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  During
the 1970s, rising prices crippled the US economy. Led by oil prices,
the cost of living rose rapidly through the early eighties, when
price growth moderated somewhat. Since that time, policy makers
in Washington made fighting inflation a top economic priority. Today,
you might hear economists in the media mention deflation, rather
than inflation, being a threat to economic growth. Are falling prices
really a bad thing? What does this mean for the economy, and what
does it mean for St. Louis?
Price levels in both St. Louis and the US economies rose very slowly
throughout the 1990s. Prior to the 1990s, economists were certain
that low unemployment would lead to rapid consumer price increases.
Between 1995 and 2000, however, prices were relatively stable while
unemployment in St. Louis and the US declined. There probably is
still a relationship between inflation and employment, but the many
changes that have taken place in the economy have muted that relationship.
In particular, the adoption of innovative technologies has allowed
productivity to increase in a variety of industries, and increased
foreign trade due to NAFTA has lowered the prices of many commodities.
Prices for some goods, such as computers, apparel, and motor vehicles
are actually lower in real terms than a year ago. By “real” terms,
we mean that the share of a person’s income it takes to buy these
goods is smaller than it once was. Falling prices are intuitively
appealing to all of us, because we’d all like to be able to buy
the same amount of goods and services for a lower price. But in
the extreme, falling prices can slow down economic growth. If you’ve
shopped for a computer in recent years, the thought that you might
be able to wait a few months and get a better computer for the same
price probably crossed your mind. If a household expects that a
good or service will be cheaper next month than it is now, they
are likely to wait until the next month to make the purchase. If
more and more people defer purchases to wait for lower prices, consumption
expenditures decline and economic growth slows down. That’s thought
to be one of the problems with the economy in Japan right now.
So in the extreme, falling prices can slow down economic growth.
But it’s not likely that widespread price declines will slow economic
growth here in the US. Although prices for goods like computers
have fallen, the prices of other goods and services, such as medical
care and housing, are increasing. So while prices for some goods
are declining, overall price levels are still rising slowly.
There’s one more important point to be made in all of this, and
it has implications for economic development here in St. Louis.
Many of the goods for which prices have declined are produced by
industries that have improved their productivity through the adoption
of high-technology manufacturing processes. Productivity growth
related to technology adoption has also occurred in the provision
of some services, like transportation and distribution. So the phenomenon
of mild price growth is one of the benefits of the adoption of technology.
In the 21st century economy, firms will have to incorporate technology
that improves their productivity to survive in the marketplace.
That’s a key reason why the RCGA’s economic development strategy
is based, in part, on the five industry clusters of: plant and life
sciences, information technology, advanced manufacturing, transportation
and distribution, and financial services. These are all fields in
which improvements in technology have improved productivity. In
the 21st century economy, metropolitan areas that aren’t home to
innovative industries and companies won’t be able to compete with
metropolitan areas in which businesses use technology to deliver
goods and services at competitive prices. Success in the cluster-based
strategy will ensure that St. Louis is a technology leader in the
21st century.
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