Metaphors are a wonderful communication tool for filling in the gaps. But there are times when they can blur more than enlarge.
That’s what happened when the editorial by former Federal Reserve Bank of Atlanta President William Ford and Daniel Smith, director of the Political Economy Research Institute and professor of economics at Jones College of Business from Middle Tennessee State University, appeared in the Wall Street Journal on Wednesday, March 30.
Both highly qualified and respected economists argued that inflation was a problem of recent government policy and the result was taxation:
“When President Biden first proposed increasing federal spending by billions of dollars, he promised not to raise taxes on anyone earning less than $400,000 a year. But the Federal Reserve’s adaptation to its spendthrift policies is now creating inflationary taxes that are hitting ordinary Americans in their pocketbooks. Not only does inflation levy taxes on income and savings, it also amplifies a host of other taxes that Americans pay.
But in their desire to prove a point, the two oversimplified causation, ignored an important story, and used “imposition” when the word “imposition” would have been far more appropriate.
The spending that Biden had requested – and which was significantly reduced – has still not passed. As the noted conservative Washington Examiner title this week, “Biden’s big spending failures help deficit reduction claims in the 2023 budget.”
Yes, his plan was to spend a lot more, but that didn’t happen. Instead, the biggest expenses occurred in two places. One was the 2017 tax law that cut taxes for corporations and the wealthy, even though both groups did remarkably well. As a reminder, the tax bill was completely a creature of the GOP, and the relief plans were bipartisan with the bills for the biggest amounts signed by Donald Trump.
The other was pandemic response – huge sums that helped keep the economy from sinking into a long, deep quagmire and actually saved the common people, not just the elites.
The Federal Reserve’s accommodative monetary policy has been around since the aftermath of the Great Recession, when the institution had been trying to revive an economy for more than a decade.
Money hasn’t grown at high rates just in the last 14 months or so of the Biden administration. Low interest rates and Fed bond purchases have been going on for many years, all to improve a difficult situation, not to fund a new spending plan.
Inflation wasn’t just a matter of Fed actions either, given how long their main effect seemed to be injecting more money into the upper echelon of the economy which then invested , driving up the prices of various assets. This inflation was largely the result of a collapse in the supply chain, hence insufficient supply, not demand fueled by too much money in everyone’s pockets. Experts had been warning companies for decades about business strategies that made businesses addicted to risky practices. Businesses couldn’t get what they needed to sell or manufacture, and consumers were left behind. Covid was the match but not the tinder.
Calling inflation “taxes” is simply inaccurate. People pay taxes to governments to achieve certain goals. Even if you think government is inherently wasteful or lazy or incompetent and you’re sure that the sheer magic of markets – which, again, were largely responsible for the pent-up supply chain problems that fueled the inflation – there are actions that occur as a result of these taxes being paid. Schools, roads, defence, market regulations that have been proven to work when left unattended and prone to disaster, these are all benefits that these taxes pay for.
Inflation is not a tax, although it is taxing. The authors are correct that it loses a lot of money as prices rise. But there are almost always inflation, even at low levels. Prices are rising, as are wages. And no one has ever called the historic upward movement of inflation a “tax,” even though getting less for your money is a pain to bear.
“While the wealthy may hire experts to protect their incomes and savings from inflation, low-income Americans are not so lucky,” the two wrote, which is true. “They also spend a much larger share of their income on essentials like groceries and rent.”
But instead of blaming Biden, perhaps they should be looking at income inequality, the upward redistribution of wealth, and the many mechanisms that take the pockets of the poor. There is something that politics could control.