fnew on Nostr: Rishi Sunak has been taking a lot of flak (largely from Keynesian economists) for ...
Rishi Sunak has been taking a lot of flak (largely from Keynesian economists) for saying that #inflation is a tax that disproportionately hits the less wealthy.
But if he'd simply said "Inflation *has the effect of a tax* that unfairly targets the less well off" then his critics might not be missing the point so badly.
#Inflation is of course not a tax levied by a Revenue service and payable by law in order to fund government spending.
But it DOES have an insidious effect similar to a direct tax, as it functions as a non-optional reduction in the amount of value that you have left over for discretionary payments (whether spending, saving, or paying down debt). It IS well established that inflation disproportionally disadvantages the poorer in society who do not hold assets or investment products whose value may increase in line with or faster than the rate of inflation (like houses).
Remember - your house hasn't become more valuable. It's just that the pounds you measure it with are worth less.
Another thing that is worth less are actual government debts (to the extent that they are not inflation-linked). In this way, inflation and the associated debasement of fiat currency can reduce the real value of government borrowing, even though the nominal amount may remain the same. Unfortunately for Rishi Sunak, about a quarter of GB government debt is index linked or tied to inflation, so this effect is not as marked as it could be, but inflation does nevertheless have this second order effect, indirectly and invisibly reducing the impact of government borrowing on the government - to the detriment of the poorest in society, who pay the price out of their own pockets.
Rishi is in good company as this is not a new idea; both William Easterly of the World Bank and Stanley Fischer of the IMF came to similar conclusions in this historic paper, for example:
"This paper presents evidence that supports the view that inflation makes the poor worse off. The primary evidence comes from the answers to an international poll of 31,869 respondents in 38 countries. These show that the disadvantaged on a number of dimensions the poor, the uneducated, the unskilled (blue-collar) worker are relatively more likely to mention inflation as a top concern than the advantaged on these dimensions."
https://economics.mit.edu/sites/default/files/2023-05/fischer_inflation_poor.pdf…
https://youtu.be/GJ4TTNeSUdQ?si=sNhRfGg8ne9MpY3n
But if he'd simply said "Inflation *has the effect of a tax* that unfairly targets the less well off" then his critics might not be missing the point so badly.
#Inflation is of course not a tax levied by a Revenue service and payable by law in order to fund government spending.
But it DOES have an insidious effect similar to a direct tax, as it functions as a non-optional reduction in the amount of value that you have left over for discretionary payments (whether spending, saving, or paying down debt). It IS well established that inflation disproportionally disadvantages the poorer in society who do not hold assets or investment products whose value may increase in line with or faster than the rate of inflation (like houses).
Remember - your house hasn't become more valuable. It's just that the pounds you measure it with are worth less.
Another thing that is worth less are actual government debts (to the extent that they are not inflation-linked). In this way, inflation and the associated debasement of fiat currency can reduce the real value of government borrowing, even though the nominal amount may remain the same. Unfortunately for Rishi Sunak, about a quarter of GB government debt is index linked or tied to inflation, so this effect is not as marked as it could be, but inflation does nevertheless have this second order effect, indirectly and invisibly reducing the impact of government borrowing on the government - to the detriment of the poorest in society, who pay the price out of their own pockets.
Rishi is in good company as this is not a new idea; both William Easterly of the World Bank and Stanley Fischer of the IMF came to similar conclusions in this historic paper, for example:
"This paper presents evidence that supports the view that inflation makes the poor worse off. The primary evidence comes from the answers to an international poll of 31,869 respondents in 38 countries. These show that the disadvantaged on a number of dimensions the poor, the uneducated, the unskilled (blue-collar) worker are relatively more likely to mention inflation as a top concern than the advantaged on these dimensions."
https://economics.mit.edu/sites/default/files/2023-05/fischer_inflation_poor.pdf…
https://youtu.be/GJ4TTNeSUdQ?si=sNhRfGg8ne9MpY3n