if we could both measure and control the money supply, I think Friedman's idea of allowing the money supply to grow at a steady rate of 4% (or x%) is a bit ironic, in that it assumes that a government bureaucrat can be smart enough to know that the real economy cannot grow faster than x%, when in fact that might be a deflationary policy. That's why I think the central banks got it right a few decades ago by switching to inflation targeting (1.5-2.5%) instead of money supply targeting.

[Mike H]

beancounter,

You misunderstand my comment. I didn't mean to imply that I was against bankruptcy, I was more concerned with the government taking or transferring the things the belong to us in favor of the less fortunate or the well-connected. For instance, I believe it was an invasion of property rights for the government, through prepackaged bankruptcy of GM, to circumvent the secured creditors place in line in favor of the unions. If the government can take the rug out from under the rules, how are we supposed to function efficiently?

Bankruptcy is one of those rules I was referring to that we must follow in order to have a thriving economy. Everyone knows the rules, until the government changes them, on an individual basis, by not protecting our rights to property.

[beancounter]

Mike H.,

Very well. However, I would not call GM workers less fortunate, as they made wages far above market and should have saved during the "good years." You are making two separate arguments; one that rule of law must be supreme, and one that natural property rights cannot be violated in any case.

It certainly is possible to take from those with and give to those without without violating the law or changing the rules midgame. However, that is not truly a topic for discussion on an economic blog, and I interpreted your comments in the context of inflation and deflation, spending and non-spending, fiat currency and commodity currency. Rule of law certainly is a topic for discussion on an economic blog because when law breaks down economics cannot work, but is a separate issue from whether the less fortunate deserve more or less, and certainly is a separate issue from natural property rights (which your original post implies by stating not just the government should be concerned about these rights which I interpreted as you referring to rights transcending law, natural rights.) I wanted to point out with the bankruptcy example that natural rights often conflict.

[lintond]

If falling prices are so absolutely bad, then why haven't they destroyed the computer business where we have observed continuously increasing capabilities at ever lower prices? This is hardly a unique case: Just compare food prices as a fraction of household budgets with those of 50 years ago.

Anyway, our experience with fiat money really hasn't met either of your criteria. We have had periods of price deflation and quite unpredictable rates of price inflation.

Perfection is not to be found in our corner of the universe. We need to evaluate real alternatives not imaginary ones.

[Optimist123]

Falling prices aren't absolutely bad. A falling general price level is deflation, which has almost always been a consequence of a decline in economic activity, which is the cause of a decline in the employment level.

[Gil]

The computer analogy is recycled rubbish. Computer prices fall primarly due to depreciation (new computer parts make the current ones less desirable) not simply increased production per se. Furthermore the cost of a new computer has come down of the years but not awesomely so. A new computer still costs a fair bit to buy even though you can console yourself that the latest is faster than what was around ten years ago. However some computer components (the CPU, RAM, motherboards) haven't seen much change in the last few years and consequently the prices of such components has been fairly static. The lack of new computer technology seems to be due both producers 'hitting a technological wall' as well as the Law of Diminishing Returns kicking in (most computers within the last few years are heaps fast enough to do most of what people want it to do so there's no impetus to trash it just because a new one is a teensy-bit faster).

[lintond]

I agree that general price deflation often was the result of economy-wide declines, but why is that a criterion for comparing money types? You don't like widespread economic declines (who does?) but unless you are arguing that commodity money caused the economic decline, why would gold (or whatever) be to blame?

Now I have read some Keynesian arguments that an outgoing inflation during a recession fools people into accepting lower real prices more quickly than they otherwise would. Even if this was true in the past, given the wide availability of inflation measures today, is there any reason to suppose that it remains true and effective.

Lastly, today in America, the newly created dollars that yield your desired 2-3% inflation, flow into the economy quite unevenly through the fractional reserve system, first to the banks themselves, and then to those receiving bank loans and finally outwards. This process redistributes wealth and income deceptively. The effects are pretty much indistinguishable from the operation of a large scale counterfeiting scheme.

[beancounter]

For an example why deflation is fatal, take a look at Japan. Japan is often cited by anti-stimulus advocates as the reason to avoid big government spending, the reason infrastructure spending can't work and so on. But whatever your political stripe you cannot deny Japan has experienced a general fall in price level year after year after year. Those who say garbage, Japan's problems would be gone if the government didn't intervene, aren't looking at the fundamentals of Japan's economy. It is an export economy based on cheap consumer goods and surprise surprise with the rise of China right next door, Japan's economy collapsed once foreign markets realized they could get cheaper in other Asian countries. What is fact is a fall in the general price level in Japan. Whether or not you agree with the measures taken, quantitative easing, stimulus, etc., the fact of Japan is deflation.

Here's how to tell if someone is biased: they have their own pet theories about how an economy works, say "government intervention is bad in all cases" or "quantative easing is evil" then search for examples like Japan to support their theories. What they should be doing is looking directly at the facts, saying "Japan has deflation of several percent a year for decades" then constructing theories from those facts, rather than fishing for facts to support their own preconceptions.

Anyone who knows anything about business knows a maintained large scale price war in an industry is bad for the industry. Rather than churn out better products companies are forced to deceive consumers with ever cheaper and cheaper garbage, all the while cutting expansion and research dollars. Is it so hard to believe an economy wide price war is anti-growth?

Saying fractional reserve banking is counterfeting is like saying anything but direct democracy is dictatorship. *Someone* has to print the money, and it can't be the politicians so why not a more or less independent body staffed by industry experts? At the same time full reserve banking is ridiculous: why should banks be expected to be mere storage bins which cannot loan large sums of money in fear of bank runs? Might as well say banks shouldn't exist at all. If you have a better solution I would like to hear it; the best I came up with was abolishing currency entirely and creating an economy entirely made up of IOUs so all tender was illegal and instead every single person in the world would be a bookkeeper. And for obvious reasons that scheme isn't workable, not to mention if it did work the economy would be absolutely stagnant, new startups finding it impossible to borrow money and old ones collapsing at the slightest strain.

[Gil]

"The effects are pretty much indistinguishable from the operation of a large scale counterfeiting scheme." - lintond.

By your logic - gold miners are doing the exact same thing if they were working in a gold coin/ingot economy. Hence in a gold coin/ingot economy gold mining should be banned lest they 'counterfeit' their way to wealth.

[lintond]

The first point of the original post was that the Austrians are wrong on money based on a no deflation and a predictable 2% to 3% standard. Yes, commodity money (Austrian money in this post) is not perfect, but fiat money is arguably worse. beancounter's example from Japan proves the point. Japan is a fiat money country. They have deflation; so fiat (Keynesian money in this post) fails the comparison criteria too. Is it perfectly clear that price deflation was the cause of Japan's problems or is it possible it is simply a symptom?

My point about fractional reserve banking was related to the idea of continuous inflation as a desirable feature of money. If money is continuously created it goes to somebody and everyone else suffers. Even with denationalized money and free banking fractional reserve banking is likely to exist, but without continuous expansion of the money supply the ongoing wealth transfers will not occur.

Yes, Gil gold miners used to get some extra value for their product because it was money too. However, it is much harder to mine a ounce of gold than to credit digital dollars. So which will cause more trouble in the long run assuming neither bankers nor gold miners are angels?

[beancounter]

The world economic order runs on fiat money, specifically the American dollar. If fiat money caused deflation, we would've had stagnant growth in the entire world for decades. Correct deflation is a symptom, a symptom of cheap labor and an economy focused too heavily on export. That doesn't mean deflation is desirable any more than any other symptom of a disease -- if you have it, it is surely sign of a disease.

Nobody wants to make less and less money on their paycheque. Nobody wants principal on their debts to stay the same at 0% interest. Everyone wants to make more and more money than their fathers and grandfathers. Inflation favors people who invest and spend their money rather than hoard it, because if they know they do nothing with it it will decrease in value. Just a little inflation being a desirable feature of money is human nature. If you dislike this argument, note that communism is a failure because it ignores human nature. Nobody will want a falling general price level because nobody wants to make less and less amounts of money regardless of whether that less amount of money can buy more. If you disbelieve that walk around asking anyone if they would like making less and less money: even try qualifying it if you want by saying the less amount of money they make will be able to buy more and you'll get some rude replies.

Even if you disregard all those arguments as too qualitative and not quantitative enough (I don't know why -- Austrians love qualitative arguments) there's the fact it is impossible to know how much currency is moving and existing at a given time. So its either slight inflation or slight deflation, and I know what I prefer -- no Japan, no deflation.

[lintond]

If you go to this site (http://www.indexmundi.com/g/g.aspx?v=71&c=ja&l=en) you'll get a graph and table of inflation rates for Japan from 2000 to 2008. This link (http://www.indexmundi.com/g/g.aspx?v=67&c=ja&l=en) will show the per capita GDP on a PPP basis.

Here are the numbers:

Year Inflation (%) GDP (US$)
2000 -0.8 23400
2001 -0.7 24900
2002 -0.9 28000
2003 -0.9 28000
2004 -0.3 28200
2005 -0.1 29400
2006 -0.3 31600
2007 0.3 33100
2008 0 33800

Where is the correlation? Serious deflation early on, but no declines in per capita GDP and a 44% growth over 9 years. Where is the misery? Yes there is a correlation between decreasing price deflation and per capita GDP growth, but the data hardly support the idea of price deflation == economic death

[beancounter]

You're doing the fact picking, cherry picking thing lintond. If anything all that shows is the government stimulus was more successful in Japan than Austrians would have us believe. 1.5% - 2.0% growth is not misery but it is considered a lost decade in terms of economics, with 3.0% growth or far far higher double digits in Asian tigers being the norm, and those countries don't have deflation problems.

You deny that deflation causes falling wages. That's a big load, akin to saying people do not always respond to incentives so tax cuts don't work. Since you don't seem to accept that a company can't continue to pay its workers the same amount of money if everything is cheaper, I don't know how else to convince you other than ask you provide example of a country with persistent deflation problems with tremendous economic growth. But again it violates common sense and human nature to think deflation has no effect or positive effect on economic growth when the human condition is to quit or grow less productive with less money. Put in other words, will you work harder if your boss gives you a pay cut? You wouldn't. Either answer how a company can pay its most productive workers more year after year if it charges less and less money for its products or concede deflation is a *disincentive* to work and a bottleneck on economic growth.

[lintond]

Trying to stay on topic....

In the index of Mises' Human Action, deflation occurs on 4 sets of pages and inflation occurs on 14 sets of pages.

Not exactly the number of word usages, but a bit more balanced than 1 to 100.

[Gil]

Of course, wages should fall during a deflationary period as holding the wages static will the equivalent of a pay rise. Deflationists complain that pay rises in step with inflation are illusionary as the purchasing power has remained, so, by rights, deflationists would have to admit that wages would fall in par with deflation. But will people keep a job and take a pay cut? Actually when watching the news around the world people ARE accepting pay cuts or more hours. It turns out that "take a pay cut or lose your job in an employers' market" does actually work in the modern era. However I think Austrians believe in negative interest rates. Theoretically the negative interest rates would cause the principle to go down but the purchasing power would be maintained. By the way, why should deflationists like the thought of more zeroes accumulating on the right side of the decimal point? I side with the Skeptical Optimist with that the purchasing power of money should be static erring on the side of very mild inflation.

[Daniel Jarvis]

I'm not sure if your illustration between evolution and intelligent design is correct in this piece.

I would say that our capitalistic founders set up the parameters (intelligent design) for economic "life" to flourish and adapt, and it has, for 200+ years.

True "evolution economics" would lead us to a totalitarian state, because the "fittest to survive" would always be the guy who can print the money and control the law. I see that trend happening now, as the federal government grows, and state/local governments + private sector shrinks. (That's what the 10th Amendment is supposed to protect us from!)

Hopefully we will get some "intelligence" in Washington that will steer us back to our founding principles.

[beancounter]

Well they accept it because they have to: better a job than no job. But I refuse to accept productivity isn't affected at all if you pay someone less. He might be at the same job but he'll do a worse job at it and that's really bad news if its across an entire economy. Not all goods are elastic, so giving someone a pay raise even if it is mostly inflation helps him pay not just trinkets like HDTVs or entertainment but necessities of life (if you assume that non-elastic goods are necessities). Someone said in a thread a couple months ago that this amounted to some kind of "delay" and stimulus spending was using this delay to hope for economic recovery akin to some kind of fraud. All I have to say to that is the "delay" if you want to call it that is intrinsic to economics when no one person can have the perfect information at the right time, so it is not fraud or counterfeiting or whatever you want to accuse it of but a realization of the fundamentals of economics. I imagine if human beings were all economic experts and could accurately and easily report how much money was in the market with full transparency a different system would work better. But we're not. The average employee or even a professional who has no knowledge of economics like a Dentist or Doctor cannot be expected to take a pay cut and calculate whether it matches deflation and is therefore no reprimand. Even economists can't agree what is deflation and what is inflation, and a system which expects the common man to have expert knowledge is a bottleneck at best.

I have a stinking feeling those who love deflation just want the things they buy to be cheaper. At risk of sounding offensive given the number of libertarians roaming around the Internet I would say most of them don't even work (not necessarily a bad thing just means they're independently wealthy) or are on fixed incomes: try finding any blog or forum like Steve's which gives any credit at all to Keynesians and you'll see what I mean, and Steve isn't even a Keynesian. You can't even find anyone who admits to being a Keynesian on the Internet. The Keynesians are too busy working and getting raises so they don't particularly care enough to stump on the Internet because raises will match or exceed inflation, but the libertarians really, really want deflation so what they have doesn't lose value and they see the natural consequence of not working = losing purchasing power as some kind of tyranny or "wealth redistribution." Any system which wants maximum economic growth should favor the working (not to be confused with working class).

[millhead]

"The world economic order runs on fiat money, specifically the American dollar."

In the debate of Austrians vs. Keynesians what would happen if the world moves towards a "united future world currency" as Medvedev proposed today?

http://tinyurl.com/mmm8ta

[lintond]

If you analyze the changes in the CPI from 1813 to 1912 (pre-FED gold standard of one sort or another), and from 1913 to 2008 (post-FED, fiat money), you see roughly 0.5% compounded deflation during the pre-FED period and roughly 3.3% compounded inflation during the post-FED period; both computed using an end-point exponential fit. The mean departure from this trend and the standard deviation of the departures was 0.1% and 5.5% for the pre-FED period and 0.2% and 5.1% for the post-FED period.

So there was no real difference between the inflation/deflation noise but a big difference in the trend rate of inflation: A dollar from 1813 would purchase $1.65 worth of goods in 1912. A dollar from 1913 would purchase 4.4 cents worth of goods in 2008.

[Gil]

The Skeptical Optimist has already addressed the Conservative/Libertarian hysteria about the U.S. dollar losing 95% of its purchasing power since 1913 ("Purchasing Power Propaganda" Dec. 2008) lintond. The real issue is what does a week's worth of work buys you. In other words, wake me when you can show Americans' standard of living dropped 95% between 1913 and 2008.

A dollar bought considerably more than what one dollar buys nowadays but it was considerably more difficult to obtain that dollar. You may like seeing the prices of goods from yesteryears being so small but you won't like seeing the wages and salaries of what people were making back then. Not only did spent a great deals more of a percentage of their income on the basics of living but got lower quality too.

[lintond]

I didn't think the comparative statistics were particularly hysterical. The original post was about comparing Keynesian and Austrian monetary approaches or basically, government-imposed fiat money and commodity money, perhaps even denationalized money depending on your Austrian. Skeptical Optimist came down on the side of fiat money on the basis that he preferred continuing steady inflation with little risk of deflation. My point was simply that historically neither money system provided "stable prices" or "steady, predictable inflation". Both exhibited roughly the same magnitude of deviation about their secular trends.

The basic question is: If you expect 3% inflation and you end up with 0% is that really any different than expecting 0% and ending up with 3% deflation? I would say not so much, both situations play havoc with the real/nominal interest rate relationship and with the expected behavior of real asset and liabilities with respect to their nominal values.

Before 1913, fiat money advocates could promise that they would maintain a stable or at least predicable price level. We have run this experiment for nearly 100 years and the facts show that the predictability of prices has not improved. We have simply added an unknowable and politically driven secular inflation component to the trajectory of prices.

[beancounter]

Yes both situations play havoc, but the real question is what plays more havoc. On the one hand deflation causes individuals to be more likely to hoard or save money. On the other inflation causes individuals to be more likely to spend or invest money. Anyone who doubts the former should visit Japan, and anyone the latter should hold on to a no-interest account for a decade.

Unfortunately I seriously doubt that a sustained period of deflation would encourage consumers to save money. It would not solve what libertarians see as an overexcess of spending and credit. It certainly would encourage investors to hoard/save money if said investment did not exceed the rate of deflation. That's right, it's a price floor. Prices might be chaotic and unpredictable, but at least there is no additional price floor with inflation. And that is the real problem with deflation, an additional price floor as dangerous as overregulation or price controls. Can't forget microeconomics.