Consumer prices jumped 7.5% compared to last January, with necessities – electricity, gasoline, used cars, many food items – up at astonishing levels. Rents have increased by the highest percentage in 10 years – and vacancy rates are so low across Southern California that it’s nearly impossible to find an available apartment, per news reports.
This inflationary spell – the highest since the end of the Jimmy Carter administration – is wreaking havoc on everyone and especially poor families. Progressive politicians have called for even more government relief and recurring direct payments to Americans, but they fail to recognize the direct connection between profligate federal spending and inflation.
Supply chain problems have contributed to the problem, but that’s not a sufficient explanation. Congress’ Joint Economic Committee cautions that “ballooning government spending” provides “consumers with so much money (subsidies and transfer payments, or easy access to credit via a low cost of borrowing) that demand grows too fast for production to keep up.”
A January report from the Public Policy Institute of California found that low-income families experienced a higher cost-of-living spike than high-income families over the past two years, which isn’t surprising given that they are more dependent on rental housing. The price of new homes has increased at record rates, of course, but most homeowners are staying put.
A follow-up PPIC report explained that Californians’ wages have gone up 5% since December 2020 because of the tight labor market, but that after accounting for inflation “average wages have actually decreased 2 percent over that period.”
It found that boosts in the federal Child Tax Credit and the Golden State Stimulus package enabled low-income residents to keep pace – but that’s only true for those who took advantage of programs. “However, those gains could be wiped out if wage growth stalls, or government spending slows out of concern for high inflation, which could constrain economic growth,” it opined.
We obviously disagree that government spending propels economic growth, but that conclusion highlights a political conundrum. If the Biden and Newsom administrations boost spending to help those in need, that will ratchet up inflation and obliterate everyone’s earnings. At best, the direct payments only helped a subset of Californians.
Yet we continue to hear nonsensical arguments that inflation actually isn’t that bad. “(I)nflation can actually be a good thing for many working-class Americans, especially those with fixed-rate debt like a 30-year mortgage,” wrote CNN’s Allison Morrow. “That’s because wages are going up, which not only empowers workers but also gives them more money to pay down debt.”
The inflation excuse-makers usually focus on one narrow element of the equation. Indeed, higher wages help homeowners pay the mortgage, but $5-a-gallon gas prices, $30,000 used cars and $10-a-pound beef prices quickly consume that modest advantage. And these pundits aren’t focusing on the long-term costs of excess government spending, as the national debt recently topped an appalling $30 trillion. Like all bills, that one will ultimately come due.
Overall, inflation is hammering all Americans and it will lead to policies – rising interest rates, higher taxes, job layoffs, more aggressive government economic intervention (remember price controls?), reduced public services – that fall hardest on lower-income people. The sooner policymakers face that reality, the sooner they can stop us from following the path of Argentina.