Written by Matt Morgan, Editor at The Daily Bell:
Congress has kept its own salary at $174,000 since 2009, voting year after year to block the automatic raises written into law. Now a group of current and former members has gone to federal court to argue that those freezes were unconstitutional, and a judge has handed them an early win. The back pay at issue runs into the tens of millions before pensions and interest are counted. Strip away the legal costume and the case is simpler than it looks. The political class is suing to protect itself from a loss that everyone else absorbs without recourse. That loss has a name, and it was described three centuries ago.
Why does a salary need a cost-of-living adjustment at all?
A wage holds its value only if the money it is paid in holds its value, but it hasn’t. Cost-of-living adjustments exist because a sound dollar does not. Since the Ethics Reform Act of 1989, congressional pay has been tied to an automatic annual adjustment meant to keep it level with rising prices, as the National Taxpayers Union lays out.
Written into federal law is the assumption that money loses value every year, reliably enough that compensation has to be indexed against it.
When new money enters an economy, it does not arrive everywhere at once. It reaches some hands before others. The first to receive it spend it while prices are still set to yesterday’s conditions. By the time it works through to everyone else, prices have already risen, and the latecomers find their wages and savings buying less than they did. The early spenders gain. The late earners pay. Inflation is not a neutral mist that settles evenly on everyone. It is a transfer, running from those far from the new money to those close to it.
This is the Cantillon effect, named for Richard Cantillon, who worked it out in the 1730s. Austrian economists have kept it in view while the mainstream has mostly waved it away with the assumption that money is neutral. It is not neutral…
The order in which people receive new money decides who wins and who loses, and the order is not random. Governments, central banks, and the firms wired to them sit near the front. Wage earners, savers, and pensioners sit at the back.
Now place Congress on that map. The federal government is not a latecomer to the money. It sits at the source, spending newly borrowed and newly created dollars before prices adjust. A member of Congress stands about as close to the spigot as a person can get.
Here is what the lawsuit actually asks for. By the plaintiffs’ preferred math, if the blocked adjustments were restored, congressional salaries would be roughly 58 percent higher than they are now, about $274,900 instead of $174,000, according to NTU. In plain terms, they want to be made whole for inflation. They want the cost of living adjsutment that keeps their pay level with rising prices, applied backward, with a check attached.
Consider who does not get that. The cashier, the welder, the nurse, the retiree on a fixed annuity: none of them has a clause in federal law guaranteeing that their income rises with prices. They simply eat the difference.
By official measures, consumer prices have climbed more than 45 percent since 2009, which means a dollar earned back then buys only about two-thirds of what it once did. No court is restoring that worker’s lost purchasing power. There is no class action for the family that held savings through fifteen years of debasement.
So the lawsuit is the Cantillon effect stated out loud and dragged into a courtroom…
And the people nearest the new money are asking to be insulated from the inflation that their own spending, and the central bank that finances it, inflict on everyone downstream. They want first place in line made official.
There is an awkward detail the plaintiffs would rather skip. They voted for the very freezes they now call unconstitutional, repeatedly, on the public record. At the time the freezes were sold as fiscal responsibility. Now they are framing them as an injury. But the hypocrisy, real as it is, is the smaller point. The larger one is structural. Whatever they said then, their position now is that they, uniquely, should not have to bear the cost of the currency they help manage.
Someone pays for the back pay, and it is not the members. NTU estimates the direct liability could reach tens of millions of dollars, with more to follow if the higher salaries are folded into pension formulas built on a member’s top earning years. On top of that comes the interest, because every new obligation is borrowed against a federal debt that now passes $39 trillion. The Government Accountability Office has already warned that the fiscal path is unsustainable, and the Congressional Budget Office’s own figures show how a one-time expense compounds into far more once debt service is added.
The money for all of it is raised the same way the inflation was:
From the people at the back of the line, through taxes today and through a quieter erosion tomorrow. The plaintiffs, whose median net worth already sits around a million dollars, would be nudged further toward the front. Everyone else stays put.
The Cantillon effect is usually invisible. That is its whole power as a political tool. It moves wealth without a vote, without a signature, without a name on the transfer.
What makes this case worth watching is that it drags the mechanism into the open for once. Here are the people closest to the money, asking a court to certify in writing that they should be shielded from the loss they help create, while the workers and savers downstream are offered nothing and asked to fund the shield besides.
