- 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,
heís 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
- 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'
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
- 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
- - You may reach Nicholas von Hoffman via email at: email@example.com
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