Less Than Zero: The Case for a Falling Price Level in a Growing Economy

by George Selgin

This book sets out to explain the complexity of why increased production does not that always bring with it lower prices. According to the book, those who look upon monetary expansion as a way to eradicate almost all unemployment fail to appreciate that persistent unemployment is a non-monetary or 'natural' economic condition, which no mount of monetary medicine can cure. Selgin explores the differences between these monetary and natural conditions, and proposes solutions of his own.

Genres: Economics, Finance, Money

188 pages, Paperback

First published August 1, 1997

Reviews

[Frank Stein · Rating 5 out of 5]

The title of this book doesn't do it justice. Instead of merely being a pitch for gradual deflation, this is a lucid, clear-eyed explanation of why our economy would benefit from switching from a steady "inflation target" to a constant "productivity norm." Selgin points out that since the economy in most situations is growing (or, in other words, is becoming more productive), goods are in reality becoming cheaper most of the time. Yet with even a 0% inflation target, central banks have to constantly inject more money into the economy to undo productivity gains and keep a steady price level. This creates real distortions in the signals given by prices.

Selgin points out that a decline in the prices of goods provides real information to producers and purchasers. It demonstrates how much productivity has changed overall as well as in different markets. He compares it to allowing the different dynamic levels of a symphony to express themselves in a recording. The goal for a good recording isn't the same steady volume of all instruments throughout, but to allow changes in volume to be clearly communicated to the listener. The same goes for changes in prices.

Selgin points out that the problems with inflation targeting are more severe in the face of negative supply shocks, or negative changes in productivity. Here the productivity norm says that central banks should allow price levels to rise higher temporarily and inject more money into the economy. Say an oil shortage raises prices throughout the economy, so real production and productivity shrink. To keep inflation steady under an anti-inflation regime, the government would have to cut back money even more, leading to more falling demand to "roll back" higher prices. Thus the productivity norm price level changes both ways with changes to the economy, creating more flexibility.

Selgin also shows that creditors and debtors of fixed money contracts benefit with a productivity norm. Since interest rates reflect not just inflation expectations but expectations about economic growth, productivity norm price adjustments do equal justice to both sides of a contract. If productivity is unexpectedly high, debtors have to pay more to reflect their better ability to repay. If productivity is unexpectedly low, however, debtors have to pay back less. Thus during a recession or depression, debtors aren't squeezed excessively for funds they don't have. Again, the flexibility benefits are enormous.

Although I don't agree with everything in this book (I'm less sanguine about the ability of wages to adjust downward), this is a great overview of monetary policy and a positive proposal for the future. It should be an economics staple.

[Sean Rosenthal · Rating 4 out of 5]

Interesting Quote:

"Using monetary policy to stabilise the price level is not at all like making the weather more predictable...Stabilising the price level is more like making barometric readings (nominal indicators of meteorological conditions) predictable, while leaving the weather itself as uncertain as ever...Just as it is desirable for barometer readings to be unpredictable if the weather itself changes randomly, it is desirable for the price level- a useful 'barometer' of changing unit costs - to be unpredictable to the extent that aggregate productivity changes randomly."

-George Selgin, Less than Zero

[Vance Ginn · Rating 4 out of 5]

Selgin does a good job of making his case for price level targeting whereby there can be inflation and deflation over time. This then is connected with his overview of nominal GDP targeting. There is more structure and validity to it then I thought before reading the book. Check it out for yourself.

[Matthias Görgens · Rating 5 out of 5]

I read some other articles by Selgin before. I looked into this book specifically to figure out how 'free banking' can stabilise nominal GDP.

[John Curtice · Rating 1 out of 5]

Only a pure academic could come up with this idea this bad

[Tyler · Rating 5 out of 5]

I almost gave this 4 stars, but I feel that would be unfair. The only reason that I would have thought to give it 4 stars is because of all the econ jargon. It's really unnecessary and prevalent with writers like Keynes. That being said, Selgin doesn't deserve to be knocked by this because it seems most economists do this. This book is not for someone who is new to economics or knows nothing about macroeconomics. If you know microeconomics, I'd suggest reading some macro before reading this book.

Selgin suggests that the zero inflationists are onto something, but do not go far enough. He suggests that PRODUCTION driven deflation be allowed rather than avoided. He suggests that producers are aware of this deflation because that's precisely what they are trying to do. All in all, great econ book!

[Mase · Rating 5 out of 5]

An awesome book, using mainstream AD-AS diagram to show why deflation is not always bad. However, more importantly, the author uses words to describe why a market economy should experience steady, but expected deflation when prices and interest rates are at their "natural" or "full information" levels - that is, when the price system is allowed to operate. The author also offers a way "from here to there" by advocating a productivity norm in monetary policy.

The book is not a long read, but is packed with info and is very useful in understanding the macroeconomy. I highly recommend this book to anyone interested in economics.