Wednesday, July 02, 2008

More Evidence that Inflation Causes Inequality

Robert Reich has an entry at his blog about the regressive nature of rises in the price of gas:

In a society like ours is now -- in which most of the gains from growth are going to the top earners, and the very top 1 percent has about 20 percent of all income (and a far greater share of all wealth) -- almost every major issue has a large distributive consequence. But because economists and policy analysts, and the members of the media who follow them, are more used to thinking about efficiency than about distributional equity, these consequences are rarely discussed.

Consider gas. As I noted in yesterday's Times, the bottom half of the American work force ­-- everyone who will earn less than about $42,000 this year ­-- is getting hit by the equivalent of a whopping regressive tax in the form of soaring gas prices. And fuel isn’t a discretionary item like cable TV that can be cut from the family budget.

On average, Americans now spend 4 percent of their income on gas. But this figure varies significantly. People who live in impoverished Wilcox County in Alabama, for example, spend 16 percent of their income on gas, while residents of affluent Hunterdon County in New Jersey spend 2 percent....

The wage gap in America continues to widen. And the gas gap is giving it additional fuel.

How can Robert Reich write that headline and not make the connection between inflation and rising inequality? Yet, his proposed solutions, such as raising taxes on the wealthy, do nothing about inflation. Raising taxes will probably reduce inequality in the short term, but at the cost of economic growth which in the long run is the only way to help the poor. Any policy intended to reduce inequality will not be effective in the long run unless it is accompanied by a solution to inflation by the Fed.

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