Why is no one talking about Covid as a direct cause of inflationary pressure, and about how to address it?

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There have been many suggestions made as to the cause of the current inflation in our economy, a number of them by me. Two things stand out for me when thinking about them.

The first is that so far no evidenced cause that can be addressed by an interest rate increase has been offered. Brexit, Covid reopening, supply chain problems, profiteering, war disruption and sanctions are all plausible contributors to the inflation. None can be addressed, let alone solved, by an interest rate rise. In fact, by adding to inflationary pressure (increasing interest rate rises is an inflationary price increase, after all) such an increase can only make things worse.

Second, I have so far not seen anyone suggest that the failure of Covid policy is to blame. I am doing so now.

Let me be explicit about what I mean. My suggestion is that the relaxation of the social distancing, home working, mask-wearing, quarantining and sick pay rules that existed until Covid was declared to be ‘over’ are a significant factor in this inflation.

As evidence, I note that when former Bank of England employee and Monetary Policy Committee member Adam Posen argued that there was a moral duty on the Bank to create a recession now he said that this was because labour shortages would otherwise create an environment where wage rises were inevitable and would become locked into the economy, resulting in stagflation. His claim was that it was Brexit and other migration rules creating this labour shortage. I suggest he is wrong, at least in part, and maybe largely. I suggest instead that it is Covid that is creating these labour shortages.

I would also add that as yet I do not think that this is creating an environment where wage increases are even adequate, let alone close to becoming locked in. In that case, I do not think he got much right. But let me explore the issue I have raised and its short and long term consequences.

In my opinion, the evidence that too early release from lockdown and the abandonment of many of the measures to mitigate and prevent the spread of Covid, plus the abandonment of home working by many employers, has meant many people are now not willing or able to work any more. They have left the workforce as a result. As the ONS has noted, those aged above 50 and so more at risk of Covid have been especially inclined to leave the workforce since the end of Covid restrictions.  As they have also noted:

Overall economic inactivity has increased by 522,000 persons in October to December 2021 compared with before the pandemic (October to December 2019). Most of the increase was because of those aged 50 years and over, contributing 94.4% (493,000) to the overall change.

These people have not just quit, but they are not going back. Add to them the number moving on from jobs because they realised during lockdowns that they just could not face returning to former employments and we see the reason for the wave of resignations now commonplace in the UK and also in the USA. Vacancies exceed the number available to fill them by so much because people have decided that the risk of working is not worth taking, based on this data. Brexit is not the problem. Covid is. Posen has it wrong.

Nor are these people moving to self-employment, where numbers are significantly down from the pre-pandemic era. They really are quitting.

If there is in that case a reason for wage rate pressure then it is within the control of the government to address it. It could encourage home working, require proper workplace ventilation, require quarantining and provide statutory sick pay so that it can happen. The shortage of skilled workers that is both harming the ability of the economy to meet need and causing wage pressure could be solved. It really is that easy.

But there is more to this than this simple short term suggestion implies. Long Covid is a reality. More is being learned about it every day. What seems certain is that almost no organ is immune from risk when a person has had Covid, and as importantly, successive bouts of Covid. Nor does age appear to provide much protection, although co-morbidities from existing risks result in greater prevalence in those who are older, almost inevitably. This makes the decision of those leaving the workforce entirely rational in that case. My question is, what happens if long Covid begins to seriously impact on health and morbidity?

We have seen the consequences of a health crisis creating a labour shortage in history. Following the Black Death in the Middle Ages a shortage of fit labour fundamentally shifted the balance of economic returns within the economy towards workers and away from capital. The shock was big enough to effectively end the feudal era (and I am aware I am offering a very brief snapshot of the era here).

I hope we face nothing like the Black Death. A functioning NHS should prevent that risk. But there is a possibility that we might see a real change in the health of the overall population in coming years. We are already seeing life expectancy fall. If both those able to work falls, whilst demand for care rises, and at the same time the pressure is created to meet existing material standards of living without changing the reward ratios between labour and capital then an impossible economic scenario is created. Like it or not, in that case the wages of labour will rise, but so too will inequality between those in and out of work, whilst care might become almost impossible to deliver.

Alternatively, the reward ratios in the economy would have to change. The return to labour would overall need to rise, including that provided by redistribution, and the return to capital, and most especially land might have to fall significantly, whether by imposition through tax, or by market adjustment, or both. If that readjustment did not happen the stresses in society in the face of increasing long Covid might become impossible to manage.

Add into all this the need for the management of climate change, which also demands major economic reorganisation and a reduction in the economic return to land, which has been exploited to push it to current unsustainable levels, and the mix is literally revolutionary in the demands it might make, although the Covid and green demands might be aligned (perhaps unsurprisingly as both might indicate the consequences of pushing nature to its limits).

In summary, I think we are missing a cause of inflation in the UK, and so a need for a better economic response to Covid that might well ease labour market shortages.

Long term, we need to think seriously about how to reorganise our economy. There is no doubt that Civid is here to stay. The thinking on what that means for the economy has hardly begun, but needs to do so, now.