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Anecdotal evidence from neighborhoods across the country indicates that, economic weakness or not, plenty of people have firework money this year.

And this is to be expected during periods of devastating deflation such as the one we are experiencing today, because it is during deflationary periods that the worst of our economic nature stands on display.

To understand, recall that all of economics comes down to two simple things... the law of supply and the law of demand. These two laws interact so that surpluses push prices down, shortages push prices up, and at the end of the day we end up in balance.

That's the way the theory works. But the reality is more complicated.

When we have economy-wide shortage, meaning there is demand for more goods and services than the economy can provide, we put strain on all of our resources.  Labor markets get tight and the price of labor increases. Energy gets tight and the price of fuel increases. Capital gets tight and interest rates increase. We call this broad-based increase in prices due to shortage "inflation". For the most part, we share the pain of inflation. We all pay for it at the pump, we all pay for it at the grocery store... we all pay for it every time we buy anything.

When we have economy-wide surplus, however, it is a different story. Think back over the course of your life. How many prolonged periods of deflation do you remember? The answer... none. That's because whereas our ability to increase supply is limited by resources, our ability to decrease supply is limited by nothing. Rather than accept falling prices, we simply produce less. We produce less by shuttering factories, laying off people, closing stores, etc.

You see, deflation and unemployment are simply two different forms of the exact same thing. We can either continue producing a lot and watch the price go down, or we can leave some of our resources unemployed so that prices can stay steady. And this is where the extreme injustice of our economy gets highlighted.

Whereas the pain of inflation is shared by all, the pain of deflation is mostly concentrated onto the backs of the unlucky few who end up unemployed.  Most people have gotten small raises the last few years, but relatively few have actually suffered substantial wage give-backs. Most people have weathered the recession just fine. They may be scared, but with an unemployment rate of 9.1 percent, 90.9 percent of people who want to be working are still working.

Rather than everyone in the economy seeing their wages drop by, say, 5 percent, 10 percent of the people in the country have seen their wages drop by 100 percent while the other 90 percent have gotten off free and clear.

Because we keep a separate account for unemployed resources, we don't factor them into our pricing studies. When gas and food prices increase, we call that inflation whether unemployment stands at 5 percent of 15 percent. So while reported inflation has been very low in recent years, that there is inflation at all is only because we don't take into account the deflation that has been sopped up and concentrated on the backs of the unemployed. If all those people were still working and producing, the deflationary spiral would be so severe that we all would have taken substantial pay cuts.

It is something to think about next time you cast aspersions on the unemployed or try to rationalize cutting unemployment benefits. Everyone who has a job and has not had a pay cut owes a debt of gratitude (at the very least!) to the unemployed who have shouldered pain that was not theirs.

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Keith Rouda's picture

About Keith Rouda

I'm a news junkie and politics addict. I stay up way past my bedtime to watch election returns come in. My free time is spent with MoveOn.org advocating for progressive policies. I have an MBA from Sullivan University and have worked in small businesses and large, in fields ranging from advertising, to health care, to information technology, to talent acquisition, to industrial quality. I moved to Louisville in 1995 and haven't looked back.

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