Tax the rich? What if we don’t tax the poor? A Guide to Inflation, the Central Bank, and Elon Musk

If you feel like life has suddenly gotten so much more expensive, it’s not your imagination.

The soaring cost of basic commodities such as food, gasoline and microchips for electronics is pushing up the consumer price index to levels never seen in decades. Housing prices are also soaring advance to several multiples of growth in disposable income, especially in Canada, raising fears of an out of control cost of living.

In response, the central bankers of Europe, the we and Canada call for patience, as they search for new words to describe what is happening. The expected post-pandemic price spike due to supply disruptions is transient, temporary, short-lived, they say, not a runaway train.

Step into the central bankers’ chair.

A few days ago, Elon Musk, founder of Tesla and now the richest person in the world, tweeted that “inflation is the most regressive tax of all, yet it is advocated by those who claim to be progressive.”

What does he mean?

As an inventor as he is, Musk did not invent the economic awareness that people with the lowest incomes spend all of their income and, therefore, feel higher prices the most because they don’t. ‘have no leeway. When basic commodities like food, gas or shelter become more expensive, the poor don’t budget differently – they do without.

The only compromise is what to give up.

But if he’s not the first person to say that inflation is a tax on the poor, he added a new twist: who’s to blame. His comment suggests that action is appropriate at this time. What is this action and who takes it? The standard response to rising inflation is for central banks to raise interest rates.

What effect would higher rates have? Savers and retirees, pension funds and financial institutions, even Elon Musk himself, would be better off as returns on savings and loans rise. Housing markets would become less foamy if higher borrowing costs reduced the number of buyers.

But what about the poor? Those who consume most of their income will have less to spend. As interest rates rise, they pay more for mortgages (and rents if the owner has a mortgage), consumer debt, and payday loans, leaving less money for other expenses.

Worse yet, many companies that took on debt to stay alive during the pandemic will finally throw in the towel, unable to continue borrowing at increased costs when revenues have not rebounded. This means that the more than 1.5 million people unemployed and working less than half of their usual hours before the pandemic will be less likely to find full-time work. The poorest employees remain the hardest hit.

You will notice that higher interest rates do not improve what makes the lives of the poorest miserable: no jobs, rising food prices, and few good housing options.

Additionally, when the Bank of Canada raises rates, it does not reduce the number of extreme weather events that reduce staple food yields; it does not end the pandemic and increase the migration of migrant workers who harvest our food; it does not increase the speed of handling containers in shipyards, nor does it add trains or truckers to move our goods. It does not reduce labor shortages. This creates more unemployed people than would otherwise be the case, as more businesses cannot borrow enough to hire more.

But is not raise rates even worse for the poor?

It is true that the most concerning aspect of the central bank’s policy is that it does not tackle asset bubbles like the gravity-defying rise in house prices. Cheap money means more buyers. More buyers are raising prices relative to the housing stock, which doesn’t change much.

Central banks are not the only solution to this puzzle. Their main tool for achieving price stability, by increasing the overnight lending rate, is a brutal tool, too brutal for this situation. The effect reverberates throughout the interest rate architecture of the economy, affecting all markets everywhere, even if real estate pressures are localized.

Other policy tools include increasing local property taxes on multiple home owners and vacant properties, changing zoning bylaws to increase residential density and rental options, and building more public housing or housing. housing cooperatives.

Just because the central bank has the power to raise rates doesn’t mean it should. We allow the police to do all kinds of things, but we want them to act only when it is appropriate.

Central bankers around the world are walking a tightrope, biding their time to act and hoping it’s not too late. When is it too late? No one is sure. Macroeconomic forecasters have long replaced astrologers in predicting the future of policymakers and have achieved roughly the same level of precision. Of the last 23 predictions of inflation surges, they were right twice.

Inflation is a much bigger political problem than an economic problem. For every central bank decision, there are a dozen or more political and fiscal solutions. The worst thing central banks can do is stay the course.

Armine Yalnizyan is a leading voice on Canada’s economic scene and Atkinson Fellow on the future of workers. She is a freelance columnist for the Star’s Business section. Follow her on Twitter: @ArmineYalnizyan

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