You hear a lot about inflation these days. The Republicans
have been harping on what they see as the failure of the Biden administration
to bring down inflation. The Democratic Party has finally decided it needs to
include the problem of inflation in its campaign (better late than never?). And
the Federal Reserve has adopted a robust attack on inflation by raising
interest rates, which will allegedly bring down inflation by reducing consumer
demand for things like housing and new cars and thus cooling off the economy.
But is it inflation that actually hurts ordinary working
Americans and, just as importantly, are the proposed “solutions” going to be
painless for them? I would argue that the answer to both questions is NO! That’s
because two very different processes are being conflated: Inflation and a rise
in the cost of living.
Let’s start with inflation. In essence inflation is simply a
decline in the value of money; that is a decline in what the dollar you have in
your wallet can buy. What is important to note here is that if you don’t have a
dollar in your wallet, inflation doesn’t really hurt you. In fact, if you don’t
have that dollar, but you owe someone else a dollar, inflation is beneficial to
you. The inflated dollar you will end up using to pay your debt will be worth
less than what it was when you incurred the debt.
This is how inflation benefits debtors and hurts creditors. People,
like bankers and the very wealthy, who have lots of money and/or are owed money,
will lose value as a result of inflation. This is why bankers in particular
hate inflation and why the Federal Reserve (the bankers’ bank) sees fighting inflation
as its number one task. They want to protect the value of their money and make
sure that, if you borrowed money from them, the value of the money which you
use to pay them back is not less than what it was when they lent you the money.
Or, if it is less, that the interest you paid on the loan will make up the
difference and then some.
On the other hand, most working-class Americans are debtors.
They owe money (on credit cards, auto loans, mortgages, etc.) and probably have
very little cash in the bank or under the bed. Their money won’t lose value as a result of
inflation since they don’t have any, but their debts will be reduced.
Take someone with a $200,000 mortgage. If there is a 10% annual rate of
inflation, the value of the money needed to pay down that mortgage after
one year will have decreased by $20,000. In that case, what’s not to like about
inflation!
There is another important positive effect of inflation for
taxpaying Americans. It automatically reduces the value of the debt that the national,
state, and local governments (and therefore the taxpayers) owe to those who
hold government bonds. Ten percent inflation will reduce the value of the
national debt by about $3 trillion, which is three times the current annual
budget deficit of the federal government. It would pay down the national debt without raising taxes or cutting services. Hooray!!!
Now what about the cost of living. Inflation does not necessarily
drive up the cost of living. That’s because the cost-of-living equation has two
sides, so to speak - the prices you pay and the income you receive. If the
prices you pay are going up, but your income is going up by the same or a
greater percentage, then your cost of living hasn’t really changed. Take
someone whose income today is derived from Social Security. In 2022 the prices she
pays may have gone up 8%, but, staring in January 2023, her Social Security
checks will also increase by 8%. She is no worse off than before and may be
better off if she is still trying to pay off her children’s college loans with
the newly inflated money from Social Security.
In the 1950s and 60s, a strong labor movement negotiated
cost of living allowances in their contracts to offset the moderate levels
inflation during that period. The labor movement and their friends in Congress
were able to get increases in the minimum wage to offset inflation. The net
result was that the cost of living did not increase; in fact, most working
Americans saw a very significant improvement in their lives as growing
productivity resulted in a period of prosperity. Inflation was not hurting them, particularly if they were buying a home, as millions of Americans did for the first time.
What followed in the 1970s was a period of hyperinflation,
the causes of which are a bit more than I want to tackle here. It’s probably
enough to note that the costs of the Vietnam War and the spike in oil prices
had a temporary effect of boosting inflation rates, much like what is happening
today. This took place at the end of the post-WWII boom and was accompanied by
declining rates of profit for big business in the US. It led directly to the
Reagan Revolution of 1980. Inflation, the wealthy owners of big business and the banks argued, must
be controlled, even at the cost of a severe recession. And they got what they
wanted.
The result of the Reagan Revolution was, that for the last 40 years the US has had a historically
low rate of monetary inflation. It has also seen galloping runaway inequality
and the increasing financialization of the economy. These two trends are
undoubtedly related to (caused by?) the long period of very low inflation,
which favored the wealthy and creditors, i.e., big business and the financial
system.
So, what are the political implications of this
understanding. Progressives must insist that the response to the current period
of inflation and the effect it is having on the cost of living of working
Americans, must NOT be another Reagan recession caused by jacking up interest
rates (the Fed just approved a fourth increase of 0.75% while I was writing this), but rather one that
deals with the other aspect of the cost of living, working class income. A few
suggestions for immediate action:
·
Raise the minimum wage to at least $15 an hour and
index it to inflation
·
Reinstate the child tax credit
·
Protect and expand the right to organize unions
·
Expand Medicaid, create a public option for
medical insurance and move towards a single payer system (Improved Medicare for
All)
·
Significantly raise the minimum Social Security
payments
·
Create a federal housing program to subsidize low-
and moderate-income housing
·
Subsidize public transportation systems
·
Provide low cost (free?) high-speed internet
access to all areas of the country
In other words, reduce the cost of living by providing low cost (or even free) services and enhancing income, while allowing
moderate inflation, which benefits the vast majority of Americans, to continue.
Radical? Yes, but no more radical than pushing the cost of bringing down
inflation on to the backs of working people. What we don't need is another 40 years like the last 40.