You don’t have to pass a tax bill in Congress to raise people’s taxes, and George W. Bush isn’t going to ask for one. Instead, he’s raising taxes in the cruelest way-through inflation.
As of the end of March, inflation was running at almost 4 percent per year. From every indication at the supermarket or the gas pump, the rate of inflation has accelerated since then. Where and when it will stop is anybody’s guess. Nor is 4 percent a small figure when you recall that this is a compounding percentage. During the last 10 years, a period when inflation has been “tamed” or “under control” or “negligible,” the cost of what you could have bought for $100 in 1993 has risen to $130.10.
Except for C.E.O.’s and other forms of the egregious rich, most people will need raises of about 5 percent this year to break even. Maybe the labor-supply situation will tighten up enough so that employers will decide that, shipping jobs off to India or not, they will have to put more money in their people’s paychecks. So far that hasn’t happened, and even if it should, experience with past inflation teaches that salaried and hourly workers get small raises and get them later than the big-money people, if they get them at all.
That is why political economist Milton Friedman, who is often unfairly and inaccurately associated with the hard right, deems inflation a tax on ordinary working people. The rich have a dozen ways to protect themselves from the havoc that inflation works on savings and investments. The kind of people who have no more than five or six months of living expenses in the form of ready money in the bank take it in the chops.
The party line is that inflation isn’t happening and will not happen. Let’s hope that, for once, the Bush party line has got it right, but the troops are getting nervous. Al Broaddus, the president of the Richmond Federal Reserve Bank, recently said out loud what others in his camp must be thinking: “The growing concern about inflation is certainly understandable. Indeed, I have to confess that after being in the unfamiliar mode of worrying about inflation falling too low, I’m dusting off my old inflation-hawk feathers in case I have to flap my wings one more time before I leave the Fed.” Mr. Broaddus said that the “Federal Reserve will monitor incoming information on pricing developments especially carefully in the weeks ahead,” although he added that he was “confident” there will be no repeat of the “dangerous, double-digit rates in the late 1970’s and early 1980’s.”
Others don’t share his confidence. The price of commodities like copper, wheat and-of course-oil are up. So also are the prices for scrap iron and dairy products. The rising price of milk prompted one stand-up comedian to tell his audience that if dairy prices don’t begin to head south soon, the President is going to order a pre-emptive invasion of Wisconsin. The other day, The Wall Street Journal ran a story under the headline of “Summer-Fun Inflation,” noting that ballpark hot dogs are up 7 percent, sunglasses 13 percent, a ticket on the Fire Island ferry went up a dollar and admission to Hershey park, that sweet and creamy dreamland in Pennsylvania, has gotten two dollars more expensive than it was last year.
To what do we owe the honor of the incipient inflation? In part, its cause may be found in yet one more White House goof-up/miscalculation in connection with the Iraqi invasion. Having decided that shock and awe would make Iraq a stroll in the park, Mr. Bush et al. decided that they would go to war without bothering to pay for it. It would be simple: You go in, get the evildoers, strip them naked, make them bugger each other, take their pictures and go home. You remember the boasting from the administration about how they would make Iraqi oil revenues pay for rebuilding the country?
The quick, cheap war has turned into a slow, expensive one, but the dogmatists in the White House-who have never taken raising taxes as an article of faith-are trying to pay for it by borrowing. None of the major wars fought by the United States has been paid for by borrowing alone. From the Civil War onward, the big wars have been financed in major part by raising taxes, which lessens inflationary pressures by taking people’s spending money away.
Oddly enough, borrowing can also act to depress inflationary forces, but not the way George Bush is doing it. You have to do it the way Franklin Roosevelt and Woodrow Wilson did: You get the people to borrow at low interest rates, thereby putting into government securities money that otherwise would be out roaring around the economy and forcing up prices. Roosevelt was able to pay for the Second World War by borrowing at little more than 2 percent. Of course, he was fighting a war people believed in, against formidable enemies with the military power to defeat us. That no doubt stimulated people’s patriotic juices and made the huge war-bond drives of both World Wars I and II great successes.
If George Bush were to attempt an Iraqi war-bond drive, he might get some of his buddies to buy a bond or two, but the non-idiot millions would have none of it. After the lies, blunders and Abu-awful prisoner stories, it will be a cold day between the Tigris and Euphrates before they’ll sell out an issue of low-interest government bonds to support the war effort.
Since he has gotten in office, Mr. Bush and his people have not only cut taxes but also talked down saving as they’ve urged more personal borrowing and more consumer spending. So who, you might ask, is paying for the war? The answer is foreigners. Asian nations-China and Japan for the most part-hold over $2 trillion worth of American debt. We were in hock to the world before Mr. Bush sent us into his war, but now we really, really, really are in hock.
We owe money up the yazoo and, instead of reining ourselves in, we continue to borrow with no immediate hope of beginning to repay the debt. As a result of Mr. Bush’s spendthrift ways, the value of the dollar has been sliding for many months, which is to say that each dollar buys less than it used to, and that’s called inflation.
The classic ploy for getting out of this spot is cheapening the money-that is, deliberately causing inflation so that a nation can repay loans of expensive dollars with cheap ones which buy less. Over the past several years, the administration has made no bones about fostering a degree of inflation for the purpose of stimulating the economy. Whether Mr. Bush also wants to devalue the money to cheat lenders cannot be known just now-but if he does, he wouldn’t be the first king, prince, President or whoever to resort to this form of theft. In the old days, the king used to dilute the value of money by putting less gold or silver in the coins; in the modern era, they simply print more of the stuff.
Lenders aren’t jerks, however. They react by selling the dollar-denominated stocks and bonds they’ve been holding, by refusing to lend more money and demanding higher interest rates. Rapid upward surges in interest rates can contribute to inflation by driving up the cost of borrowing, thus making our financial mess messier.
To get investors to buy bonds in the face of inflation, the government sells something called a TIPS, or a Treasury inflation-proof security. As inflation increases, the government increases the nominal value of the bond. For example, if you buy a $100 bond and inflation goes up 1 percent, the face value of the bond goes up to $101. But a population like ours, which is all but bereft of cash assets, has no money to buy inflation protection. And in the long run, if enough of these bonds are sold, we will have no idea what the national debt is, since the nominal value of bonds will keep getting larger at an unknown future inflation rate.
Apologists for the administration will tell you that a damaging inflation is not in the cards. They argue that business is able to reduce the costs of goods and services so successfully that prices cannot rise significantly. Up to a point they may be right, but we have probably passed it by now.
But not to worry if the basics look grim. Alan Greenspan has been reappointed to four more years as chairman of the Federal Reserve Board, where he has presided over one big boom, two recessions and two stock-market crashes. This will be his first inflation. Lots of luck to us all.