Inflation Punishes the Unprotected

Government shields its employees and beneficiaries, but not ordinary workers, from higher prices.

By Phil Gramm and Mike Solon. Excerpts:

"While indexation of tax brackets was added in the 1981 Reagan tax cut, capital gains, corporate profits and other federal taxes have never been indexed. When the 1993 Clinton tax increase subjected Social Security above a certain income level to taxes, that income level was never indexed. While today personal income-tax brackets are indexed for inflation, the price index used to adjust the tax brackets for inflation is a different index from the one used to adjust spending for inflation, yielding adjustments in tax brackets that are some 12% less than the inflation adjustments that increase spending. So either the level of government spending overcompensates for inflation or personal-tax brackets undercompensate for it.

While virtually every aspect of the federal budget is to some degree protected from inflation, either automatically or under the rules of government budgeting, if you work for a living in the private economy you are largely unprotected from inflation. Those who run the government, and those who are protected by the government from inflation, may be confused about the threat posed by current price increases, but nobody needs to tell American workers that they have an inflation problem.

Average weekly earnings since January are up $15.59, but with inflation surging to levels not seen since the early 1980s, real weekly wages are down $8.99, the largest real-dollar drop in wages since Bureau of Labor Statistics data were first collected in 2006. By comparison, real wages have fallen more in the past seven months than they rose in the final 27 months of the Obama presidency.

Historically inflation has been particularly cruel to the working poor. Despite the economy’s growth in 1981, the 12.5% inflation rate pushed some 2.5 million people, 2.2 million families and a million children into poverty.

Perhaps the greatest insult that is added to the injury of inflation is how the people pulling the wagon are so much less protected than those riding in it. When funding for the War on Poverty started to increase in 1967, 68% of Americans in the bottom quintile of earners who were between 18 and 66 and neither full-time students nor retired had jobs. By 2017 the average real level of federal transfer payments to the bottom quintile of households exceeded $45,389, and the labor-force participation rate among those prime working-age Americans had plummeted to 36%. Today those not working are largely protected from inflation; those who are working see inflation erode the value of their wages. Their life savings also suffer as inflation eats into the purchasing power of their savings accounts. With a one-year certificate of deposit earning roughly 0.2%, a $50,000 nest egg has lost almost $2,000 of purchasing power in the past seven months."