Reparations Likely to Cause Inflation and Economic Uncertainty

In a large economy like the United States, every action has a corresponding reaction. This axiom is true for everything from price manipulation and taxation to the concept of reparations.

As a term, reparations are the political effort to make amends or provide restitution to individuals or groups of people who have suffered historical injustices, systemic discrimination, or harm as a result of actions taken by a government, institution, or society.

For example, on May 6, 2023, the California Reparations Task Force recommended several payments to the state's Black residents, including payments for those affected by bank redlining, i.e., denial of service, over-policing, and nineteenth-century slavery.

To many, this recommendation seems fair and feels good.

What if Newton Was an Economist

Newton's third law of motion is familiar to nearly everyone. "For every action, there is an equal and opposite reaction."

While physics and economics are certainly different fields, there is a sense in which Newton's law also holds true for money. If government policy impacts the supply of money or the private sector's ability to produce goods and services, that policy will have corresponding consequences elsewhere in the economy.

Think about President Franklin D. Roosevelt's efforts to help farmers during the great depression. President Roosevelt saw how farmers were suffering and sought to help them with the Agricultural Adjustment Act, which meant to stabilize the prices farmers received for the food they produced. But it ended up with the U.S. government buying food products and destroying them while many in America did not have enough to eat and were going days without a meal.

Actions in one part of the economy had a corresponding consequence in another part of that same economy.

Reparation Impacts

Reparations will have an impact too. If the United States —as individual states or collectively as a nation— is going to give reparations serious consideration, the government should at least consider two likely outcomes, inflation and uncertainty.

Inflation

Inflation erodes buying power. A $1,000 is still a $1,000 in the sense of the numerals printed on the paper, but in the face of inflation, it buys fewer things.

Reparations will almost certainly lead to more rapid inflation for two reasons.

First, the policy might inject, if you will, large amounts of money into the economy, encouraging the prices paid for goods and services to rise. For example, according to some published reports, the California Reparations Task Force's recommendation would payout between $640 billion and $800 billion to the state's Black residents.

A 71-year-old Black Californian might get as much as $1.2 million if the recommendation became law. That is a significant amount of liquidity and is likely to cause inflation.

The government will also be incentivized to encourage inflation. Economist Thomas Sowell refers to inflation as an invisible tax since inflation is one of the ways politicians offset expenses. When the real value of money as it relates to buying power is diminished, so too are political outlays like reparations.

This is necessary because of the scale of this proposed government redistribution. If we take the lower estimate of $640 billion in California reparation payments and divide it by the number of adults in California —24,621,819, according to Infoplease on May 9, 2023— we find that the liability is nearly $26,000 each.

Uncertainty

Reparations will also lead to economic uncertainty.

At almost the same time that the California Reparations Task Force made its recommendation, Denver City Councilwoman Candi CdeBaca said that all White business owners in the city should be charged an additional tax as a form of reparation. The taxes collected would be redistributed to Black and Brown business owners in the city.

Cdebaca later added that her comments were taken out of context, which could be correct. Our point is that contextually correct or not, they cause uncertainty.

If you were an ethnically White business owner in Denver, would you think twice about renovating your building in the city? What if new taxes made it difficult for your company to survive? Would you want to have a significant and unmovable investment located where business conditions might change rapidly?

Or what about California? Knowing that the state could need to increase taxes to pay for more than $640 billion in reparation payments, would you invest in infrastructure there?

Whenever the future of tax or monetary policy is unsure, businesses are less likely to invest, potentially stifling the economy.

Economics and Politics

Reparations can feel like they are righting some wrong. But it is important to remember that they will have an economic impact.

As various states or the nation discusses reparation policies, we need to consider these impacts. Even if we do not find it absurd to hold people responsible for things that happened before they were born, we might find it impractical to implement policies that could significantly harm the economy as a whole.