YOU ARE HERE: LAT HomeCollectionsFactories

Too Much Supply Causes Deflation

May 12, 1991

In his column, "Deflation Is the Real Threat to Economy" (May 1), James Flanigan curiously overlooks the most obvious cause of "falling prices and wages and values of real estate and businesses." When supply greatly exceeds demand, whether in office buildings, shopping malls or crops, prices must fall to ruinous levels. Deflation is indeed a sign of real danger, but the cure is not more shopping malls.

According to countless history books and such influentials as Herbert Hoover, Franklin D. Roosevelt and Bernard Baruch (the financial wizard of an earlier time), all great depressions have been caused by excessive competition (duplication of output) and overproduction.

These people would have been horrified by Flanigan's standard economic view that the Great Depression could quickly have been ended if capital had been available to build still more factories and plant still more crops. Since the 1930s, unfortunately, economists have convinced policy-makers that because demand is or can easily be made unlimited, it is impossible to "over-invest" in factories and farms.

The huge amounts of capital diverted into mergers in the 1980s demonstrates the silliness of the economic argument. Mergers occur because capital cannot be used for new plants when there already are too many plants trying to sell to the same customers. Mergers invariably eliminate jobs and factories instead of creating them.

History suggests, economists to the contrary, that the Great Depression was ended only by the huge public spending of World War II (deficits up to 30% of gross national product) and by restrictions on consumer goods competition and output.

The Depression could have been ended earlier, of course, by similar spending on social programs. A depression in the 1990s can be averted by huge public-sector spending and restrictions on competition. Instead, we seem determined to follow the economists into the abyss.


Los Angeles

Los Angeles Times Articles