Do NOT take financial advice from Kiplinger’s Personal Finance Magazine. Are there economics editors over there? The brief article is talking about how zero inflation is “bad for you.” Ignore the larger economic question about how inflation is bad for you, this article is arguing that from a pure dollars and sense perspective, inflation makes people better off, and zero inflation makes people worse off! Here is why:
Government benefits and tax breaks designed to keep pace with inflation through annual cost-of-living adjustments and indexing won’t budge in 2010.
The point of benefits and tax breaks indexed to inflation is to make sure the REAL value of those things is not deteriorated by inflation. If there is zero inflation, then the real value of those things does not change at all over time. To illustrate, if you get $1000 per month in welfare benefits today, the point of the COLA indexing is to ensure that you have equivalent purchasing power next year and the year after (all else constant). If prices were to rise by 10% next year, then in order to be no worse off, your welfare benefit would have to be raised to $1100 (here’s a question for intermediate micro students: prove that in a world where average prices rise by 10% and your income rises by 10% that you are undeniably better off). So, if prices do not rise at all, then your welfare benefit can remain at $1,000 next year and you are just as well off.
Here is a list of the nonsense the author tells us about:
No hike for interest rates
Since nominal interest rates include the real interest rate plus an inflation premium, then nominal interest rates will not rise when inflation is flat. This does not change REAL interest rates one bit. Let me ask you, would you prefer a world where your CD or savings account paid you 5% per year, but after price increases you were left only 1% better off? Or a world where your CD or savings account paid you 1% per year, but prices were the same over time?
Normally, tax brackets are indexed to inflation. More income gets included in lower brackets, lowering everyone’s tax bill
The point of bracket indexing is so that inflation does not drive people into higher tax rates without their real incomes increasing. If there is no inflation, the only way you could be driven into higher tax brackets is when your real income increases – the point of a progressive tax system. Thus, the lack of indexing does not hurt you one bit in a world with no inflation.
For the first time since automatic cost-of-living adjustments were instituted in 1975, Americans won’t see an increase in their retirement or disability benefits.
See my discussion of welfare payments above.
High-income workers, rejoice. The maximum amount of wages subject to Social Security taxes will remain at $106,800, the first time the index hasn’t changed since 1971.
Again, this is nothing to rejoice about. The SS tax income limits rise so that only people with real income increases will face additional tax burdens. Since there is no inflation, the only way someone can exceed that limit is if their real income increased.
It is nothing short of astonishing that this article was published. Arguing that zero inflation is bad for you because COLA does not adjust is like arguing that a warm winter is bad for you because you don’t need to turn the heat on as high to keep your house at 65 degrees.
HT to Alex Armlovich for pointing out the article and its silliness.