All Saying Different Things, All of Them Correct

This is going to be one of those rare blog posts where I agree with everyone. There has been a lot of great economics related content on the web the past few days.

In the New York Times Allan Meltzer  worries that we will soon have a great deal of inflation:

Milton Friedman often said that “inflation was always and everywhere a monetary phenomenon.” The members of the Federal Reserve seem to dismiss this theory because they concentrate excessively on the near term and almost never discuss the medium- and long-term consequences of their actions. That’s a big error. They need to think past current political pressures and unemployment rates. For the next few years, they cannot neglect rising inflation.

Whereas Paul Krugman believes we need to fear deflation:

Things get even worse if businesses and consumers expect wages to fall further in the future. John Maynard Keynes put it clearly, more than 70 years ago: “The effect of an expectation that wages are going to sag by, say, 2 percent in the coming year will be roughly equivalent to the effect of a rise of 2 percent in the amount of interest payable for the same period.” And a rise in the effective interest rate is the last thing this economy needs.
Concern about falling wages isn’t just theory. Japan — where private-sector wages fell an average of more than 1 percent a year from 1997 to 2003 — is an object lesson in how wage deflation can contribute to economic stagnation.

Who is right? They both are - here is how it is possible:
Right now the economy is walking a tightrope act, and the statistics do not lie( i don’t accept it always, but people do,so can put the argument from that perspective) - we are not in a 'balanced' state and we risk falling off the rope onto the deflation side. At least in theory monetary policy and fiscal policy can be used to push us towards being balanced again by increasing the rate of inflation. I say in theory, because I believe fiscal stimulus is unlikely to work well in the real world. Monetary policy, of both the conventional and unconventional sorts can certainly increase the money supply leading to increased rates of inflation. But it is easy to push to far, risking falling off the other side of the tightrope in the long run - for the reasons Meltzer gives. We need to fear falling off of either side of the tightrope.
And why is deflation harmful in a recession? Krugman gives one reason, though I also agree with an argument made by Arnold Kling:

Workers view wage rates as signals of their employer's long-term commitment to their welfare. Thus, a wage cut is a particularly negative signal, and it is difficult to cut wages in a downturn without causing major problems.

More specifically, it is difficult to cut nominal wages in a downturn. We can however, a cut real wages is possible (which is what in reality needs to happen) by leaving nominal wages unchanged and having a positive rate of inflation.
Of course, there is also the issue of the unemployed, who no longer have wages to cut and require jobs. I agree with Mark Thoma's take:

Artificially restraining wages from falling is not the correct response, the key is to drive the unemployment rate down so that the labor market tightens and wages rise in response. That is why it's essential that stimulus programs provide a boost to employment, and I've wondered from the start if the stimulus programs we enacted have focused enough on providing employment opportunities.

One policy that would help accomplish this, is to cut the payroll taxes paid by firms, as to reduce the costs of employing workers.