As Electric Vehicle Prices Decline, Will the Federal Reserve Step In?

A front page story in the Wall Street Journal this week carried the headline “EV Prices Are Being Slashed, Testing Appetite of Consumers.” Inside the headline, it was reported among other things that “Many electric models have never been cheaper” and that electric vehicles “are among the biggest bargains on the dealership lot.”

Should the Fed step in? If the question appears flippant, that’s because it is. But it’s also a reasonable question given the view that the Fed allegedly exists to maintain “price stability.” To be clear, the idea that an entity of government should be empowered to maintain “price stability” insults stupid given the importance of pure price signals to progress, but this is what the experts believe.

Paul Krugman thinks much more important than “price stability,” the Fed must ensure that prices never fall. He writes that “Imposing significant deflation on a modern economy leads to very high unemployment.” About Krugman’s droolings, before conservatives settle into resting smug face, they would be wise to remember that Milton Friedman and his disciples have long contended against all reason that the Federal Reserve’s failure to “print” (whatever that is) or increase so-called “money supply” brought on “deflation” that caused the Great Depression.

To economists, falling prices are a danger. They don’t grasp that falling prices are the surest sign of a soaring economy given the rather simple truth that growth is but a byword for productivity leaps, and productivity leaps are made possible by rising investment that enhances the ability of producers to create more and more at prices that continue to fall.

Ok, so economists think falling prices are a bad thing regardless of religion, and they maintain that it’s the Fed’s job to maintain “price stability,” which is the alleged middle ground between what they imagine is inflation and deflation.

Which requires a few corrections. There’s a massive difference between rising prices and inflation. While inflation is the currency equivalent of the length of a foot being shrunk, rising prices can occur for all manner of reasons: think growing excitement about a specific market good, production difficulties for a specific good, or regulatory barriers that restrain the production of a specific good. Importantly, those are NOT instances of inflation. That is so because economics is about tradeoffs. The rise in price of one product by definition signals the fall of another.

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Falling prices are no different. They can be (and most often are) a consequence of a growing number of hands and machines at work in the creation of a market good, reduced regulatory barriers to a product’s production, and then as is seemingly the case with EVs, falling prices can signal declining consumer interest. At least as of now, consumers don’t feel as passionately about electric vehicles as they used to, and car dealers are slashing prices to clear inventory.

Importantly, none of what’s been described has anything to do with deflation for the same reason that rising prices aren’t signals of inflation. Economics is once again about tradeoffs. If prices are falling, we have more dollars to pursue other goods and services formerly out of reach.

It all brings us back to what inflation actually is. At present the dollar is near all-time lows versus gold, and then floating exchange mediums like the yen and pound are similarly on the rise against the dollar. Historically this was inflation, but the various religions think Fed rate fiddling brought prices down and that “deflation” might be the looming risk. Try not to laugh, while asking if the Fed will try to arrest the decline in the price of EVs.