What’s so bad about inflation?

 

In the past few months much ado has been made about the inflation rate. According to news reports we are seeing the worst inflation in the last forty years. There have been several explanations, some of which don’t hold much water. Many main stream media commentators have been focusing on the role of the stimulus programs of the Biden administration increasing consumer demand. The somewhat weak response of the Democrats is that it’s all due to the supply bottlenecks, which can be ironed out as we deal more effectively with COVID. Neither captures the whole picture.

To begin to understand the current situation we need to ask, just how bad is the current inflation? While the headlines report soaring inflation at the end of 2021, they fail to mention that this followed two years (2019 & 2020) of very low inflation, the lowest since the Great Recession of 2008-09. In other words, prior to 2021 prices were deflated, and now, to a large degree, they are catching up with what would be considered normal inflation rates of 2 to 3 percent. Add to that the effects of COVID on supply chains in some industries (a product of the widespread business practice of maintaining almost no inventory and outsourcing production, all part of globalization) and the difficulties of enticing workers to take jobs where their health might be endangered or where they cannot find child care for young children and what we get are shortages and a temporary burst of rising prices.

And don’t forget that big business has used its power to take advantage of “shortages” (real and manufactured) to extract more than their usual “pound of flesh”.

One of the questions we should be asking is, what’s so bad about inflation for working Americans? Most workers in the US owe money; they are debtors. When there is a period of inflation, the money they use to repay their debts has less value than it was when they borrowed it. Inflation benefits that who haven’t been able to save (either in the bank or under the mattress). It hurts those who have large stockpiles of $$$, since those dollars are now worth less (or if there is enough inflation – think the 1920s in Germany – worthless). That’s why bankers hate inflation (and raise interest rates whenever they think it’s seriously devaluing their $$$) and why the bankers’ bank, the Federal Reserve, does everything possible to keep inflation low. To put it succinctly, moderate inflation is good for ordinary people and bad for banks and the wealthy.

Now there is a caveat to my assertion that inflation is good for working people. They have to make sure that they are getting raises in their pay commensurate with rising prices. In the nineteen fifties and sixties, strong labor unions fought for cost of living raises in their contracts and even in non-union work places, employers frequently offered this benefit to keep workers from looking for another job. Unfortunately, guaranteed COLAs only exist in a few places today.

For the last 40 years, mostly due to the policies of the Federal Reserve, inflation has been kept very, very low. These are the same 40 years that have seen the growth of runaway inequality – the rich getting richer and the rest of us not sharing in that prosperity. Do we need more proof that low inflation benefits that who have $$$ and hurts those who don’t?

So, the real answer to inflation should NOT be how to bring it down to under 2%, but rather how to ensure that workers’ incomes keep pace (or even exceed) the pace of inflation. The question is “what is to be done” to achieve this. Four legislative actions which would drastically change the outlook for working Americans, without cutting the meager benefits of some inflation are:

·         Raising the minimum wage to $15. This directly benefits the lowest paid workers, who are working full-time jobs that pay below the poverty level for a family of 2 or more, but also effects workers currently make more that $15 an hour – “a rising tide lifts all boats” definitely applies here. This would immediately offset the effects of inflation on a significant portion of American workers.

·         Making it easier for workers to join a union. This involves updating the restrictions on employers’ tactics to prevent workers from joining unions AND rigorous enforcement of these restrictions by the NLRB. Think the PRO (Protecting the Right to Organize) Act. Over the past 40 years, corporations have been given relatively free reign in their ability to oppose the right of workers to organize and bargain collectively. As a result, organized labor today represents only 10.8% of all workers in the United States, compared to 20.1% in 1983. This despite the fact that over 60% of workers say they would like to join a union today.

·         Providing universal free high-quality Pre-K. While some may debate just how much children benefit from Pre-K education (there is plenty of evidence that children from marginalized communities do benefit significantly), there is little doubt that this will free up millions of women and men to rejoin the workforce, particularly if it is coupled with a $15 minimum wage and workplace protections against COVID (a mask mandate, for example).

·         Enacting universal, single payer healthcare, with the ability to regulate prescription drug prices. Healthcare expenses are the number one cause of bankruptcy in the US. Lack of healthcare insurance results in thousands of preventable deaths each year. Enough said.

None of the above are designed to reduce inflation, which, based on the analysis above, will moderate over the next year or so without drastic action being proposed by some, particularly raising interest rates. And that’s OK, because inflation isn’t really the problem, it’s the ability of workers’ income to match (or exceed) the increase in prices that needs to be improved.

There is one other action that I haven’t seen anyone else propose, which might moderate inflation to some degree and could have other beneficial effects. While Lizzy Warren and others have proposed a wealth tax, which is a great and long overdue idea, I think it should be coupled with an excess profits tax. Such a tax would disincentivize using the current situation with COVID to rip-off consumers as many corporations are doing (think Dollar Tree and big Pharma) or, failing that, provide revenue for free Pre-K and other social programs.

I know that this sounds like a crazy radical idea, but it’s been done before! In the US! During WW II an excess profits tax was adopted by Congress to “siphon off war profits.” For profits resulting from the war, the tax rate was set at 95 percent. And aren’t we engaged in the different kind of war today?