NORTH MIAMI – FEBRUARY 20: Elinor Mantin shops for groceries at Lorenzo’s Supermarket as a new … [+]
Metaphors are a wonderful tool in communication to bridge gaps. But there are times when they can muddy more than magnify.
That’s what happened when the op-ed of former Federal Reserve Bank of Atlanta president William Ford and Daniel Smith, director of the Political Economy Research Institute and a professor of economics at Middle Tennessee State University’s Jones College of Business appeared in the Wall Street Journal on Wednesday, March 30.
The two highly qualified and respected economists argued that inflation was an issue of recent government policy and the result was taxation:
“When President Biden first proposed increasing federal spending by trillions, he promised not to raise taxes on anyone earning less than $400,000 a year. But the Federal Reserve’s accommodation of his spendthrift policies is now creating inflation taxes that are hitting ordinary Americans in their pocketbooks. Inflation not only taxes away earnings and savings, it also amplifies a host of other taxes Americans pay.”
But in their desire to prove a point, the two oversimplified causality, ignored some important history, and used “taxation” when the word “taxing” would have been far more appropriate.
The spending that Biden had requested—and which was significantly whittled down—has still not passed. As the conservative Washington Examiner’s headline noted this week, “Biden’s big spending failures help claims of deficit reduction in 2023 budget.”
Yes, his plan was to spend much more, but it didn’t happen. Instead, the biggest spending happened at two points. One was the 2017 tax act that sliced taxes on corporations and the wealthy even though both groups have been doing remarkably well. As a reminder, the tax bill was completely a GOP creature, and the relief plans were bipartisan with the bills for the largest amounts signed by Donald Trump.
The other was the response to the pandemic—enormous sums that helped keep the economy from slipping into a long and deep quagmire and actually rescued the little people, not just elites.
The Federal Reserve’s accommodating monetary policy has been around since the aftermath of the Great Recession as the institution was trying to jumpstart an economy for more than ten years.
Money hasn’t been cranking out at large rates only over the last 14 months or so of the Biden administration. The Fed’s low interest rates and bond purchases have been going on for many years, all in an attempt to improve a difficult situation, not to fund a new spending plan.
Inflation also wasn’t solely a matter of the Fed’s actions, given how long their major effect seemed to be the injection of more money into the economic upper echelon that then invested, driving up various asset prices. This inflation was largely the result of a supply chain collapse, so a of short supply, not demand fueled by too much money in everyone’s pockets.. Experts had been warning companies for decades about business strategies that made corporations dependent on risky practices. Companies couldn’t get what they needed to sell or make, and consumers were left out in the cold. Covid was the match but not the tinder.
Calling inflation “taxes” is simply inaccurate. People pay taxes to governments to achieve certain ends. Even if you think that government is inherently wasteful or lazy or inept and are sure that the pure magic of markets—which, again, were largely responsible for the pent-up supply chain problems that drove inflation—there are actions that happen as a result of those taxes paid. Schools, roads, defense, regulations of markets that have proven themselves when unsupervised inclined to cause disaster, all of this are benefits those taxes pay for.
Inflation is not a tax, although it is taxing. The authors are right that it causes a lot of money to go to waste as prices grow. But there’s almost always inflation, even if low levels. Prices rise, as do wages. And never has anyone call the historical upward movement of inflation a “tax,” even if getting less for your money is a pain to endure.
“While the wealthy can hire experts to shelter their income and savings from inflation, lower-income Americans aren’t so lucky,” the two wrote, which is true. “They also spend a much larger portion of their earnings on essentials such as groceries and rent.”
But instead of blaming Biden, perhaps they should look at income inequality, the upward redistribution of wealth, and of the many mechanisms that pick the pockets of the poor. There’s something that policy could control.