OPINION:
Like Dracula rising from his coffin to haunt the living, inflation is returning with a vengeance. While the Biden administration has been busy taking credit for inflation coming down — after conspicuously denying culpability for running it up to 40-year highs in the first place — President Biden is once again silent as inflation reaccelerates. Worse, Bidenomics is keeping the monster of inflation alive.
Annual inflation, as measured by the consumer price index, rose from 3.0% in June of this year to 3.2% in July, and when the figures for August come out, we’ll surely see that it’s risen again. That’s no surprise, though, given the breakneck pace of spending and borrowing by the U.S. Treasury after the debt ceiling was suspended in June.
In response to Treasury Secretary Janet Yellen’s trillion-dollar borrowing spree over the last several months, the Federal Reserve has allowed the money supply to grow. That is providing the federal government with the money it wants, but it’s casting a shadow on the American financial landscape, beckoning the inflation Dracula to return.
Congress and the White House spent over $6 trillion last fiscal year and are projected to do the same by the end of the current fiscal year too. Even drunken sailors would blush at these numbers. So much spending has caused the Treasury to borrow over $1 trillion a year, and the Fed obliges by creating money to keep the Treasury’s borrowing costs artificially low, financing a $32 trillion debt.
But as the federal government spends, borrows, and creates too much money, an unseen transfer of wealth happens. Every time the Fed creates a dollar for the government, it slightly devalues all other existing dollars, effectively shifting that lost value into the newly created money. This is why inflation is a hidden tax: It transfers wealth from the people to the government.
How big is this wealth transfer? In July, the average American worker earned $33.74 an hour and paid $3.37 per hour in federal income taxes. But inflation has reduced the purchasing power of that worker’s pay by $4.62 an hour, compared to when Mr. Biden became president.
That reduction in what the worker can buy with his wages represents a real tax on him and is the amount of wealth the government confiscates from him on an hourly basis while he is working. In other words, the hidden tax of inflation has more than doubled the effective income tax rate of the average American worker to pay for excessive federal government spending.
It is shockingly like a vampire parasitically draining his victims to sustain himself. The American people are being robbed of their savings and their incomes so that a bloated bureaucracy can continue expanding. If it’s allowed to continue, it will eventually siphon all the life from Americans’ livelihoods.
So, how do we stop the monster? Trimming the federal budget is the sunlight that will force the inflation Dracula back into his coffin.
And it’s imperative that this start soon. The financing costs of the federal debt are exploding, which only further increases government spending, making the situation deteriorate even faster. It’s just like a household budget where the response to a maxed-out credit card is to open another one and max that out too. The interest charges on each one only exacerbate the family’s financial difficulties.
The dynamic of this vicious downward spiral is playing a key role in the current reacceleration of inflation, which began in July and will certainly continue in August.
Fortunately, large and steady reductions in the federal budget can stop both this failure of federal finance and the deterioration of the dollar. Slamming the brakes on government spending will remove the Fed’s incentive to create inflation, and then prices will finally stabilize as the Treasury’s borrowing bonanza comes to an end.
That is the only way to drive a stake through the heart of the inflation Dracula.
• EJ Antoni is a public finance economist at The Heritage Foundation.
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