[jessejmc]

tl;dr

Restaurants that sell cheap meals, like bowls of beef and rice, are lowering prices. The expectation of cheap food is causing other restaurants to seem too expensive, which may cause them to lower prices as well. The lower prices leads to lower revenue which leads to less money to cycle back into the economy. A recession occurs.

[Psyonic]

"The lower prices leads to lower revenue which leads to less money to cycle back into the economy." How so? The customer still has that money, and will likely spend it on something else. Either by going out to eat more often, buying that new HDTV, or taking the kids to a sports game. I fail to see how that money doesn't end up cycling back into the economy. Unless we are to presume the money saved is hidden under a mattress...

[jakarta]

Let's say you operate a business in a deflationary economy, such as Japan. Deflation --> Prices go down.

Yes, consumers will be paying less for goods, this is true, and on the surface seems good, but dig a little deeper. When deflation strikes an economy, almost all businesses are affected. That is why economists worry so much about it and are willing to use inflation to combat deflation.

Think about it: The beef bowl restaurant has lower prices, so they make less money. They will be unable to keep on as many employees, they won't have the excess capital to use for expansion, they will have less money to give suppliers, might not be able to pay rent... employees who are fired will be without incomes so they wont be able to take advantage of lowered prices. These are the ripple effects you need to look at.

The reason people fear deflation is because it is able to rapidly spread throughout the economy and infect almost any business.

http://en.wikipedia.org/wiki/Deflation#Deflation_in_Japan

^ you can read more about the deflation problem in Japan.

[yummyfajitas]

I believe the specific scenario being worried about is the following:

People are not going out to eat more often or buying that HDTV. Instead, they are saving the money. Normally this would stimulate investment, but due to uncertainty no one is borrowing.

I don't know if this is correct, but it seems to be the worry. There also seem to be some cultural attitudes at play: "When you buy something cheap, you lower the value of your own life."

[noodle]

http://en.wikipedia.org/wiki/Deflation#Deflationary_spiral

[kqr2]

According to the article:

The restaurant chains insist they have not downsized their portions, and will make up for cheaper prices by raising efficiency.

This may also be simple captitalism at work. Restaurants are being forced to become more efficient and competitive to attract customers.

People save money on food and therefore have more disposable income to spend in other areas of the economy. So it's not necessarily a lose-lose situation.

[orangecat]

That sounds like a variant of the broken window fallacy. Stuff getting cheaper isn't bad for the economy; see technology in the last 100 years.

[lliiffee]

I'm not sure what the broken window fallacy has to do with anything.

As for technology, see the comments in the article by economists about the difference between lowering prices based on improved productivity (good) and just lower demand (bad).

[jrockway]

I read this as, "As an owner of a restaurant, I expect an x% profit margin. My friends down the street, however, seem to be happy with less. This means that I now only get an x-y% profit margin, and that means I have to trade in my 767 for a Gulfstream V. Clearly those damn consumers don't know what's good for them, and this is going to ruin the economy again. I say this as a completely unbiased neutral party who is deeply concerned with society in general, and certainly not because I want to keep my artificially high profit margin and the luxuries it affords me."