Good Deflation and the House of Cards
Reviewed October 2026. Written in spring 2026, during the school budget fight. Sources were re-checked and some wording corrected in October 2026.
Good Deflation vs. Bad Deflation
Most people hear “deflation” and think economic collapse - the Great Depression, where prices fell because nobody could afford to buy anything, businesses closed, and the spiral fed on itself. That’s demand-collapse deflation and it’s genuinely catastrophic.
What we’re describing is something completely different: overhead-removal deflation. The demand doesn’t change - kids still need to be taught, people still need healthcare, buildings still need roofs. What changes is the cost of delivering it, because intermediary layers get thinner or disappear.
| Bad Deflation | Good Deflation | |
|---|---|---|
| Why prices drop | Nobody can afford to buy | The overhead got removed |
| What happens to workers | Lose jobs, can’t find new ones | Same work, less toll extracted from it |
| What happens to quality | Degrades as everyone cuts corners | Maintains or improves - the work itself didn’t change |
| What happens to demand | Collapses - downward spiral | Stays the same or grows - people have more capacity |
| Historical parallel | 1930s Depression | Technology-driven cost reduction (computing, solar, communication) |
Think about what happened to the cost of computing. In 1980 a megabyte of hard-disk storage cost hundreds of dollars. Today it costs a fraction of a cent. Did the computing industry collapse? No - it exploded. The deflation in cost created demand rather than destroying it. More people could afford computers, which created more use cases, which drove more innovation, which drove costs down further. A virtuous spiral.
The same thing happened with solar energy, communication costs, and information access. When the cost of something drops because the means of production improved rather than because demand collapsed, it’s a gift, not a crisis.
A House of Cards
I sometimes picture the economy as a house of cards that we keep building taller. It isn’t a brick wall that looks like it could stand there nearly forever. It sways in the wind, and it needs constant tending, which is a fair description of what central banks spend their days doing.
Why does it keep growing? The official answer is inflation, a few percent a year. But people seem to know in their gut that this isn’t the whole story, which may be why so many are unhappy even in years when pay technically outpaces the published number. In a survey published by the Brookings Institution, 80% of respondents believed prices systematically rise faster than wages. And a 2024 study found that much of the gap between good economic numbers and a bad public mood is explained by a cost the official price indexes leave out entirely: the cost of borrowing. My bet is that two other things keep adding floors as well.
One is extraction. The tolls described in The Virtuous Spiral keep rising, and they don’t all show up in a price index.
The other is that the baseline of a normal life keeps expanding. This isn’t about flashy new cars. Internet access is now close to a utility, everybody needs a cell phone, and your kids keep needing more things because their friends have more things. The house of cards keeps expanding to meet the ever-increasing needs of the house of cards.
That is partly a good thing: quality of life is going up, though how you define quality is its own tricky question. It is also a trap. We get further and further from the basics, and everybody has to keep up with a growing list of new things or lose out.
Through all of it the ground stays the same. There are still twenty-four hours in a day, and reading a child a bedtime story takes as long as it ever did. A raise helps at first. But before long it gets eaten by inflation, by extraction, and by enshittification, the slow worsening of things we already pay for, and we are right back where we started, one floor higher and with further to fall.
Rather than chase an ever-expanding paycheck that is chased in turn by ever-increasing extraction, the real goal should be making our time more meaningful. One way is to bring the height down: take cost out of the things we actually need, so that life sits closer to the ground and closer to something more natural. Another is to make it easier to do work that is our own, like starting and keeping up a small business. That is a place where technology really can help, by removing the toil and the costs nobody wants so that more of our time goes where we choose.
Automation, AI, and robotics will widen what is possible at the base. What we want that to look like is the question we have to answer ourselves, local community by local community.
| Back to: The Virtuous Spiral | Next: The Tooling Multiplier and the Time Dividend |