Another reason why inflation is a good idea

April 7, 2009

Megan McArdle is unhappy with the state of green consumption:

When I look back at almost every “environmentally friendly” alternative product I’ve seen being widely touted as a cost-free way to lower our footprint, held back only by the indecent vermin at “industry” who don’t care about the environment, I notice a common theme: the replacement good has really really sucked compared to the old, inefficient version.

(Scare quotes Megan’s, natch.)

The problem, as Megan admits, is that she’s looking at the “cost-free” replacements: the bottom-of-the-line green products which can be used to replace legacy products which are the result of decades of development and economies of scale. It’s hardly surprising that these first- and second-generation products can’t compete on price.

But my feeling is not that the new products are too expensive, so much as that the old products are too cheap. That’s certainly the case with food: chicken, beef, and other corn byproducts — including the famous high-fructose corn syrup — are so underpriced that their cultivation is destroying the planet and causing mass obesity.

And more generally, the story of both Greenspan bubbles is that the Fed was happy to bring interest rates down to extremely low levels because of the massive amounts of disinflation being imported to the US by China (again, at huge environmental cost).

My hope is that the world which emerges from the present crisis will be one where goods, in general, have a price which is commensurate with their cost. I remember walking down Broadway last year, in Soho, and overhearing a woman coming out of H&M explaining to her friend that the clothes there were great: they were so cheap that you could wear them once and simply throw them away, without having to worry about how they stood up to washing or dry-cleaning. And although it was easy to conjure up lots of high moral dudgeon to direct at the woman in question, the fact is that incentives matter, and the prices at H&M were clearly incentivizing her to feel that way: as a general rule, it’s not good for the planet when a frock costs roughly the same as the cost of dry-cleaning it.

So it would be great to have some targeted inflation here: not just to help solve the housing mess, but also to bring the cost of many everyday products up to a point at which people become much more careful about using them — and much more inclined, too, to pick a green alternative.


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