Perhaps you’ve heard? Officials in Washington, D.C. are terrified over the specter of “deflation”. While inflation is usually considered to be an evil, the government is willing to print up untold sums to avoid what it sees as the calamity of falling prices.
Why are falling prices so bad? Actually they’re not bad at all, they’re a good thing. Falling prices means things are more affordable and plentiful, which is the natural state for a growing economy. The tech industry, one of the most economically lively and societally transformative, has been in a constant state of deflation from the very beginning. Think about Moore’s Law, falling broadband prices, cheaper computers, ubiquitous cell phones, etc. Deflation. It’s all good.
But the government hates deflation because it’s bad for borrowers. The government, with its multi-trillion annual deficits, is the biggest borrower around. As a borrower, the government would prefer inflation — essentially paying off its debt through freshly printed currency. In a state of deflation, the government’s monster debt remains the same, but the tax base shrinks as prices and wages all go lower.
Yet that’s precisely what the Internet is doing. Sure, tech has always been a deflationary force, but it’s at the point where it’s really creating hyper-efficiencies and price pressure across all industries simultaneously. It’s contributing to the collapse in real estate prices, car sales, travel industry profits, you name it. It’s basically done hollowing out media industry profits, for good. And as any self-respecting Web 2.0 windbag can tell you, it’s creating new markets where reputation and attention serve as substitutes for money. Historically, market forces and price signals have been the primary way in which a society regulates itself, but the Internet is providing ways to replace it. And these new non-money markets can’t be taxed.
In a vacuum, this is all great stuff. It’s creative destruction, and that’s a good thing, even if the collapse of old industries is painful. But we can survive old industries collapsing. That’s progress. Yet this progress for all people comes by creating a less-monetary, cheaper economy that will provide serious tax collection headaches for the government, which took out trillions in loans, thinking that the status quo would last forever. When the government goes bust, that won’t be quite as pretty or societally comfortable as when a legacy industry goes under.
(This post originally appeared as a column at peHUB)
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