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<\/a><\/center><\/p>\nIt may come as a surprise to you that the United States has been financing a welfare program that takes money from the poor and gives it to the rich.<\/p>\n
Inflation as a Policy Tool<\/h2>\n
If you read a lot of modern macroeconomic literature or major in economics in college, you\u2019ll hear economists talk of the \u201cmultiplier effect\u201d of monetary and fiscal stimulus. In times of economic slump, money injection (for monetary policy) or government spending (fiscal policy) greases the wheels of our complex economic machine, bringing unemployment down and output up.<\/p>\n
In response to these policy proposals to change the level of unemployment or production, \u201creal\u201d metrics of the economy, Milton Friedman argued that money is \u201cneutral.\u201d In other words, changing the supply of money in the economy to manipulate relative price levels doesn\u2019t actually change anything in the long run. When people realize their money is worth less than before, they adjust their mindset, demanding higher wages for higher prices. After these changes are made, unemployment and production end up in the same place as before.<\/p>\n
While Friedman\u2019s argument sheds light on many\u00a0failed economic policies<\/a>\u00a0from the latter half of the 20th century, it doesn\u2019t explain the mechanics\u00a0behind<\/em>\u00a0rising price levels (from inflationary policy) once the newly created money travels through the economy, sector by sector.<\/p>\n Richard Cantillon first suggested in 1755 that money is not as neutral as we think. He argued that money injection\u2014what we could consider inflationary policies\u2014may not change an economy\u2019s output over the long-term. However, the process of readjustment affects different sectors of the economy differently. This analysis, known as the Cantillon Effect, serves as the foundation for the\u00a0non-neutrality of money<\/a>\u00a0theories.<\/p>\n Cantillon\u2019s original thesis outlines how rising prices affect different sectors at different times and suggests that time difference effectively acts as a taxing mechanism. In other words, the first sectors to receive the newly created money enjoy higher profits as their pay increases, but general costs are still low. On the other hand, the last sectors in which prices rise (where there is more economic friction) face higher costs while still producing at lower prices. Because, as Friedman taught us, the real economic variables are still the same in the long run, the price of inflation is paid for by a \u201ctax\u201d on the sectors with more friction, which subsidizes more time-responsive sectors. In our modern economy, the Cantillon Effect is at play with a stratified socioeconomic impact, favoring investors over wage-earners.<\/p>\n Let\u2019s say the Fed decides to lower interest rates (by expanding the supply of money in the economy). Soon after the Fed makes its announcement, investors anticipate new earnings from increased investment. In fact, once even a few people get wind of the Fed\u2019s intentions, investors expect prices to rise, whether they rely on algorithms or rumors for their information. Investors flock to the financial markets, hoping to get there first; if they can buy stocks while the prices are still low, they can reap enormous profits once prices rise.<\/p>\n However, the sudden increased demand for stocks in the financial market bids up asset prices, and this happens rapidly. Within minutes\u2014seconds, even\u2014the expected increase in the price level has been factored into the financial markets. The first place where \u201cinflation\u201d is felt is in the financial marketplace.<\/p>\n This means that people who are most invested in the market are the first to benefit from inflation. They see their asset prices increasing, yet the prices in the rest of the economy are still low because this happens seconds after it\u2019s clear the Fed is inflating the money supply.<\/p>\n While the companies with investors buying up shares see the increased inflow of cash, they also have new investment opportunities because of lower interest rates from inflation. Both of these factors help their profits rise, and they find ways to continue expanding business (by increasing their purchases of intermediate goods). The first few businesses to turn their profits into production benefit from lower prices, but once other companies start demanding more intermediate goods, their prices start to rise. Thus, the intermediate goods sector, which includes raw materials and technology that facilitates business, is the next to experience rising price levels. Companies that primarily sell these intermediate goods now have more profit, but the rest of the prices in the economy are still relatively low.<\/p>\n Afterward, these higher-priced intermediate goods increase the costs of business operations and production, so final goods (for consumers) begin to rise in price, as well. The companies that can turn around their initial investments to final goods the quickest have the most to gain.<\/p>\n But there\u2019s more. When prices are higher throughout the economy, the last to benefit are workers, who see an increased cost of living and factor this cost into their wage demands. Even among workers, wage-earners are the worst off, for many salaried employees anticipate inflation and factor it into their contracts. And with that, the inflationary policy has passed through the economic system, raising prices. And, as Friedman said, the policy\u2014in the long run\u2014doesn\u2019t change real factors.<\/p>\n In the modern financial system, the current realization of the Cantillon Effect looks quite similar to a regressive tax. The first to benefit are often corporations with plenty of investors, whether publicly traded or financed through private equity. Next, raw goods benefit from increased prices, including already heavily subsidized industries such as steel and aluminum. Technology also benefits, for it is utilized as an intermediate good for many companies. Even within the raw goods and technology sectors, the quickest corporations to turn investments into production\u2014larger corporations like Amazon or Microsoft, which have the infrastructure to expand\u2014benefit disproportionately.<\/p>\n On the consumer side, people investing most of their savings in the stock market benefit from increased investment bidding up prices. On the other hand, individuals living from paycheck to paycheck, or even those who just have a savings account in a bank, lose money to price increases.<\/p>\n Nonetheless, policymakers neglect these effects in an effort to reign in the economy without considering the consequences of their actions. Often, they justify surprise inflation by claiming it will \u201chelp the poor<\/a>.\u201d However, any inflationary monetary policy regime suffers from the ramifications of the Cantillon Effect.<\/p>\n In fact, even a price-stable economy requires money injection to counter the deflationary effects of growth. This money injection may keep prices for real goods stable, but asset prices continue to rise. It\u2019s true that most economists accept a low level of inflation as fine\u2014healthy, even. But when our current expansionary system, however well-intentioned, ends up exacerbating inequalities in the marketplace under the pretense of\u00a0egalitarian stability<\/a>, we ought to examine its true consequences more thoroughly.<\/p>\nContextualizing the Cantillon Effect<\/h2>\n
For Example<\/h2>\n
A Regressive Tax?<\/h2>\n