Thursday, 4 August 2022

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.

Image Credit


Dave Levy said...

This is very good, but for completeness, one of the reasons for sterling's decline and thus the importing of higher prices is Brexit, or at least the Brexit deal we have but Labour have closed off that escape route too.

Phil said...

My bad!

Ken Burnett said...

First time as a tragedy, the second…
This is looking a tad like the crisis of Labour in the Depression. When the class traitor who was the Labour leader split the LP and joined with the Tories, the first thing the new government did was sack the Gold Standard. At the time, Sterling was based on the price of gold which overvalued Sterling and made exporting more difficult. This meant that the heavy engineering industries were disproportionately affected. By coming off the Gold Standard the economy recovered, although mainly in consumer products such as radios, which were disproportionately manufactured in the South. Where my family lived in Glasgow was pretty much a hand to mouth existence, which is why my mother barely made 5 foot in height. No love for the Tories there.
One member of the Labour government whinged later,
“They didn’t tell us we could do that.”
This morning I’ve been listening to the TV news, and all I can hear is the Governor go the BoE, KPMG, and all I’ve heard is the conventional wisdom.
I’m waiting for someone to explain the equivalent of coming off the Gold Standard, so far, in vain.

Blissex said...

so the average uk property price is 300k and the average uk rent is 15k and both are growing at 15% per year so 45,000 taxfree profit for average owner occupiers and 2,200 extra income for landlords which as a rule are owner occupiers too.

inflation is a problem only for the foolish losers who bet on the rewards of low productivity work and business instead of high productivity property. the government and the opposition are equally keen on keeping the 40 yo MURP (Make Upgraders and Renters Pay) policy that has benefited "the economy" so much. 😭

Blissex said...

«the cost of living is such a problem, especially for the pension-dependent core Tory voter»

The core tory voter is laughing all the way to the bank thanks to the big uplift to their living standards paid for by stupid upgraders and renters given by massive improvements in property prices and rents (and I imagine most readers of this blog, and New Labour officials and MPs, are in the same comfortable position and thinking "and there but for the grace of Thatcher and Blair would I go too").

If Starmer wants to compete with the Conservatives he need to propose more significant improvements to the living standards of owner occupiers and landlords: this government has already abolished the multiple-of-earnings guidelines for mortgages, Starmer could propose making again mortgage payments tax-exempt or even tax-deductible.

Starmer's problem is that any policies he proposes much ahead of elections to improve the lifestyles of his core constituency of propertied affluent voters will be stolen by the Conservatives and LibDems, and I guess that's why he is keeping them back.

He could in the meantime however do some signalling in that direction, by saying that his team is aware of how much upper-middle class "aspirational" voters are doing to spend on consumption and keep "the economy" going, and therefore he is planning ways to fight inflation by lightening their tax costs and reduce the cost of the labourers they employ as cleaners, gardeners, carers, etc.

Robert Dyson said...

"wealthy interest trumpeting the common, general interest" I think you meant trumping the common, general interest.
What a trick Truss could play, a rabbit out of the hat. However, does she have to take note of those interests against it that could cripple & topple her government? I am not totally sure who really runs the country.

Blissex said...

«"wealthy interest trumpeting the common, general interest" I think you meant trumping the common, general interest.»

By general agreement of the media and political parties "the common, general interest" is that of "investors".

«I am not totally sure who really runs the country»

Decades ago H. Wilson was saying it is "whig" industrial interests and commercial finance interests. In recent times (e.g. since 2016) the "tory" landowning and "investment" finance interests have been ascendant, provoking huge pushback such as the campaign by right-wing "whig" media against a right-wing "tory" Johnson government,

Zoltan Jorovic said...

Phil, there is a valid reason for the BoE to put up interest rates. If they don't, then real interest rates effectively become negative. And not just by a bit. This has implications for savings and investments and invites escalating borrowing and debt. It undermines our whole (dysfunctional) system and could lead to instability and a crash. It could lead to an attack on Sterling and a big drop in the value of the £ which pushes import costs up and further fuels inflation.

At the moment it is difficult to see a way out. Although wage demands are not the cause or driver of inflation, they could reinforce and embed it.

The underlying cause of all this is the decline in surplus energy (energy available after the energy required to generate/produce energy) which has been happening since around the turn of the millennium. War, pestilence and neoliberal stupidity and greed has exacerbated it.

Zoltan Jorovic said...

@Blissex, if you try to explain everything through the lens of property prices you will miss the big picture. I accept that it explains the actions of our current ruling class, but it is based on an illusion which is about to be exposed. The illusion that finance is not subject to the laws of thermodynamics. It might not be, but the people and things it buys and supports, and upon which it ultimately depends, very much are.

I recommend for an explanation of what lies behind the wizard's curtain.

Anonymous said...

Reeves objecting to the 'threat' of Truss changing the BoE's remit...overlooking that the remit is set by politicians to start with. It's not holy writ.

Blissex said...

«Not 1000, not 300, not even 30. If you look at the graph for fossil fuel affordability you'll see it started to level out about 1980s and then to decline as we hit the 2000s. [...] When will the proverbial hit the fan? I suspect within the next decade, but it could be longer. Unlikely to be more than 25 years at most. [...] the decline in surplus energy [...] if you try to explain everything through the lens of property prices you will miss the big picture»

The big picture is indeed cheap energy as the source of 90% of our living standards, but that is relatively longer term.

The picture you seem to imply is that renters and upgraders should continue to pay for the comfortable and luxurious lifestyles of owners and landlords, and then in 20-30 years it won't matter because all of us are screwed anyhow.

Well, I think that while the speed and depth of energy crisis is somewhat uncertain, it is still worthwhile to point out that property based corruption is the foundation of the electoral success of thatcherite rentierism, and should be fought for the benefit or the majority, including most upper-middle class property rentiers, who rely on it for security.

«I recommend for an explanation of what lies behind the wizard's curtain.»

That says “the British fixation is with property prices rather than the stock market. Whilst the stock market “wealth effect” is an adjunct to the American economy, inflated property prices play a central role in supporting the illusion of prosperity in the United Kingdom. The harsh reality is that the British economy is a basket-case.”.

BTW "Surplus Energy Economics" is interesting, but so is "The Consciousness of Sheep" and Steve Keen's research on the importance of energy and several books, plus some of my own scattered comments ;-), in particular the idea of applying the notion of "consumer surplus" to fuels.

But my usual recommendation is Tony Wrigley's authoritative and largely ignored work, of which the article form is short and still fairly complete:

As well as the much older:

As to the latter, even if worldwide reserves of high energy density and high quality mineral oil are becoming scarce, reserves of coal are still good for a long time, even if its higher cost, lower energy density and greater pollution means that living standards will have to be cut substantially with respect to those of a mineral oil based system. But in the regress to a coal economy the question of property rentierism becomes rather more pressing.