As QE begins the process of tapering off, confusion remains as to whether or not that is a good thing, albeit the inevitability of the process. (QE, will we "See You In September?") Just the same, central banks are careful to target a small amount of inflation, and are in general opposed to any overall deflation - whether bad or good - as George Selgin noted in this recent video. While his theories of good and bad deflation are sound, they nonetheless are somewhat drowned out in the cacophony of today's inflation targeting which can make it difficult to distinguish between other threads of monetary theory. Selgin - in particular - further distinguishes his ideas from those he refers to as "zero inflationists", which may not always be apparent.
Even though it was somewhat disconcerting to hear George Selgin call for less QE in the above linked interview, that's in part because his thought processes can appear to run a bit counter to what Market Monetarists actually support. One looks a bit closer, however, and discovers that George Selgin is not so far removed from Market Monetarists as it might seem. As one commenter at The Money Illusion noted, Selgin is also getting better at relaying his ideas to the public nowadays, than when he wrote Less Than Zero back in 1997.
My primary concern in terms of a (present potential) role for positive deflation, is that incentives in the non tradables sector are still not well aligned in this regard. In order for good deflation to be a positive contributing factor for nominal stability, hidden productivity problems need to be uncovered in a number of non tradable industries which also benefit from the lack of transparency at the Fed (of which convoluted inflation targeting is no small contributing factor). As a result, we have the positive deflation which results from "pure" tradable goods (those with few subsidies, etc.) "hidden" by forms of local, state and national inflation which central banks do not create, but instead find themselves obliged to follow (through printing money) up to a certain point, at which they must then arbitrarily cap at the agreed to point.
Does the central banker's position (for not reflecting good deflation) have something to do with the fact that local economies often prefer to create wealth through less innovative processes in general? Positive incentives on the part of local economies are skewed, in that individuals have a limited range of choice for the most important components of consumption, once they commit to an area. That in turn means a pre-existing commitment to the real estate market and the services which in turn reflect the wealth levels the real estate market suggests. In other words, non tradable goods, so far, have not had the same incentives to innovate that tradable goods have, in that they don't have to compete with worldwide markets for a customer's attention. However this has led to lack of sustainability in their present form.
Central banks therefore end up with a delicate balancing act, because non tradable goods over time can become the larger representation of goods in an aggregate sense. Plus, bad deflation can result, when overall growth becomes too suppressed from the local non tradable sector advantage. Besides the need for nominal targeting to untangle these problems, structural change is also an important component so that real growth without inflation might be possible. However, structural change certainly means different things to different people, and admittedly, I approach this problem a bit differently than some think about it. The nature of a global economy, and its effects on markets in different areas, mean that no consumer options for lifestyle and consumption can be reduced to simple equations, for instance.
However, greater coordination of lifestyle and consumption options is possible, that would not only give non tradable sectors more incentives to innovate, but also to become more accessible and productive in the process. Ultimately, the best way to return to greater productivity and economic access is to transform some non tradable goods into tradable goods. Such an undertaking would not be so difficult as one might imagine, either for construction possibilities or actual components of individual time,. Were it possible to do this, good deflation may ultimately have a chance to work to everyone's benefit. I plan to do a follow up post on this subject in a day or two, which breaks down several approaches to production currently used, in simple terms.