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Inflation is higher for the poor

I keep saying that if you care about poor people, you should be a libertarian.

The Institute for Fiscal Studies is pointing out that while poorer people are paying more for food and fuel, richer people are enjoying low interest rates. So government spending and borrowing and the artificially low interest rates that go along with that are harmful to poor people, as are taxes on fuel, and income tax on minimum wage earners, and countless other instances of state meddling.

Real money and a small state lead to high growth which makes everyone richer.

11 comments to Inflation is higher for the poor

  • Mr Ed

    Real money and a small state lead to high growth which makes everyone richer.

    Ah but what about the ‘Golgafrincham‘ class? The useless ‘third’ of the population that lives by the State, the council staff, the civil servants, the bankers, the ‘economists’, the political journalists, the NHS managers, the BBC staff, the MoD, the Defence contractors/pork farmers, the government IT projects, the Universities, the State school teachers, the police, the fire brigades, sitting around or working on building sites, the health promoters, the indolent dole scroungers, the lawyers on legal aid or working ways round regulations, the Quangocrats (employees of state-funded, unaccountable agencies), the unsackable and unchoseable judges (violence to the language there, sorry), the Highways Officers, the whole host of parasites, for whom such a state of affairs would mean poverty and real work?

    The make-up of our society would be profoundly different, and many, many people would be suddenly poor and destitute. The concentrated benefits would diffuse out to the genuine economy, and you might find that people in small towns up and down the country could afford not to look tatty, that pound and charity shops might be less prominent, whilst shiny London turns into a destitute, scruffy, desolate concrete desert.

  • Laird Minor

    That’s a feature, Mr Ed, not a bug.

  • Current

    I’m sceptical about this in the long run. Interest rates will rise again, their low level is a historical abnormality.

    Mass production is much easier to improve than other forms of production. The things the common man buys are much more likely to be made by mass production than those bought by the rich. The same is true of service industries, the rich purchase more services which use a larger component of human labour. Labour becomes progressively more expensive over time, so services rise in price more quickly than manufactured products. In manufacturing it’s much easier to mechanise tasks and reduce labour costs. So, over time we should expect that inflation would be generally lower for the poor portions of society than for the rich. There was some research from the US that demonstrated that it had been for the past ~10 years, though I can’t remember the authors.

  • Lee Moore

    I’m unconvinced by the theory that rich people benefit from low interest rates. Sure, some well off people have big mortgages, but as a rule interest is aid by borrowers to lenders, and to be a lender you have to have something to lend. I would expect that most rich people are creditors rather than debtors, and so suffer from low interest rates more than poor people, who are more likely to be debtors.

  • Laird

    Lee, you miss the most important reason why the very rich benefit disproportionately from low interest rates: such rates artificially stimulate the securities markets, which is where rich people park most of their money. The fact that they also pay less on their mortgage is trivial, as you noted.

  • Richard Thomas

    Typically, the only reason that the rich would have mortgages anyway is because there are tax advantages to do so and that investments can often return more than what interest rates currently are.

    Interest rates are currently so low because of the huge amount of money printing going on right now. That may be anomalous but does anyone think the government will (or can) back out of that now? There’s no turning back now until it all falls apart, I fear.

    Oh. And I do believe I heard a report on the radio a while back that the price of houses of the very wealthy were largely unaffected by the housing collapse so there’s that too.

  • Paul Marks

    The “Cantillon Effect” (named after the 18th century Irish economist Richard Cantillon) shows that, even when prices are not going up in the shops, monetary expansion (the true meaning of the word “inflation” – before wrongheaded people such as Irving Fisher got hold of the term, in spite of the refutation by Frank Fetter in theory and 1921 and 1929 in practice) tends to benefit the rich at the expense of the poor.

    Not all the rich and not all the poor – but at the end of the boom-bust the people who are better off than they otherwise would have been tend to be from the rich and the people who are worse off than they would have been tend to be from among the poor.

    By the way – the losers from the boom-bust (from the monetary expansion) tend to lose more (over what would be the case had the boom-bust not occurred) than the winners gain (over what would be the case had the boom-bust, the credit-money expansion, not occurred).

    It is not a zero-sum game.

    It is actually a negative-sum game.

    Those people who claim that lending that is “based on” real savings (not from real savings) is for the long term benefit of the economy (for the “needs of trade” as the idiots of the early 19th century “Banking School” put it) are not just wrong – they are actually coming out with a line that is the reverse of the truth.

    Their credit-money expansion actually harms (not helps – harms) the long term development of the economy – although it may benefit a few wealthy interests (at the expense of everyone else – and the total cost is far greater than the gain that a few people make).

    As for government intervention…….

    Government intervention (via Central Banks) is about making the credit money expansion larger (not smaller).

    Governments are obsessed with attaining “low interest rates” – “easy credit” under the delusion that it is for the long term benefit of the poor (who are actually hurt by it more than anyone).

    For the end result of such “compassionate” government monetary policies – see most of Latin America.

  • Jaded Voluntaryist

    Well, I can tell you that this poor person is really struggling.

    I’m currently spending over 10% of my income on energy, and my house is still freezing. It hovers around 16 degrees Celsius and I can’t afford to have it warmer. It has been fitted with the most expensive and least efficient heating system known to man – manual storage heaters. Running just two costs over £5 a day, and two wont heat a three bedroom house.

    I am the recipient of the state’s largess in the form of a Housing Association house, which costs me over 20% of my (admittedly mostly benefits derived) income. They spent a fortune insulating the walls and the loft, when the windows leak and the kitchen is falling apart. But insulation counts toward “energy efficiency”, whereas there’s no box for leaky windows or disintegrating kitchens. My parents in law recently paid for us to have 5 days away at a holiday home. My wife was crying on the way home because it brought home just how low our living standards are.

    I should be a poster-boy for statism. I was born to a lower working class family going back many generations. I am intelligent. I survived a terrible state school with good enough grades to get into university. I was raised to believe that if you obtain a good education, you’ll go far in life. I am currently in the final stages of finishing a PhD, and despite all this I’m still dirt poor. I’ve come to realize that what I was raised to believe is a delusion.

    I’ve also come to the realization that in our society, for the most part, social mobility is a complete crock. The system does not care about you, nor do they really want you moving up through the social classes. They want you to stay where you are and be “proud”. The left wing middle class don’t care either. Academia is full of these sorts of people. Born into privilege, they have never known anything approaching real hardship so they don’t understand the pressing desire to leave it behind. If you speak to them about needing a job, they look at you blankly. In their world, a year or two here or there without employment, or doing voluntary work, is not a big deal. They can’t imagine what it is like to have *no* money. If you press them, they suggest you look for benefits to support yourself.

    It’s amazing how few people working in academia come from lower class backgrounds. Education is not the engine of social mobility it is supposed to be. Young people are being lied to in that regard. It’s amazing I’ve made it this far. For example, there are no fully funded Master’s places for my subject area. I survived my Masters by obtaining a private grant for fees only, working a 10 hour a week job on top of my full time course and claiming benefits, while trying to support a wife and kids. I realized afterwards that those sorts of barriers are designed to keep “people like me” out of the upper tiers of academia.

    Of course I have come to this realization rather late in the game, and there’s not much I can do with it. I do the best I can with what I have.

    I suppose the point I’m making with this rant is that for those born of privilege, the need for gainful employment and affordable living is more of a theoretical idea than a practical one. They don’t know what it’s like to live under the system they helped create, so they don’t really care. I’ve also concluded that the middle classes, for the most part, are part of the problem rather than part of the solution. They don’t have any understanding of poverty, so, for example, they are quite happy to see house prices inflated because they’ve already got one. They would never support legislation that brought down the prices of houses (for example the abolition of planning law) because they don’t want to see their assets depreciated.

    Society is run for the benefit of those who already hold assets, be those economic or more abstract assets like political power. The middle classes are content providing you don’t hit house prices, the left wing types are happy providing they keep their position and their funding. Sure, they might try and make your poverty a tad more comfortable, but what no one seriously tries to do is actually create a climate where a person can go from having nothing to having a lot.

  • Andrew Duffin

    “richer people are enjoying low interest rates”

    Ahem.

    It’s only borrowers who “enjoy” low interest rates.

    Personally, I am pretty pissed off that my savings are being destroyed yet again by the State’s debasement of the currency.

  • Rob Fisher (Surrey)

    Andrew Duffin: well, from the point of view of the article I linked to, “richer people” all have mortgages. People who have savings are pensioners (and are therefore poor). People without mortgages who aren’t pensioners are struggling to “get on the housing ladder” and, therefore, poor.

    Yes, it is sloppy language and generalisation, but it is probably true enough for most people.

  • […] A useful reminder from Rob Fisher at Samizdata — inflation hits the poor much harder than anyone […]