Inflation, the Silent Tax

Friend and fellow blogger, Rick at Economics for One, wrote this note on the taxing effects of inflation.

I note the following: The other interesting, if not chilling, effect of inflation is that inflation induces greater and greater dependence on government services and employment, which Rick alluded to by explaining the dilution of money as a function of distance from the government. Since people typically want more money rather than less (or more accurately, they want the benefits that more money can seemingly purchase as long as thy have more relative to the amount everyone else has), this dilution gradient likely steers people through this preference to less distance from government distributions of money. (In fact, in light of the Obama stimulus plan, numerous people have recently counseled me to seek government contract employment or seek ways to obtain stimulus money.) It seems to me that this then provides an opportunity for the political class to buy more power by linking access to money to votes for the political class that provides the money. The net effect is the strengthening of the power base of a political class…until the inflation get so unmanageable that the economic system collapses. The net effect of inflation, then, is not only a silent tax but an increase in power for the political class that induces the inflation.

A clarification on political class…Party affiliation may fluctuate as people obtain benefits or lose purchasing power as they perceive those effects being connected to a given party. But a class of people that seek political power will engage in these inflationary tactics regardless of party affiliation. As Friedman and Hayek pointed out, statism extends across political parties, leading to ambiguity and dilution in the real, pragmatic difference in the parties.