How Is Inflation a Highly Regressive tax on Wages?
|Friday, 20 April 2012 05:44|
No one expects great economic analysis from the Post, especially on its opinion page, but the conclusion of David M. Smirk's piece on the euro crisis must have left millions scratching their heads. The column told readers:
"Inflation, of course, is a highly regressive 'tax' on already stagnating wages and salaries. No wonder European governments are dropping like flies."
Actually, most wages follow in step with inflation, although some workers do see declines in real wages when inflation rises. However, the biggest losers are creditors who are almost by definition wealthy, since people owe them money. If a creditor has lent out $100 million at 2 percent interest (e.g. buying a 10-year U.S. or German government bond) and the inflation rate rises from 2 percent to 4 percent, this creditor has lost an amount equal to 100 percent of his expected income or 2 percent of his wealth. This is a far larger loss than any worker could experience as a result of this increase in the inflation rate.
Also, most workers are debtors to some extent. They are likely to have mortgage debt, credit card debt, student loan debt and or car debt. A higher rate of inflation means that they can repay this debt in money that is worth less than the money they borrowed.
The other strange part of this assertion is that inflation is the reason "European governments are dropping like flies." Of course the euro zone has very low inflation right now, even though many economists advocate a higher rate of inflation. It therefore makes no sense that inflation is causing governments to fall.
The piece also bizarrely includes Mexico on a list of countries that have experienced a boom following a bout of austerity. Mexico's economy has had very weak growth, especially for a developing country, over the last two decades.
Finally, the piece includes the assertion:
"some of the periphery countries in the area of fiscal policy have, to put it bluntly, a history of cooking the books. They deserve the bitter medicine [austerity]."
This is an interesting moral position. The vast majority of workers, students and retirees in countries like Greece and Spain who are suffering from unemployment, higher tuition and pension cuts had no idea that their leaders were cooking the books.
By contrast, highly paid global financial policy strategists like Mr. Smirk might have been expected to recognize the asset bubbles that were driving the U.S. and European economies. They should have warned political leaders and the public at large that these economies were moving into dangerous terrain. If someone "deserves" to suffer we might think the people responsible for reckless policies would be the most obvious candidates, not ordinary workers and retirees.
For the folks who think that inflation leads to lower wages, here is a series showing the average real (inflation adjusted) hourly compensation (wages plus benefits) and the rate of inflation.
These series give the basic story, although they are not perfect for reasons that you do not want to hear about. If you can see a negative relationship (i.e. higher inflation leads to lower real wage growth) you have better eyesight than me.