Rampant inflation in recent months has, rightly, become a political issue. With overall inflation at 6.8% and durable goods inflation at a shocking 14.9%, commentators from across the political spectrum are weighing in.
A particularly pressing issue is the effect of this inflation on people at or below the poverty line. In a post on Twitter, Paul Krugman, a well-known economist and commentator, poses the following question: “Is there any good reason to believe that inflation hits low-income households especially hard?”
While this seems to be a simple question with a straightforward answer, it’s instructive to see what evidence Krugman and those who agree with him bring to bear. This is a great example of academic technicalities being used to mask the simple truth. Krugman has a long history of running interference for the Democrats, and this case is no different. Rampant inflation is not reflecting well on President Joe Biden and his party, so commentators such as Krugman are attempting to deflect blame or, in this case, argue that the inflation itself isn’t so bad!
The economic logic is clear: Higher inflation is most certainly more difficult for the poor to tolerate.
Let’s first look at the evidence Krugman cites for the notion that inflation is not more painful for those with lower incomes. He states: “Inflation redistributes from creditors to debtors — not exactly a burden on the bottom half of the income distribution.”
Technically this is true. Over time, inflation erodes the value of money, meaning that those paying back debt will do so with dollars that are worth less than they were originally when they first borrowed the money. Krugman also refers to a graph showing that deflation during the 1970s coincided with rising income inequality. Also true. But how is this related to the present plight of the poor and those with lower incomes?
The problem for Krugman is that the first excuse doesn’t amount to much, and the second is a distraction. Does the fact that the average low-income household pays back its debts with less valuable money over time outweigh or significantly alleviate the 6.8% increase in food price inflation from November 2020 to November 2021? It’s doubtful that the average family struggling to deal with the post-COVID economy is delighted that massive banks with trillions in assets and the ability to influence interest rates will be paid back in less-valuable dollars over the next five to 10 years. Rather, necessities are a larger percentage of the budget for low-income working families than they are for the rich, making it much harder for them to deal with inflation in necessities such as food and energy.
The wealthy hold far more assets than the poor, and the value of those assets is also rising with inflation. Now a family saving for their first home will find that home even more out of reach than before. Meanwhile, stock prices are rising, further enriching the financial elite and those with the largest portfolios.
Prices of durable goods such as home appliances, furniture, vehicles, TVs, and computers have increased 14.9% in the last year. Are the working poor relieved that, even though they can’t replace their broken refrigerators, at least their car loans are being paid back in less valuable dollars? Surely not. And yet Krugman and others carrying water for the Biden administration can’t be bothered to admit this simple fact.
Krugman’s appeal to rising inequality during the deflation of the 1970s is a silly distraction. He is well-known for these simplistic statistical analyses that are missing many other variables. Just because two variables appear to have a certain correlation doesn’t mean one is causing the other. Further, if you look at the same data over a longer period of time, it appears that Krugman’s conclusion is reversed.
Some claim the inflation we are facing right now is “transitory,” meaning that it is caused by the policy response to the pandemic and the associated fallout. Indeed there are many references to demand-pull inflation from the stimulus packages paid out in the last two years. On the other hand, the Federal Reserve’s recent change in perspective on inflation, and the possibility that it doesn’t have the policy tools to deal with it, could mean that the current high-inflation conditions will persist.
The bottom line is that the present inflationary conditions are not likely to end soon, and those in the bottom two-thirds of the income distribution will bear most of the cost. Economists should not be ignoring the reality of the situation; rather we should be helping to devise policies that can help those who are struggling to weather the COVID-policy-induced inflation.
Levi Russell is an assistant teaching professor at the Brandmeyer Center for Applied Economics at the University of Kansas and a fellow at the Leonine Institute for Catholic Social Teaching. You can email him at email@example.com.