The Cruelest Tax

| April 19, 2024

Where are the economists today that understand the lives of ordinary Americans? Those that I read tend to dismiss the distress among regular folks as due to misperceptions or a lack of sophistication. My own observation of inflation is that how a person experiences it depends on his or her socio-economic position in society.

The great former Chairman of the Federal Reserve, Paul Volker, said the following about inflation in a PBS interview.

Inflation is thought of as a cruel, and maybe the cruelest, tax because it hits in a many-sectored way, in an unplanned way, and it hits the people on a fixed income hardest. And there’s quite a lot of evidence, contrary to some earlier thinking, that it hits poorer people more than richer people, who have more maneuverability, more ways to protect themselves – who own their houses, for instance.

Volker’s observations ring true today. The March Consumer Price Index release showed a 5.7% increase in the cost of renting a primary residence versus a year earlier. Motor vehicle insurance increased by 22.2%. Food “only” increased by 2.2%, but how food inflation hurts a family depends upon income quintile. It matters little to the top 20% and slams the bottom 40%. Adequate food and shelter are nearly unobtainable for many lower-income Americans. A research report from the U.S. Department of Agriculture shows why.

The budget share for total food increased by 13 percent in 2022, the latest year for which we have data. However, how much that share is depends on income quintile. The lowest quintile (bottom 20%) spends about $5,000/year on food. This represents more than 30% of their annual budgets. The top quintile spends almost $16,000/year on food, but it only represents about 7.5% of their total annual outlays. The second-lowest quintile spends about $6,500/year on food, which is still a hefty 16% of their annual budgets.

The Tax Policy Center at the Urban Institute & Brookings Institution put the top 5% of incomes at $286,304 for 2021. This means that most or all of the economists that I read are in the top quintile of the income distribution. Not only do they not suffer from inflation but are likely to profit from it. I guess that answers my question of where the economists are that understand the lives of ordinary Americans. They are working at the USDA and writing papers that few people will ever read.


USDA ERS - Food Prices and Spending

** CPI Home : U.S. Bureau of Labor Statistics (bls.gov)

*** First Measured Century: Interview: Paul Volcker (pbs.org)