Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Inflation Taxes You Without a Vote
Transcript
- Lucas: There's a tax that nobody votes on, never appears on a receipt, and costs the average household thousands of dollars a year. It's inflation. Luna: Right, the 'inflation tax.' I've heard that term thrown around, but it's not like the government sends you a bill for it. Lucas: Exactly. And that's why it's so insidious. When the government spends more than it collects in revenue, it has to finance that gap. One way is to print money, which effectively dilutes the value of every dollar already in circulation. Luna: So the government is literally creating new money out of thin air, and that reduces the purchasing power of the money we already hold. That's the tax. Lucas: Precisely. Economists call it seigniorage. But the real-world effect is that your savings lose value, your wages don't stretch as far, and the government gets to pay back its debt with cheaper dollars. Luna: And it's a tax that falls hardest on people who can't protect themselves. People with fixed incomes, retirees, low-income households who hold most of their wealth in cash. Lucas: That's the brutal part. The wealthier you are, the more likely you are to own assets that rise with inflation — real estate, stocks, commodities. But if you're living paycheck to paycheck, you feel every price increase. Luna: So how big is this hidden tax in dollar terms? Can we put a number on it? Lucas: Sure. The U.S. national debt is about $28 trillion. If inflation runs at 2%, the real value of that debt effectively shrinks by about $560 billion per year. That's a transfer from creditors — including pension funds, foreign governments, and ordinary Americans holding Treasury bonds — to the government. Luna: Wow. So every year, inflation quietly reduces the burden on the government by half a trillion dollars. And nobody voted on that. Lucas: Not only that, but the government actually benefits from inflation in another way: bracket creep. When incomes rise with inflation, people get pushed into higher tax brackets, so the government collects more revenue without passing a new tax law. Luna: So inflation is like a fiscal double-dip. It reduces the real value of debt and increases real tax revenue. Lucas: Exactly. That's why some economists argue that moderate inflation is actually a convenient tool for governments. But it's a dangerous one, because once inflation expectations become unanchored, it's very hard to get them back down. Luna: And that's where central bank independence comes in. The Federal Reserve's job is to keep inflation in check, even if the Treasury would prefer a little more flexibility. Lucas: Right. The Fed's mandate is price stability and maximum employment. If they let inflation run hot to help the government's fiscal position, they lose credibility. And once credibility is gone, inflation becomes much harder to control. Luna: But here's the thing: the Fed isn't completely independent. It was created by Congress, and its mandate can be changed. There's always political pressure to keep rates low. Lucas: Absolutely. And we've seen that tension play out in real time. In 2021 and 2022, when inflation spiked, the Fed initially said it was 'transitory.' They were slow to raise rates, partly because the political pressure to keep rates low was enormous. Luna: And that delay cost people. Real wages fell for many workers, and the cost of living soared. Lucas: Yeah. The inflation tax is regressive in the worst way. Lower-income households spend a larger share of their income on essentials like food, rent, and gas — exactly the categories where prices were rising fastest. Luna: Let's talk about Social Security. cost of living adjustments are supposed to protect retirees from inflation. But the formula uses cpi w, which tracks urban wage earners and clerical workers, not the spending patterns of seniors. Lucas: Good point. Seniors spend more on healthcare, and medical costs have historically risen faster than general inflation. So the COLA often understates their true cost of living. Luna: That means the inflation tax hits retirees twice: their savings lose value, and their benefits don't keep up. Lucas: And it's not just seniors. Anyone with a fixed-rate mortgage benefits from inflation — they pay back their loan with cheaper dollars. But renters get no such benefit. They face rising rents immediately. Luna: So inflation redistributes wealth from savers to borrowers, from renters to homeowners, from the poor to the rich. That's a pretty regressive tax. Lucas: Exactly. And yet, there's almost no public discussion of inflation as a fiscal tool. People see higher prices and blame greedy corporations or supply chains, but the role of monetary and fiscal policy is often overlooked. Luna: So what can people do to protect themselves? I mean, you can't exactly opt out of inflation. Lucas: You can't opt out, but you can hedge. Holding hard assets, Treasury Inflation-Protected Securities, even just negotiating a higher salary helps. But the most important thing is understanding that inflation is not an act of God — it's a policy choice. Luna: Speaking of choices that matter, we want to be transparent about how this podcast stays on the air. We don't run ads, and we don't have a corporate sponsor. The only reason we can keep doing this is because some listeners choose to support us. Lucas: Yeah, if you've gotten something out of our conversations — maybe a new way to think about the economy or a concrete insight you can use — and you'd like to help us keep going, you can support the show at buy me a coffee dot com slash fexingo. Luna: It's a small gesture that adds up, and it keeps us independent. No pressure, just an option. Lucas: So back to inflation. One of the most important things to watch is the breakeven inflation rate — the difference between nominal Treasury yields and TIPS yields. That tells you what the bond market expects inflation to be over the next five or ten years. Luna: And right now, that breakeven is around 2.3%? That suggests the market trusts the Fed to keep things under control. Lucas: For now. But if fiscal deficits keep growing and the debt keeps piling up, the temptation to inflate away the debt will only increase. That's the real risk. Luna: So the inflation tax is not just a historical curiosity. It's a live issue that will shape policy debates for years to come. Lucas: Exactly. And understanding it is the first step to making sure you're not the one paying it. Next time you see a price increase, ask yourself: is this a supply shock, or is it the quiet tax we never voted on?