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The hidden tax of inflation

Prices are on the rise in many countries around the world. Price increases are measured by a statistic called inflation, which expresses the percent prices have increased on average over some period of time. Canada saw its highest rate of inflation in over a decade in July when the annual pace of inflation hit 3.7%.

Compared to the U.S., though, Canada is in a relatively good spot. The Consumer Price Index (CPI), which measures inflation by comparing a fixed group of goods over time, rose to 5.4% for the month of July. This ties with June’s numbers for being the largest rate of price increase since 2008. An alternative measure of inflation, the Personal Consumption Expenditures Index, reached its highest rate in 30 years.

Economists have mixed feelings about how long inflation will last, but one thing is clear. Prices are on the rise, and you’ve likely noticed your money isn’t stretching as far as it used to. So why is this happening now? Well, Nobel-price-winning economist Milton Friedman famously commented, “inflation is always and everywhere a monetary phenomenon.” In other words, if you want to see why prices are rising, follow the money.

Money-printing mania

When a central bank prints more currency and puts it into circulation, those who get first access to the money are in for an unexpected payday. So, what will they do with this new money? Well, some of it will be saved, but some will be spent. Suddenly the newly printed money in your pocket might let you buy something you’ve had your eyes on for a while. The store then generates more revenue which can go to investors or paying new workers. So, spending increases, and this might not sound so bad so far. But this is when the problems began.

As that new money goes into the pockets of new workers or investors, they spend some of it too. But, as demand increases while this new money circulates, prices begin to rise. There are more dollars in the economy, but the same amount of stuff. So, the value of dollars decreases relative to the value of goods and services. Money loses some of its value, and prices rise to reflect the money’s lower value. When the central bank prints money, it creates this process whereby money loses its value.

This is exactly what’s happening around the world. In Canada, a common measure of the quantity of money in circulation shows an increase from $1.8 trillion at the beginning of 2020 to $2.2 trillion today. That’s approximately a 22% increase in the quantity of Canadian dollars in circulation in less than two years!

As you might expect from the higher rate of inflation, the increase in the supply of US dollars has been even more alarming. The supply of US dollars has increased by 32% in the same period. Nearly one-fourth of all U.S. dollars in circulation today were printed since January 2020.

This money printing, unprecedented in recent history, was in a large part to prop up economies being damaged by COVID-19 lockdowns. However, we’re beginning to feel the effects of this temporary solution, and Christians should recognize the consequences of money-printing.

Inflation hurts savers… especially among the poor

The problem isn’t simply that, after a period of having more money, consumers now have to face higher prices. Remember, the first person to receive new dollars is able to benefit from spending them. However, as the money circulates more, prices begin to rise. This means not everyone gets the benefit from this newly printed money. And this new money comes at a cost.

As prices rise, the money in people’s savings account loses value too. In this way, inflation acts as a tax on savings. By taking future purchasing power from the thrifty, government can print money and give it to private banks to lend to businesses today. Inflation hurts savers.

There are a few work-arounds to this problem. There are financial tools which help savers to shield the value of their money from the degradation to inflation, but, unfortunately, these tools and methods are costly to learn about and utilize. As such, we should expect inflation to be especially deleterious to poor and middle-class savers who don’t have time to focus on protecting their wealth since their weeks are consumed by making enough wealth to survive until the next paycheck.

The problems don’t end there. While some have the luxury of a job where pay can be re-negotiated easily, this is not true for everyone. Many jobs involve contracts wherein workers agree to a specified wage rate for a definite period. In this case, not only is the savings account of these workers losing value due to inflation, but the weekly paycheck they receive will also be hurt. If you receive the same paycheck every two weeks, but the paycheck can buy you fewer goods and services due to price increases, you’re worse off. Economists call this a decline in the real wage.

Why would the government inflate?

So what is the benefit to government lowering the purchasing power of citizens? Well, there are a couple of benefits to government.

First, a government can lower its debt burden. Governments often finance spending by selling government bonds. These bonds are promises to pay back the purchaser with interest. When inflation strikes, prices and nominal wages rise. As a result, the amount of tax revenue the government collects increases. This makes it easier to pay back debt which remains stagnant as prices and incomes rise.

Second, remember that the “new” money maintains high value before it circulates widely. As a result, government can appease special interest groups in the financial industry by putting the newly printed money into banks first. The new money in banks provides access for large corporations to take the high-powered money out as loans for new projects.

Be wary of the inflation tax

Christians should be especially wary of the tax imposed via inflation for two major reasons.

First, inflation disproportionately impacts the poor. When prices on everyday goods like groceries, energy, and transportation rise, this disproportionately hurts the poor. While 5% more expensive food is a relatively small increase for a millionaire, food can easily make up a huge percentage of monthly pay. Someone living paycheck-to-paycheck can’t afford a rise in prices. Further, the wealthy often receive income through financial assets like stocks. Stock prices also tend to increase during times of inflation, so the income of the rich stays relatively stable. The poor, often locked into prior wage agreements, don’t see their incomes rise immediately with inflation.

Second, inflationary policies encourage behavior the Bible explicitly calls foolish. Proverbs 21:20 (ESV) tells us, “precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.” This verse is descriptive. A fool consumes all of his wealth, whereas a wise man saves it in his dwelling. However, remember that inflation destroys the value of savings. If someone was keeping $1,000 in savings, and a grocery store trip costs $200 before inflation, and $250 after inflation, the saver goes from being able to afford five trips to being able to afford four. If instead, the consumer had used the $1,000 to buy a new flatscreen TV, inflation would not have had any effect. This example illustrates an important point. Because inflation taxes savers, it discourages frugality and encourages consumerism. Why save for tomorrow if money-printing is going to make savings worthless?

Unfortunately, monetary policy is hardly, if ever, discussed on political debate stages let alone Christian churches. However, if we believe our role as Christians in democracy involves looking out for the poor among us, we should watch out for policies which seem tailor-made to harm their interests.

Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He has previously written for both the Foundation for Economic Education and the Institute for Faith, Works, and Economics.


Up Next


The $15 minimum wage - good intentions are not enough

In the US, the latest COVID-19 relief package has re-awoken the debate on minimum wage increases, and that policy conversation is spilling over into Canada, Australia, and much of the Western world too. Often policy proposals put Christians in difficult territory. The Bible was not written during a time where every person would be personally accountable for participating in the governing of a nation. There’s very little in the way of advice to voters on specific policies. However, this doesn’t mean Christians can’t form educated opinions about policies like the minimum wage. To do so, believers can evaluate the fruits of the policy.  Good intentions One way to evaluate whether the minimum wage increase would be a good thing is to see if the intended fruits of the policy are good and analyze whether the actual fruits will match the good intentions. Supporters of the minimum wage increase are ostensibly trying to help lower the level of poverty. Higher wages for the lowest wage workers could give them a chance at a better life. This intended fruit appears to be good. Lowering poverty seems to be unambiguously good. And a reasonable interpretation of Matthew 22:20-22 could claim it’s within the state’s right to take money from business profits and give it to workers. Combining this logic with verses like Psalm 41:1 could make a powerful case for this proposal. A Christian might be tempted to stop thinking here. Perhaps the increased cost to businesses is worth the poverty alleviation. However, even if someone does accept this trade-off, the biggest problem with increasing the minimum wage lies more in the results than intentions.  Bad results Good intentions are not enough to eliminate poverty, as evidenced by the American “war on poverty,” now entering its 58th year. The minimum wage law does not guarantee every person a job at $15/hour. In actuality, what the minimum wage law does is make it illegal to gainfully employ any worker whose skills don’t bring in $15 of hourly revenue. Economists refer to the revenue an additional worker brings in as “marginal revenue product.” For any worker with a marginal revenue product less than the minimum wage, employing them would either mean making a net loss on the hire or breaking the minimum wage law. Businesses must make a profit. If a business fails to do so, it will eventually have no option other than shutting its doors. If businesses fall behind competitors in making a profit, they also run the risk of being driven out of business. As such, hiring decisions in business are based on whether they generate profit. If a salesman, for example, sells $8 worth of products an hour, and he gets an offer for a wage of $7.50, the company finds hiring him to be worthwhile. However, a company that pays a salesman who sells $8 worth of products per hour a wage of $15 is losing $7/hour. Companies that hire this way will be outcompeted by those who don’t. So, what is the result of a minimum wage? Workers who don’t make their companies enough to warrant getting paid the minimum wage are fired. Economic theory suggests this, and a recent working paper from the National Bureau of Economic Research surveys studies on the topic and shows the research overwhelmingly finds that unemployment results from the minimum wage. Not only do some workers not have their poverty alleviated, but the workers with the least opportunity are more impoverished. In fact, evidence suggests this unemployment is imposed on minority groups and women disproportionately. The problems don’t stop there. Unemployment increases, but some workers who previously made a minimum wage will keep their jobs. Aren’t these workers made better off? Not necessarily. If a worker was previously willing to work a job for $8 (as evidenced by the fact that they accepted the job), but now the same worker is being paid $15, this doesn’t mean they are $7 better off. Why? Well, since the employer is mandated to pay a higher wage, they are going to try to get the most work out of the worker possible. Workers might find that these new expectations and pressures make the job less enjoyable than if they were paid an $8 wage. Also, if you’re getting paid more than you would have needed to accept a job, and there are a lot of unemployed replacements waiting, you’re going to be willing to accept a less pleasant job to keep that high-paying job. A higher minimum wage gives workers less bargaining power and, as such, will lead to workers taking on jobs with bosses who don’t need to offer them as much dignity. This is not to say all bosses will take advantage of this position, but it seems unrealistic to assume none will. In sum, if we judge a policy by its fruits, a $15 minimum wage will increase the poverty of those with the lowest opportunity, and it carries the possibility of work becoming less dignified for those lucky enough to keep their jobs. Despite potentially good intentions, the results speak for themselves. Instead of giving more dignity to work and lifting people out of poverty, the minimum wage exacerbates both problems.  Bootleggers, Baptists, and bad intentions For argument’s sake, I’ve assumed good intentions on the part of minimum wage policy advocates to this point. However, it’s important to point out that the minimum wage is utilized as a tactic by racists and labor unions to cut out the competition. Stanford economist Thomas Sowell has chronicled how a Canadian minimum wage has racist roots. Sowell argues: “In 1925, a minimum-wage law was passed in the Canadian province of British Columbia, with the intent and effect of pricing Japanese immigrants out of jobs in the lumbering industry.” A largely automated company would love to increase the labor costs for its competitors. The results of the Australian minimum wage were similar. Sowell points out: “A Harvard professor of that era referred approvingly to Australia’s minimum wage law as a means to ‘protect the white Australian’s standard of living from the invidious competition of the colored races, particularly of the Chinese’ who were willing to work for less.” Whenever Christians support policy, they should take care to avoid contributing to the “Bootleggers and Baptists” phenomena. This phrase describes how, when the US passed alcohol prohibition, the two major groups who supported it were Baptists who opposed alcohol and illegal alcohol bootleggers who stood to profit if legal alcohol distributors were closed. In supporting prohibition, Baptists supported the profits of bootleggers with bad intentions. In the cases Sowell cited, the “bootleggers” were racist who wanted to eliminate minority labor competition. Today, bootleggers can come in the form of a business like Amazon, which, as a largely online company, doesn’t rely on laborers who make less than $15 per hour. Since Amazon already pays its warehouse workers $15/hour, an increase in the minimum wage would do little to impact their costs, but it would raise the costs to one of Amazon's biggest competitors – Walmart. Bootleggers could also be skilled labor unions that lobby for the minimum wage to limit the competition from unskilled, but lower cost, labor. In these cases, the special interest groups intend the policy to prevent less fortunate low-skill laborers from having jobs. To make a positive difference in the world, Christians must consider more than their intentions behind policies. Instead, it is part of our responsibility, given the form of government God has allowed us to participate in, to be educated about the results of policy. In the case of raising the minimum wage, the results are in. Christians need to do better if we want to help the suffering of “the least of these.” Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He has previously written for both the Foundation for Economic Education and the Institute for Faith, Works, and Economics....

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