WESTMINSTER — In the wake of the Federal Reserve Board's recent decision to raise short-term interest rates (and indications that they plan to further raise rates over the coming year), I am concerned that our national conversation about responses to inflation has been unduly constrained.
Among the many possible responses to rising inflation (specifically, the demand-induced inflation we are currently experiencing because of excess liquidity, or “too many dollars chasing too few goods”), there are two main possibilities:
Option A: Raise interest rates. (This is generally the only option we are allowed to discuss in media, government or polite company.)
• Raises the cost of borrowing.
• Reduces employment, thereby putting downward pressure on wages, especially at the lower end of the wage scale.
• Inflicts pain on the poor and the working and middle classes, while rewarding the wealthy and the investor class.
Option B: Raise top marginal tax rates and taxes on wealth.
• Removes excess liquidity (“too many dollars”) from those who have the most excess liquidity in our economy.
• Affects people who have benefited from 60 years of tax cuts and deregulation.
Additionally, I think it is important to note that the rise in energy prices is not simply a matter of demand, but one of supply, the results of the decision by OPEC Plus countries to limit production last year, as well as the prospect of unstable supplies due to the war in Ukraine.
The effect of rising energy prices is certainly inflationary, but for consumers at the lower end of the earning spectrum, it has a deflationary effect as well: It dries up our excess liquidity all by itself.
I think it is incumbent on our representatives in Congress, as well as the economic punditry in media, to start looking at options beyond short-term interest rates to solve our inflation problem.