"The psychology of inflation" has come under attack from the right, left and center.
Arthur Burns, the desposed shah of the Federal Reserve System, says on all-out assault on inflation is now imperative. Jimmy Carter, the man who deposed Burns, had a hard glint in his eye as he looked into the television lens and outlined his battle plans. The man in the middle, the American taxpayer, applauded from the sidelines.
So we are all in agreement now that inflation must end. But there is little likelihood that it will.
To look at what it takes to make a dollar is to understand at once why a dollar is worth so little and may soon be worth even less.
John Average works for Consolidated Mousetrap Corp., which put $1 worth of material and labor into the manufacture of a mousetrap and charges wholesalers $3 for it.
Why? Well, four years ago, a competitor brought out a cordless trap. Consolidated had to junk its obsolete traps, design a new model, and pay for new molds, tools, jigs, dies and production lines. To raise capital, it borrowed money and sold more stock.
Now the EPA has set antipollution standards for mousetrap factories and for the finished trap itself. Consolidated must go back to the drawing board, and back to the bank for more capital. At 19 percent. When the company considered selling more stock, its underwriter asked, "To whom?"
Consolidated's need for cash is exacerbated by both escalating costs, such as those for energy, and "routine" costs such as matching the FICA taxes deducted from employee paychecks and the costs of John's life insurance and hospitalization protection. Also his sick leave. And paid vacations. And pension. And a few other things.
If all these expenses aren't enough to drive up prices, Consolidated has one more basis for overpricing its mousetraps. The government will tax away half of any profit it makes.
For sililar reasons. wholesalers tack on a hefty percentage when they sell to retailers. The retailer adds a big markup because his clerks, all of them named Jane Average, are unionized and must be provided with benefits equal to those given John Average.
However, inflation is no more pleasant for the individual than for his employer. To begin with, a consumer ends up paying $9.95 for the $1 mousetrap, less a $1 factory rebate that costs about $1.10 to process because the people hired to do the processing also have to be paid.
In addition, if Consolidated had to inflate its prices because of high wages and high taxes, John Average must inflate his wage demands because of high prices and high taxes. If Mrs. Average also has the misfortune to be employed, the tax bite is even larger.
John and Jane have heard the advice, "Don't get mad, get even." But when they find they can't get even, they get mad. They decide to discipline themselves and spend less. They begin to put some money in the bank.
However, in short order they discover three things: 1)Banks have more savings plans than airlines have special fares. 2)There is little to choose among them. 3)None of them can keep John's and Jane's dollars from drying up into worthless dust over a period of time.
Whatever interest a bank offers, it is not enough to offset the rate of inflation. Except for an exemption that is absurdly small, any interest or investment dividends John and Jane earn are taxed as ordinary income. If they later use saved dollars to replace the family car or anything else that has worn out, they pay a sales tax for the privilege of buying something that has increased in price faster than their capital increased while it was deposited in the bank or invested in American industry.
After a while, John and Jane realize that inflation has been cheating them. Instead of denying themselves the comforts of life in order to save dollars that diminish in value, they begin to "buy ahead" to offset price increases.
In summary: John Average earns his dollars from a company that needs high prices to compensate for the high taxes and high wages it pays out. John pays taxes on that part of the taxed mousetrap profits that are paid to him in wages. If John invests in Consolidated, or lends it money to design new models that keep him on the payroll, he pays taxes on the portion of the taxed profit that is repaid to him. So John and Jane pay taxes on the taxed money they earn, the money they save and the money they spend. On their deathbeds they can contemplate how much of what's left will be taken away by estate taxes.
As is evident, one doesn't have to be an economist to understand what causes a psychology of inflation.
I stand in awe of economists who know how to reverse this psychology.
My one regret is that there is no way to tax the violent arguments that take place among economists who know precisely what must be done to dispel the psychology of inflation.