John Cochrane Defiantly Takes On Economic History

A Benjamin Cole post

As I predicted, the right-wing has gone past its fixation on absolutely dead prices as an economic cure-all and moral imperative, to the even-better nirvana of…deflation.

I wish I was making this up.

But comes now University of Chicago scholar John Cochrane, path-breaking with stalwart allies such a FOMC member Charles Plosser, that deflation is an economic elixir, not a sign of stagnation. Cochrane authored a recent The Wall Street Journal op-ed genuflecting to southerly price drifts.

I just don’t get it.

Recent Economic History

Okay, let’s look at the United States, 1982-2007. That’s a 25-year stretch, and recent too. In 1982 the U.S. GDP was $5,865.9 billion. It rose to 13,206.4 billion in 2007 (both figures in 2005 dollars).

That is a real increase of 125.1%, or an annual compounded rate of 3.3% real, for 25 years running, with all the imperfections and structural impediments that the U.S. economy has.

In the real world, the U.S. economy performed well 1982-2007. That is not debatable.

The rate of inflation? In the 25-year period prices rose 114.8%, so the inflation rate was about 3% a year. Except for 1982, inflation was always below 6% and, and only twice below 2% in the 25 years. In other words, moderate inflation in the 2% to 4% range was the norm. It worked.

For most of that period of prosperity, moderate inflation was accepted across the political spectrum. And why not?


There was a modern nation that passed through deflation, which regular readers know was Japan. From 1992 to 2012, Japan had mild deflation.

Looking to the St Louis Fred series, we have to go with 1990 to 2011 figures (due to data discontinuations), and we find Japan had a real annually compounded GDP growth of less than 1%, or 0.91%, through that 21-year period.

Japan’s real growth rate was one-third of that of the United States, when we compare their mildly deflationary period (1990-2011) to the mild-to-moderately inflationary period (1982-2007) of the United States.

If you are old enough, you remember in the 1980s when Japan was hailed for its lack of structural impediments, for its cooperation of government and business that created the biggest business boom of all history. By the 2000s, some economists said it was structural impediments holding Japan back.

In fact looking at the yen’s exchange rate and deflation, it seems much more likely the Bank of Japan held Japan back.


Cochrane is correct in some regards; mild deflation does not coincide with recession, only with very, very sluggish real growth. Yes, the U.S. can probably go to mild deflation, and it will only look somewhat slower than 2008-2012. If you have a sinecure at an academic institution, maybe that is fine.

But Cochrane ignores the bigger picture: Robust growth is associated with moderate inflation.

In the end, based on recent and cogent historical experience, it comes down to this: Should we forego trillions of dollars of real output just to bring a subjective index of prices (CPI or PCE) to a dead halt, or even into deflation territory?



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