Inflation: The other tax
By Beth Cody, Writers’ Group member
Iowa City Press-Citizen
Wednesday, April 14, 2010

Each April, I usually write about taxes. But this year I want to mention another, more misery-inducing "tax" that will soon make life more unpleasant for most people, thanks to the accelerating spending binge of the current and previous administrations (Obamacare will only hasten the timetable).

The "other tax" I'm referring to is inflation.

Inflation is not thought of as a tax by most people, but it serves the very same purpose: it transfers money from the pockets of productive citizens to the coffers of government.

What causes inflation? Economists describe it as "too much money chasing too few goods." So basically, if government prints more money than people need to buy things, prices will rise.

Inflation hurts the average citizen (but often benefits the rich). Our money doesn't buy as much, and wages don't keep up with rising prices. It discourages saving and encourages borrowing today and repaying with less-valuable dollars tomorrow.

But the same holds true for government debts: it makes the trillions in dollar-denominated debts our government is racking up easier to repay, so our government likes a controlled rate of inflation. That's why we have had an average inflation rate of about 3% over the past 20 years.

Now, 3% doesn't sound like much, but it compounds over time. We've actually lost half the value of our money in the past 25 years – trillions of our earnings and savings essentially transferred to the federal government.

Now, if inflation rates remain stable, we can invest to stay ahead of anticipated inflationary losses. But they fluctuate: in the past 25 years they have ranged from over 5% to last year's negative rate (deflation). And that's assuming you believe government inflation measures are accurate.

And unfortunately, many people believe that rates will soon be even higher. Why? Because our government will have little choice.

Entitlement promises were already a ticking time bomb, but adding a huge new middle-class health care entitlement will (as most Americans understand), make it even harder for government to pay for its promises: Social Security, Medicare, Medicaid, the many ongoing foreign wars and military bases, education, housing, expanding regulatory agencies, drug warriors, and a hundred thousand earmarks.

There are only four ways to finance this mammoth spending and accumulated debt: more borrowing, higher taxes, spending reductions and inflation.

Borrowing is certain to become more costly as our risk of default grows (see Greece). Higher tax rates bring economic malaise and actually result in lower overall tax receipts (even lowering tax rates to stimulate the economy would require double-digit growth to "outgrow" our debt). And realistically, our political system makes it nearly impossible to cut entitlements.

So the only option left is inflation. Economists are already discussing higher "target" inflation rates, perhaps twice the recent average rate. This means that we will lose half the value of our money in only twelve years, instead of twenty-five.

This means more economic misery for most of us: rapidly-increasing prices, paychecks stretched past the breaking point, desperate retirees, lower standards of living, shortages of goods as people hoard, higher mortgage rates, fewer jobs, worsening economic stagnation. We will then need even more "help" from the same government programs that have caused our misery.

And the joke: inflation won't work. It will reduce a small part of our debts, but will result in higher spending, since most entitlement payments are indexed to inflation. The hole will get even deeper and the United States will be forced to default anyway.

Then all the people who have become completely dependent upon government for employment, Social Security, welfare and health care (the majority of our population) will really be in trouble (as will we all when our economy careens into a ditch). Government spending is a great way to help people, isn't it?

Interesting times (read: human suffering) lie ahead.