Inflation and the Cost of Living – They are NOT the same thing!

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.