Since the disastrous 1930s, economists and central bankers seem to have lost sight of the fact that there are two kinds of deflation one malign, the other benign. Malign deflation, the kind that accompanied the Great Depression, is a consequence of shrunken spending, corporate earnings, and payrolls. Strictly speaking, even in this case, it is not so much deflation itself that is harmful as its underlying cause, an inadequate money stock. In response, firms are forced to curtail production and to lay off workers. Prices fall, not because goods and services are plentiful, but because money is scarce.
Benign deflation is something else altogether.
It is a result of improvements in productivity, that is, occasions when changes in technology or in management techniques allow greater real quantities of finished goods and services to be produced from a given quantity of land, labor, and capital. Because an increase in productivity is the same thing as a decline in unit costs of production, a productivity-driven decline in the prices of finished goods and services needn t involve any decline in producers earnings, profits, or payrolls. Lower costs are matched by correspondingly lower consumer prices, not by lower wages or incomes. Such productivity-driven deflation is actually good news to the average breadwinner. Thus, since World War II, the United States has witnessed frequent gains in productivity.