#121 The Inflation Tax

Christians are taught to save money, and avoid debt.  But our national economic decision-makers are encouraging the opposite because of the inflation tax. 

 

All dogs will go to heaven, but no taxes will.  The idea actually stems from James Madison, who wrote in Federalist #51: If men were angels, no government would be necessary.”  You see, the purpose of taxes is to fund the government.  It is only necessary because humans have a fallen nature.  When we’re angels, in heaven, no government will be necessary, so taxes won’t exist.  Actually, stating that the purpose of taxes is to fund the government, puts me in something of a minority these days.  In the textbook we use at Dallas Baptist University, our author, Gregory Mankiw says that 83% of economists agree that the redistribution of income is an acceptable role for the government.  

As we will see in today’s podcast, wealth is being redistributed by the inflation tax.  But it’s being distributed in a regressive form: More is being taken from the poor in taxes because of inflation.

In our recent book Biblical Economic Policy, Sergiy Saydometov and I explain that taxes are a necessary evil in a fallen world.  So, the first assumption is that they should be kept as low as possible, and clearly, they won’t exist in a perfect state, as we perceive heaven to be. 

How we got here

In the macro model that you’re now looking at, I explain the two entities that have an impact on the US economy: The government with fiscal policy and the Federal Reserve Bank, which guides Monetary Policy.  Milton Friedman famously said, “Inflation is always and everywhere a monetary phenomenon.”  Well, he died in 2006, but I think he would change his mind if he saw the kind of outrageous spending that’s going on today.  He might say that inflation is caused by monetary AND fiscal policy.  I don’t think he ever predicted that the US government’s fiscal policy would produce a $2.5 trillion annual deficit. 

Here’s a one-sentence summary of fiscal and monetary policy that caused inflation to be at a 40-year high: The government spent too much money, and the Fed kept the interest rate at zero for too long.  Done. 

For more details about how the federal government is pumping up this historic inflation, I will refer you to my podcast #101, Inflating Inflation 

The Dual Mandate

When the Fed was founded in 1913, it had ONE mandate: Stable prices.  Their job was to control inflation, which you see on the left side of the Macro model.  In 1977, they received their second mandate: Full employment, on the right side of the diagram.  Old foggies like me think they should have only one mandate: Controlling inflation.  And it’s times like this, with inflation running at 7.5% that guys like me look like geniuses.  The reason we are having inflation, at least from the monetary point of view, is because the Fed kept the interest rate near zero to try to lower unemployment.  It worked, but it caused inflation.  Matthew 6:24 says you can’t serve two masters, for either he will hate the one, and love the other, or else he will hold to the one, and despise the other.  That scripture applies to the Fed, which tries to do two things at the same time. 

There’s another reason the Fed should not have a second mandate for controlling unemployment.  That’s because monetary policy can lower unemployment only for the short term, and eventually, it will return to its natural rate.  For more on that, see my podcast #21 titled Economic Humanism, and #41 In the Fed we Trust. 

Five Inflation Taxes 

1.  The Wages Tax

In economics,