Inflation: The Enemy Is Us

If everyone agrees that inflation is a grave problem, why is it so difficult to stop? One reason is that while people like to rail against rising prices, many also derive some handsome benefits from it. They have in effect become a constituency for inflation. Says M.I.T.'s Lester C. Thurow. a member of the TIME Board of Economists: "Suppose you told small businessmen that you could wave a magic wand and bring the inflation rate to zero. They would think about it for a minute and say no. They have made some fixed commitments in loans and inventories that they would not want to live with."

Anyone with heavy debts benefits from inflation, which is why Americans no longer heed the warning in Hamlet: "Neither a borrower nor a lender be." People take out loans in the expectation that they will be able to pay them off later with cheaper dollars. And in recent years they have been right. Borrowers can now repay their debts with dollars worth just 63-c- in 1975 terms. That view is an important factor behind the sharp increase in consumer installment debt, which since 1975 had gone from $172.4 billion to $305.5 billion by the end Of last October.

Homeowners are among the biggest gainers. Many people buy property today with the anticipation that inflation will continue. A homeowner holding a 12% mortgage would have a crippling house payment if inflation, and the accompanying double-digit salary increases, suddenly stopped. Marty Brennan, 39, a San Francisco real es tate speculator, makes an annual income of more than $100,000 from property investments. Says she: "Without inflation, I would have to be about 20 times smart er at my business and would have to work a lot harder to earn money instead of just making it."

Inflation also benefits mil lions of unionized workers, government pensioners and Social Security recipients whose in comes rise automatically along with the Department of Labor's Consumer Price Index. Econo mists generally say that the CPI exaggerates the real rate of inflation by as much as 2% because, for one thing, it overvalues in creases in home financing charges. This distortion enables many people to keep their incomes ahead of the surge of inflation.

At Hughes Tool Co. in Houston, for example, both union and nonunion employees get quarterly cost of living raises whenever the CPI rises by .3%. The 1.3 million military personnel or their eligible survivors received two increases in 1980: a 6% boost in March and a 7.7% one in September. Says Lieut. General Leroy J. Manor, executive vice president of the Retired Officers Association:

"Personally, I have no complaints."

Joseph J. Minarik, a Brookings Institution economist, argues that inflation has generally worked to the advantage of the poor. A number of welfare pro grams are indexed to the CPI, thus giving the poor a slightly better income than they had before. Wealthier people have lost ground, claims Minarik. Reason:

they are among the principal owners of stocks and bonds, assets that have fared the worst under inflation because of the uncertain investment climate.

One clear gainer from inflation is the government. As inflation pushes people into higher tax brackets, federal, state and local bureaucracies collect larger revenues without having to put tax increases to a vote. Every 1% increase in inflation results in a 1.5% growth in personal income tax revenues. Consumers and politicians waging war on inflation might adopt a motto of the late great comic strip character Pogo: "We have met the enemy, and he is us."

This file is automatically generated by a robot program, so viewer discretion is required.