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An Economic Bandaid

infographic by Kevin Masse ’25, Aidan Ma ’22, Zoey Katzive ’24, Anna Jung ’23, and Jiahua Chen ’24

Inflation: We hear about it all the time, but what does it actually mean for our daily lives? This economic phenomenon—which refers to a decrease in the purchasing power of money due to increased prices of goods and services—is wreaking havoc on the US economy owing to a combination of supply-chain difficulties, large stimulus packages, and record-low interest rates. If economists’ projections hold true, inflation will likely hover between 5.5 and 6.2 percent for at least the next year. This is in stark contrast to inflation rates from the past two decades, which have stayed around 2 percent. Though inflation makes it harder for everyone to afford goods and services, wealthy Americans will largely be fine, as many possess stronger financial literacy, have access to financial planners, and hold greater savings. By contrast, those living paycheck-to-paycheck will suffer disproportionately. As prices rise and wages stagnate, poorer Americans will have to reduce their spending on essential goods—such as health care, nutritious foods, and utilities— thereby reducing their quality of life far more than their wealthy counterparts.

So, what solutions exist? Classic macroeconomic theory instructs that, to reduce inflation, the Federal Reserve must raise interest rates and the federal government must reduce fiscal spending. In normal times, these solutions would make sense. Given the precarious state of the US economy due to the Covid-19 pandemic, however, these policies will only further harm low-income Americans in the short-term.

Fortunately, there is another option: cost-of-living adjustments (COLAs). Just 11 percent of companies in the United States provide COLAs—or salaries that adjust for increases in prices—despite the fact that consumer price levels are at a 30-year high, with projections indicating that the cost of basic necessities will continue to rise. While Democratic lawmakers often choose to focus on broader, long-term solutions, such as a universal basic income (UBI) and a $15 federal minimum wage, these initiatives are not politically viable in the immediate future. COLAs, by contrast, could be passed by the current Congress. As such, legislators must act now and add an amendment to the federal minimum wage law that mandates COLAs to address the devastating effect of inflation on low-income Americans.

The federal minimum wage today is worth 48 percent less in real terms than what it was in 1968. This means that minimum wage earners today can buy about half of the goods and services that minimum wage earners in 1968 were able to purchase. This devaluation will only continue to grow rapidly as inflation rates rise. Amending the Fair Labor Standards Act to index the federal minimum wage to yearly inflation would help solve this pressing issue. Each year, the cost of inflation would be calculated and then added to the base level wage. This would keep already low wages at the same levels that they were prior to the pandemic. In effect, this means that Americans would be able to purchase the same quantity of goods, even as prices rise. This solution would help individuals afford their basic needs.

What’s more, this COLA legislation may even have a chance of being passed in Congress without strong opposition. As of November 2021, 19 states have minimum wages that adjust for inflation each year. Several of these states—including Missouri, Montana, Nevada, Ohio, and South Dakota—lean right. Given that less progressive states are already seeing the utility of COLAs, Republican lawmakers in Congress would likely consider supporting this measure. In fact, a GOP-commissioned study recently highlighted how inflation affects low-income Americans, signaling that Republican lawmakers may be feeling pressure to take action. And for Democrats striving to permanently increase the minimum wage, this amendment will only further their cause by effectively increasing the minimum wage each year, which would be a victory in and of itself.

With record-high inflation and the limited current feasibility of a $15 federal minimum wage, Congress ought to find tangible ways of increasing the purchasing power of lower-income Americans. Increasing interest rates and cutting government spending goes against Democrats’ credo, but inaction will leave few other options. Indexing the federal minimum wage to yearly inflation is both effective and reasonable, with even right-leaning states already writing these provisions in their minimum wage laws. Congress must act now to ensure that low-income Americans can purchase basic necessities and survive this period of higher inflation.