WHY IS INFLATION A TAX? — PART 6

Home Finance – What Budgeting Looks Like
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Here is the final post in this series.

  • Part 1: Introduction
  • Part 2: How Much Money Do Our Leaders Want To Spend?
  • Part 3: What Additional Factors Can Produce Inflation?
  • Part 4: What Is Wrong With Price Controls?
  • Part 5: Why Is Inflation A Tax?

In this post we will address the following.

What Should We Do?

How do we get inflation under control? Before we can decide what to do, we need to clearly define the problem. What drives inflation? What are the primary things that define the value of a dollar? Look again at the math problem. What are the most pertinent factors?

  • With taxes we reduce the supply of dollars in circulation.
  • With government spending we increase the supply of dollars in circulation.
  • To get taxes and spending in sync, we set priorities. That is, we decide what we want our government to buy for us. Then we decide how much we are willing to pay in taxes in order to get what we need our government to buy for us.
  • When government spends more money than it consumes in taxes, that eventually results in inflation.
  • When government spends less money than it consumes in taxes, that eventually results in deflation.
  • If inflation starts to get out of control, then the Federal Reserve tries to control inflation by raising interest rates and discouraging borrowing and investment. That stifles economic activity and effectively reduces the supply of money, decreasing the number of people businesses want to employ.
  • If deflation starts to get out of control, then the Federal Reserve tries to control inflation by lowering interest rates which encourages borrowing and investment. That promotes economic activity and effectively increases the supply of money, increasing the number people businesses want to employ. Note that deflation is relatively rare.

Is inflation really a problem or is the Federal Reserve creating a problem by doing something about inflation? That is, do we actually need to control inflation? Well, that depends upon the amount of inflation, but none of us like making business deals based upon a commodity with an unstable value.

Consider some of the problems with ten percent inflation per year.

  • If we have money in the bank, that money loses ten percent of its value every year.
  • If we only get a five percent pay increase, due to inflation we actually receive a five percent pay cut.
  • Mortgage lenders are going back to balloon mortgages. That makes figuring out our house payments unpredictable. Will our salaries keep up? Who knows?

As the result of such headaches, inflation creates enough problems that if nothing is done inflation stifles economic activity. Without a reliable and stable medium of exchange (like the greenback), we are reduced to a barter system. That slows economic activity to a crawl.

Therefore, we have a puzzle. When there is the potential for so much trouble, why would we ever allow our government to spend significantly more money than it consumes in taxes? The answer is that we, the American electorate, lack self-discipline. When we allow Congress to set budget priorities, we don’t correctly distinguish between our “wants” and our “needs.”

What is the difference between “want” and “need”?

Because government does not produce anything, anything it gives us it must first take from us. So, government cannot give us anything we want without taking away something else that we want. Therefore, both logic and morality (if we don’t want to rob our neighbors using the tax system) dictate that we should allow Congress to spend money only upon those things that we need from government. That means we should only allow government to buy and provide us things that only government can provide. That includes things like national defense, the regulation of interstate commerce, interstate highways, Federal police forces, Federal courts, Federal prisons, and so forth.

The framers of the Constitution were in fact quite aware of the tendency of politicians to overspend. So, they specifically authorized Congress to restrict its spending to a list of items (see Article I, Section 8). Unfortunately, Congress has been spending and spending and spending money on things that are not on that list (or anywhere else in the Constitution) for decades.

How does Congress get away with spending money on things the Constitution does not authorize? Our members in Congress promise to give us the things we want (but don’t actually need), with other people’s money. Then they contrive to make us dependent upon that money.

Consider the two biggest budget items, Social Security and Medicare. For most of our nation’s history, Americans prospered without either Social Security or Medicare. Now these two items make up half the Federal Budget, and we call them funding them mandatory spending. Ironically, when Congress spends money as authorized by the Constitution, that is called discretionary spending. If that is not Orwellian, what is?

Think! How does the financing of Social Security and Medicare work? Old people, who tend to vote, receive the tax monies of younger people who don’t tend to vote. Senior citizens actually vote to tax their own children, those other people, to pay for programs that rightfully should not exist.

Think! Don’t most of us have the sense to realize that we are running out of money to pay for programs like Social Security and Medicare? If our leaders won’t exercise the self-control required to set limits on their spending, and we refuse to hold them accountable, the collapse of our economy is inevitable.

Because we refuse to hold our elected representatives accountable to the Constitution, Congress has become thoroughly undisciplined. Because Congress cannot get its act together, it often passes bills to keep on spending what it has been spending in the prior year. If you and I could just print money, I guess that would work for us too.

Congress has resorted to this kind of last-minute temporary spending bill in 43 out of the past 46 years due to its failure to approve full-year appropriations in time for the Oct. 1 start of a fiscal year, according to a government study

U.S. House passes crucial stopgap government funding bill, avoiding partial shutdown | Reuters

Here is how bad the budgeting process has become.

Tardy federal budgets are nothing new in Washington. According to the Tax Policy Center, Congress has only completed the budgetary process in a timely fashion, which requires passing all 12 appropriations bills prior to October 1, four times since fiscal year (FY) 1977. The last time Congress’ budgetary process worked as expected was FY 1997, more than two decades ago.

The broken federal budget process gets even worse with $1.5 trillion omnibus spending bill – Reason Foundation

Are these failures entirely due to incompetence and a lack of discipline? Probably not. Congress still manages to spend huge sums of money. They just pack all of the pork they want into huge bills no one has time to read, and their preference seems to be to pass these monster bills when no one is watching.

How can we hold these devious people accountable? We can vote them out of office. So, start studying the people on your ballot, and vote in November.

Additional References

5 thoughts on “WHY IS INFLATION A TAX? — PART 6

  1. Something I learned long ago. While I worked in business establishments, the companies had to be responsible, handling their resources to make better decisions. As a teacher, but also being around a couple other “public” entities for a time, the idea of money is more from a “we deserve” mentality, all too many employees getting used to the idea they “deserve,” even though production doesn’t prove out. Our leaders are far to used to not having to work for a living: in it’s truest sense. If they were honest, they wouldn’t touch a dollar unless everything tied into the U.S. Constitution and freedom with responsibility.

  2. Tom,

    Biden’s spending policies without a long-range plan is a disaster.

    The result of inflation and raising the interests’ rates require the Fed to pay higher interest on borrowed money which has served to balloon the National Debt to 31 trillion

    Somehow, we need to change House and Senate control to return some fiscal sanity to the USA before all taxes have to rise to pay the higher interest by government to pay debt.

    Sad

    Regards and goodwill blogging.

Comments are closed.

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