By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.
Despite current inflation rates, the United States economy appears to be doing well when looking at the stock market indexes and GDP. The Dow Jones Industrial and S&P 500 are nearing or breaking record highs. Growth in the stock market has also spilled over into a growing gross domestic product (GDP). But these high points are in contradiction to other economic indicators. The labor participation rate is at its lowest in nearly 40 years, which has led to a shortage of workers. This shortage of workers has exaggerated global supply chain issues. How can Wall Street be doing so well, and Main Street be doing so poorly?
To understand this predicament, we must first look at what caused the inflation in the first place. The money supply has increased due to expansive government spending and Federal Reserve policies intended to restore the pre-COVID-19 economy. However, instead of bringing the economy back to prior levels, these government responses have exaggerated the problems Covid-19 placed on supply chains.
The increased money supply expanded the impact of the shortage of goods caused by the supply chain problems. Shortages create scarcity, which drives prices upward compounded by the fact that the money supply also expanded. Now not only were there supply chain issues but also more money chasing these fewer goods. In response to this problem, companies blamed inflation for raising prices to match rising expenses after decades of lowering costs to be more competitive. Passing the blame to inflation has allowed companies to charge consumers more than needed to keep up with inflation.
Higher prices increase the Consumer Price Index (CPI), a collection of goods that a consumer would buy. Not only has this collection of goods gotten more expensive, but also more sales taxes are paid for those items. For example, if something costs $10 and tax is 2%, then $.20 would be paid in taxes, but increased to $15, then $.30 would be paid in taxes. Goods are now more expensive because of inflation and increased taxes on those goods.
This fact clouds economic indicators that make it look like the economy is rebounding. Oklahoma City’s six months of record sales tax collections could make it look like economic growth. The increase in sales taxes is because of an increased cost of goods caused by inflation. The same could be said for Oklahoma, with state revenue collections up nearly 14% compared to last year. The cost of inflation does not stop with increased prices of goods but also results in increased taxes paid for those goods.
Lasting implications of inflation will trouble the economy for many years to come. The perceived positive performance in the stock market is short-lived, and without a constant infusion of government spending, it may very well crash. The market will have to correct itself, causing economic stress and possibly higher unemployment in an economic downturn. The effects of the illusion of wealth in the growing stock market created by inflationary policies are minimal compared to the impact of inflation. Only those who are already wealthy can weather the storm of inflation and reap the benefits. Because of this, inflationary spending hurts those who are not already rich the most. As Milton Friedman said, “Inflation is taxation without legislation.”
The opinions expressed in this blog are those of the author, and do not necessarily reflect the official position of 1889 Institute.