Inflation Lurks as Stealth Tax

From Carolyn Baum at Bloomberg.com:


Inflation is sometimes referred to as a hidden tax. Unlike other taxes, it doesn’t require legislation by Congress or the states. It doesn’t merit a line item on the 1040 federal income-tax form many Americans will file this week. And it doesn’t appear on the bottom of sales’ receipts as a percentage markup on the things we buy.

Yet, like a tax, it takes resources out of the economy and redirects them to less productive uses. It distorts price signals and leads to a misallocation of capital. It’s a silent way for the government and central bank to devalue the currency, raise prices, help borrowers and punish savers.

And it’s exactly the wrong prescription for the U.S.

The official push for higher inflation as a cure for a sluggish U.S. recovery began about two years ago with a paper by International Monetary Fund economists, including Chief Economist Olivier Blanchard, titled “Rethinking Macroeconomic Policy.”

Other notables jumped on board, including Harvard’s Ken Rogoff (does he think this time is different?) and Greg Mankiw, an economic adviser to President George W. Bush. In their view, higher inflation would accelerate the deleveraging process by allowing debtors -- including the U.S. government -- to pay back their loans in devalued dollars. (Score: borrowers 1, savers 0.)

More Is Better?

Princeton University’s Paul Krugman, another advocate of higher inflation, argued in his April 5 New York Times column that 3 percent or 4 percent inflation would “almost surely help the economy.” It would do this by eroding the real value of debt and discouraging businesses and consumers from sitting on cash.

If 3 to 4 percent inflation can do all that, just think what 6 to 8 percent could do!

And that’s one of the problems with targeting a little more inflation: You may end up with a lot....

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Link: http://www.bloomberg.com/news/2012-04-11/inflation-lurks-as-stealth-tax-on-top-of-form-1040.html