To listen to much of the economic coverage these days — from various points along the political spectrum — you would think that the biggest question for our future livelihoods is who, if anyone, can save us from the menace of low prices. Whether deflation is imminent has been the subject of some debate, with the latest comments by the Federal Reserve strengthening the “yes” camp (even though those comments were hedged). Most people involved in the conversation have taken it for granted that deflation would be a very bad thing: that it would take the economy into a contractionary spiral.

A dissenter from this view is George Selgin, an economist who teaches at the University of Georgia’s Terry College of Business. Selgin challenges the view, commonly held on the right and in the center, that government should guarantee price stability. When productivity is increasing, he argues, prices should fall. Deflation based on productivity increases need not have the harmful economic effects associated with deflation based on a collapse in the money supply or of consumer spending.

Selgin argues that a productivity-based deflation need not result in a decline in wages, even in nominal terms. Nor need it increase the debt burden, as the worriers contend: “[A]lthough loans would be repaid in dollars more valuable than before, the dollars the borrowers made with the loan would also be more valuable.” A productivity-based deflation is “very kind to pensioners and others living on fixed incomes.” There is historical precedent to support both points.

What about the idea of deflation spiraling out of control? “One of the things that keeps coming up,” says Selgin, “is this knife-edge view of deflation — [this idea that] you get to zero inflation slowly, then suddenly it drops like a cliff and you spiral down. The arguments . . . to sustain that image of things make some sense if the deflation is caused by a decline in purchasing power. They make absolutely no sense if what’s causing prices to fall is a greater abundance of final goods. Prices can keep falling gently.” Selgin notes that a similar argument was used in the late 1970s as a reason not to let inflation fall below 5 percent.

One reason people lend credence to what Selgin calls the knife-edge view is that they believe that the Federal Reserve cannot combat deflation once nominal interest rates are at or near zero. But as Fed governor Ben Bernanke pointed out last fall, the Fed “has most definitely not run out of ammunition” in such circumstances. Indeed, he says, “The conclusion that deflation is always reversible under a flat money system follows from basic economic reasoning.” The Fed can always create more money. (Bernanke does not, however, seem to agree with Selgin about the possibility of benign deflation.)

Is deflation, of either the good or bad kind, imminent? Not according to Selgin: “It’s not clear that there’s much of either happening. There’s some evidence of deflation only in producers’ prices, that is wholesale prices, and if you take oil out, there’s not even much of that going on. What you’ve really got here is mostly a decline in prices that’s on the wholesale level and this is heavily influenced by the recent drop in oil prices following the conclusion of the war. Now if you just think about that component, you have to call it good deflation because it’s brought about by more abundant oil availability. . . . The kind of deflation that you really want to worry about is not the kind caused by a greater output of commodities or finished goods. It’s the kind caused by a lack of demand for goods, by falling levels of spending for goods and services. [That is] not happening.”

Selgin suggests that deflationist policies could end up “solving a nonexistent problem and in consequence exacerbating a real problem that’s evident, the problem of an overly cheap dollar. . . . There’s no reason for the deflation alarm to be sounded at this point or for the monetary authorities to suddenly think they have a reason for expanding the money supply.”