Inflation and Political Paralysis

Ofgem has changed the rules so the price cap can "update" on a quarterly basis, with a projected average bill to be around £3,600 from October. Inflation is forecast to hit 13%. The Bank of England has put interest rates up to 1.75% and says we have a recession to look forward to as well. But don't worry, it claims rising unemployment is a sacrifice they're happy for others to make to bring prices back under control. Charming.

The received economics wisdom goes something like this. Inflation is caused by there being too much money in circulation. Because workers have too much spending power, this magically means there are not enough goods to go around. Effective demand has outstripped effective supply. Therefore, to check inflation and drive it back down the money supply has to be tightened. And how does one do that? By putting up interest rates so a) people have an incentive not to spend but save their cash. b) to curb spending power by putting up mortgage, loan, and credit repayments, and c) driving businesses to the wall and pushing up unemployment to trash incomes. Therefore, in the early 1980s Thatcher's government (partly) justified its closure of state-owned industries and the subsequent return of mass unemployment in these terms. The workers had had it too good, and now it was time to pay. We also see it in Rish! Sunak's Tory leadership pitch. While Liz Truss offers what establishment scribblers love to call "cakeism", Sunak's policy menu is steeped in Thatcherite realism. His National Insurance increase is to stay because, he argues, reversing it as per the Truss plan would stoke inflation. There are two problems with this. Its reversal is peanuts compared to the rate of inflation. It's not going to make people flush by any means. And second, if we hold with his conceit that rising incomes causes rising prices, or exacerbate it, then why doesn't his energy bill handouts? Curious.

Actually, what is happening in the economy shows the falsity of the Thatcherite-Sunak perspective. Rising industrial action and double digit pay requests are responses, not causes of inflation. Pay has been flat for over a decade, and if anything the acute phase of the Covid crisis was very much a deflationary event as growth went into reverse, profits plummeted and wages went south. As Marx put it in his famous Wages, Price, and Profit,

a struggle for a rise of wages follows only in the track of previous changes, and is the necessary offspring of previous changes in the amount of production, the productive powers of labour, the value of labour, the value of money, the extent or the intensity of labour extracted, the fluctuations of market prices, dependent upon the fluctuations of demand and supply, and consistent with the different phases of the industrial cycle

. Think about what's been going on before the war in Ukraine got under way. Inflation was driven by asset price inflation. I.e. The property bubble that has been burgeoning since the 2008 crash and was stimulated by the bank bail outs. We might mention the country's persistent productivity crisis and the refusal by British capital to invest cheapens Sterling and means less bang for your buck in the global market place. The fluctuations in fossil fuel prices, and how it's more profitable for British gas producers to sell abroad precisely because of the weak pound. And how yo-yoing oil prices impact on global commodity prices. The capitalists can't be let off the hook either. Establishment economists like the Bank and Westminster City boys like Sunak never fret over the surplus profits British capital have enjoyed while successive governments have held wages down. Their continued price gouging is not some natural compulsion or the fortuitous consequences of just how the way things are. Their prosperity flourishes, and continues to flourish because they are not going to tighten margins and drop profits to help out the people that generate their wealth. Profit is sacrosanct, and the Tories agree. Their refusal to go against the inflationary grain is yet another example of the minority, wealthy interest trumping the common, general interest.

Where is Labour in all this? Offering practically nothing. In her response to the Bank of England's interest rate and projections announcement, Rachel Reeves announced a bold and brilliant response equal to the moment: a couple of hundred quid off heating bills by cutting VAT on fuel. And there will be people at party HQ scratching their heads in disbelief as Labour's poll leads slip from their recent double-digit highs. To be honest, we shouldn't expect anything different from Reeves. Despite an occasional gesture toward Labourism, her pre-politics career at the Bank of England, the embassy in Washington DC, and at Halifax Bank of Scotland saw her steeped in the same orthodox idiocies as Sunak, the BoE's personnel, and pretty much any "mainstream" economics wonk you can imagine. Her infamous and much quoted speech from 2013 that attacked people on social security was more than just right wing positioning - it comes straight from her spontaneous outlook, conditioned by years of being surrounded by the neoliberal commonsense of her peers. This certainly trumps the politics of the Labour family that is supposedly so dear to her. It was the left to the TUC's Kate Bell to argue the only way out is higher wages, stronger workers rights, and "profit restraint". The chance of Reeves taking this mildly Labourist line?

But this is a major political problem. Double digit inflation is a major crisis, and comes at the confluence of crises for the British state. If Truss wins the leadership contest, which is highly likely despite her aptitude for gaffs, with an energy bill non-payment campaign gathering steam and getting favourable coverage in the right wing press and Labour offering nothing in case they upset The Sun or whatever, Truss has an opportunity for something of a reset. There's little hint of it in her campaign at present, but the cost of living is such a problem, especially for the pension-dependent core Tory voter, she can define politics by doing the unthinkable. In other words, while Labour runs scared of providing effective opposition the idea a Truss government might raid profits or subject the Big Six energy companies to a Macron-style nationalisation cannot entirely be ruled out. At a stroke this would turn the Tories' fortunes around among those flirting with Keir Starmer, the Liberal Democrats, or are thinking about staying at home. Truss is set up nicely for a decent length of time in office and her party would be on course for its record fifth win in a row if she grasps this particular nettle. Right now, I'd say she's more likely to go for it than the shadow chancellor is.

It doesn't have to be this way. Westminster is in recess but politics does not go on holiday. It's not too much to expect a party supposedly serious about winning an election and fancies itself a government in waiting to have policies that can match the gravity of our predicament. The present Labour leadership does not, and as such they're leaving the door open for another successful Tory reinvention and all the electoral pain that entails.

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