Sucker-Punching The Economy

Even as our politicians strive to figure out creative and equitable ways to tax the rich, ensuring the wealthy pay their “fair share” of taxes, they have actually mastered the art of taxing the poor.

Inflation is a tax on the poor. The rich are often protected from inflation as they own so-called “hard assets'' like real estate and stocks, the price of which naturally increases to reflect the inflationary effect. But not so the poor who must constantly play catch-up just to ensure their wage increases keep up with inflation in order to even maintain their modest standard of living.

Every four decades or so the pendulum of power swings, often painfully, between Capital and Labor. President Franklin D. Roosevelt ended the era of the Robber Barons and thereby empowered Labor through strengthening the Unions. Nearly 40 years later President Ronald Reagan strengthened the role of Capital by lowering taxes, while weakening the role of Labor by firing the unionized air traffic controllers. With the top 1% now owning more than 50% of the wealth in this country, the balance of power is likely shifting again to Labor, a transition that could once again be painful.

Short of the pitchforks coming out, how else can the balance of power shift?

Those of us old enough to remember the painful Stagflation of the 1980’s could hardly forget the landmark 1986 Tax Reform. The act delivered a sucker-punch to the economy by raising capital gains taxes from 20% to 28%, and limited the deductibility of real estate losses, with the combined effect of drying up investment capital and forcing the collapse of all asset values. After enough real estate investors literally and figuratively mailed back their building keys to their local Savings & Loan lenders in lieu of foreclosure, the Resolution Trust Corporation (otherwise known as taxpayers), had to step in to clean up the mess at great expense to the nation.

At 6.2% and counting, once again inflation is rearing its ugly head, because too much money is chasing too few goods. To fix the first part of this problem, the Federal Reserve must face reality, stop printing money and allow interest rates to reflect their true natural market level. However, this time around, we are also facing the more complicated problem of  goods scarcity, due to the cumulative effect of the pandemic's shock to the economy, including labor shortages, transportation problems, and supply chain disruptions like the shortage of crucial ingredients like semiconductors.

Unless our politicians can find the delicate balance between the Fed’s actions and the deregulation of our economy to allow the supply chain to heal itself and deliver the goods we need, inflation will spike to over 10% next year, and the economy will tank, delivering another sucker-punch to the American, and in turn the global economy.

— Sina.