I posted this thread on Twitter this morning:
The government and the Bank of England are again calling today for wage restraint to beat inflation - as if the whole cost of beating inflation must fall on wage-earning households and not the companies and banks that are causing it or the wealthy who are gaining. A thread....
As I have said time and again, wage rises cannot be causing our inflation. Wage rises have been persistently lower than the rate of inflation throughout the period since Covid and so there is no basis whatsoever for saying wage rises are causing inflation.
If the Governor of the Bank of England and the government want to crack down on inflation they need to cut interest rates as they are pushing up prices. They also need to end profiteering. And they need to tax those who have gained - the wealthy and the banks - more.
In that one last tweet, I offer a complete strategy for beating inflation, because, given the facts, it's not hard to work out what to do. But the government and the Governor refuse to take account of the facts. That's because they have a dogmatic dislike of working people.
How do I know that? Because the Governor has let his senior staff say that people must get used to this inflation cutting their real incomes and the government is trying to force perpetual pay cuts on public sector workers. That's what anti-working people policy looks like.
But let's instead of engaging with their rhetoric look at what has actually happened. We have had inflation:
The inflation arrived after the Covid reopening. It peaked a few months ago. It is now falling. It will - because throughout history it always has - go back to around one to two per cent a year. No action is needed for that to happen. Inflation just always does go back to normal.
And then we have wage rises. In an ideal world they would go like this:
Wage rises will always follow inflation and continue after that inflation has gone back to normal because that is necessary to make sure that working people do not suffer as a result of that inflation.
It is important to say that if the inflation is even - i.e. all businesses can increase their prices evenly - then they can also all increase their wages because the price increases clearly give them the means to do so. Wage rises are not an issue in that case.
There is an issue if some companies can increase prices excessively and others cannot. Banks, fuel companies, some supermarkets and mobile phone suppliers look like they are profiteering - i.e. increasing prices excessively - right now.
At the same time, many smaller businesses are having problems passing on their cost increases. So inflation is creating real stress between large and small business - and so on their ability to pay wage rises. But overall, if employers want people they have to pay the going wage.
The only question then is by how much the wage rate will rise, and what period of time is required for it to do so. The first chart with wages rates on it (above) assumed wages would follow the same pattern as inflation, with a bit of a lag.
However, that is not what has happened since 2021. There has, instead, been something like this going on:
Wages have fallen compared to inflation to date. This is apparent in this chart: real wages are falling as inflation peaks in this chart. However, there is then a lengthy catch-up period. Long after inflation has fallen away wages keep rising at rates that exceed inflation.
This catch-up period has to happen. If it does not then inflation permanently shifts income in the economy from working people to employers. The result is a recession because people do not have enough to spend.
That is why everyone, employers included, always want wages to catch up with inflation in the end. The pretence that this is not the case from both the government and the Bank of England is particularly worrying: it is as if they want to crash the economy.
Importantly, this catch-up process is not inflationary. That's because employers will have increased their prices long before wages catch up. They will have made excess profits until wages are increased again to match inflation. They can, as a result, afford the pay rises.
So why will they give up those excess profits? First, because they will not get staff unless they do. Second, because they can afford to pay, and third, they will know that unless they do people will not have the means to buy what they have for sale.
In that case, all that the long tail of pay rises at rates above inflation does is redress the imbalance between wages and profits created by inflation in the first instance in a way that hopefully restores working people's incomes and prevents recession.
This is what economic reality looks like. It is enforced by the fact that people are free to change employer and they will if they cannot get the pay rises they need to pay inflated prices and (quite critically) inflated costs of borrowing.
The pressure on people to demand pay rises - which will continue for some time as yet (two or three years, I suggest) - will come from both price and interest cost increases, so much of this upward pressure on wages is in fact wholly created by the Bank of England.
And whatever any politician says, people will demand these rises because they will have to do so in order to stay in their homes, feed their families and meet their essential costs of living, all of which will have risen in price. They're not being greedy. They want to survive.
Apparently the Bank of England does not understand that need to survive, but as I have shown recently that is unsurprising: average pay at the Bank of England is £69,000 a year with an average £20,000 pension contribution on top of that.
Why does all this matter? Three reasons, I suggest. Firstly, because whilst the government persists with its low pay policy our public services will get worse and worse as people have no choice but cease working in them to make up their income elsewhere.
Second, because very soon we will be hearing politicians saying they cannot meet the pay demands of people that will be for above-inflation pay rises - but they will have to pay them unless public sector workers are going to be made perpetually worse off.
Third, because unless this demand that wages be held down changes we are going to inevitably head for a recession. It is as simple as that.
The result is that unless we get some change of heart in the government - and in Labour, who appears to have no greater understanding of this issue - then we are heading for more, and very prolonged industrial strife, major private financial stress, and recession.
None of that is necessary. If we simply accept that wages have to maintain a fair share of the income of the country or bank loans cannot be repaid and goods and services cannot be bought then none of this stress is needed. A process of managed realignment is required instead.
And if the country is to be worse off - as the Bank of England says it will be because the cost of imports has risen - that does not change any of my argument. Everyone should share that loss - and not just working people. So wages should still increase.
Instead, in that case, the exchange rate should be allowed to fall (something we should be used to since it has already tumbled since Brexit). That then shares the additional cost of imports, if they are really rising.
Not understanding anything of this is simply a recipe for economic stress, economic disruption and destruction of our public services. Since understanding it is really not hard, I am staggered by the intransigence of the government and the Bank of England.
What is their motivation for wreaking havoc? I wish I could offer a benign answer to that question, but I can't. I can offer an explanation of the sort Warren Buffet once provided: “There is a class war going on and its by the wealthy on working people.” That is it, I'm afraid.
There is no justification for that class war. I am baffled as to why Labour appears to be signed up for it. But I will keep talking about it until common sense - and economic peace - breaks out. I am just hoping that might be soon.
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There very obviously is a class war going in the sense a small sector of society is seeking to protect its interests and ignoring the interests of the larger sector. The small sector is able to do this because there’s widespread ignorance amongst the vast majority of people how money works. This ignorance is embedded in all the UK’s political parties. As I’ve been posting the factors underlying inflation are complicated but this is ignored. To take but one example it’s not just government that brings money (promises) forward from the future to invest but also the private sector yet ignorant politicians persist in telling us it’s all the fault of government spending too much. The reality is that both sectors are chasing many of the same real resources particularly labour. It clearly has to be some entity’s responsibility to act as arbiter to balance this competition and that can only be government. This will be increasing clear as climate change begins to bite in the UK!
Thanks for the clarity of this, Richard. It very much helps to pass the argument on to others.
My only query in the above, is of which average you have for Bank of England employees’ earnings? Govt is happy to give a mean everage for nurse and train drivers’ wages, when we know that that i th wrong averge to use to get a picture of an average employee – as it pushes up the apparent wages of all by including the wages of a few at the very top. I presume that it might be difficult to get a breakdown of wages at the BoE, so I also presume that the figures you give for average wage and average pension are mean avergess?
Best wishes, and thanks for your continued provision of economic info and thought
They are means
Nothing else is possible
Totally agree.
I’ve been trying to think beyond the facts and into the motivation of all of this and my conclusions are as follows:
1. To soften us up for AI and more automated services – like on the railways.
2. To set up to reduce the cost of service to increase profits or make them more attractive for further privatisation.
3. To end the provision of all public services where possible (no state ownership, but financial support to investors only).
4. To end the ability of labour to stick up for itself, spare labour on hand reduces costs – the sort of market capital loves.
5. In my view therefore, interest rates rises and calls against wage rises are part and parcel of ongoing austerity policies.
The railways are a case in point. The privatisation of railways did cause some form of wage inflation because of the hiring behaviour and challenges faced by private service providers who are literally scrapping over drivers in particular (and of course who was going to pay to train new drivers! Just pinch drivers from other operators by offering more money) . The West Coast mainline being a particular case in point where their wage levels could not compete elsewhere and train cancellations became horrendous. The problem was London centric – there were not enough London based drivers to start trains because the wages were not high enough to live in London (and in their wisdom, the railway companies no longer have digs for non-London drivers to sleep overnight if coming from the North – also we have virtually no overnight passenger trains anymore to balance rolling stock from end to end of the system like we used to).
Obviously some sort of labour market exists for train drivers that benefits drivers but a market that benefits labour cannot be allowed can it? According to my local rail guard, moves are now afoot to engineer a change in railway hiring and grade scales across all companies that is meant to wipe our pay differentials between providers. In other words, it’s going back the BR days with one employer discussing pay with the unions. Hah!
In one sense, this looks reasonable, but in another its not. All it will do is rig the labour market for railways in favour of employers and funnel decisions about pay through one overseeing body. That oversight can/will be used to control and drive down wages and keep them there – that is what I think will happen. Obviously we are still going to be ‘nudged’ into doing badly paid work whether we like it or not.
In the meantime, driver only operation (DOO) trains will become more commonplace but the teething troubles I hear coming out of Litchurch Lane’s new DOO trains are another matter.
Covid has not helped because operators realised they could do with out ticket office staff – just leave passengers to the internet where the highest prices will always come at you first! Great!
The worst aspect though is that a railway denuded of people to help passengers and low paid people if they do is just so redolent of one-eyed profit making.
What sort of mass transit system do the idiots at the DoT want at a time when the potential for public transport to help with climate change is huge? It could be a mass employer with well paid jobs. But no. Because capital doesn’t want to pay a good rates because of its perverse class bias towards itself being richly rewarded away from workers who are just not as wealthy as them (so they must be lazy and needy and lacking ‘resilience’ instead).
It’s almost as if they’ve got to mess it up on purpose just keep the carbon lobby happy. I would not put it past any of them.
Thanks Richard for giving me the knowledge to spread the word, or rather, make sure I can ask the right questions. Having just seen the BBC run a piece on asking people if they would reject a pay rise if it helped bring inflation down, really shows the important work you, and the many commentators on this blog, are doing.
I work in a Scottish college, having just been through a ‘consultation’ where jobs have been lost, and now still fighting for last year’s pay rise, and will be going again for this year’s, we are up against the college saying it can’t afford pay rises because of a cut in government funding, I’d love to hear some views on this to help argue our point. Enjoy the coffee, it’s my birthday
Good luck, thank you and happy birthday!
Fergal Keane’s ‘Brave Britain’ on BBC One and the Today programme could be seen as an example of why ‘we’ dont understand how our system works.
He revisited people living in low income parts of Britain in Glasgow Leeds and Cornwall – over the last twenty years.
His conclusion is that even in the most diffiult of circumstances people can be very brave and very resilient, – and above all very kind to each other.
Illuminating and maybe heartening in its own way it can be seen as just one more BBC obsession with delving in minute detail into the stressful lives of ‘ordinary people’ struggling to survive – to pay the mortgage, to find a job, to pay the rent, to raise the kids, to get enough to eat.
What these programmes all have in common is not asking why people are not getting paid enough, why mortgages or prices or rents have gone up – they just take all this external context as a given.
We never see a similar minute in depth examination – of how or why the ownership of wealth, of land, of property, has grown vastly more unequal over the last decades, and how this has fed into making ‘ordinary people’s lives much more difficult.
Is this stream of propaganda why the Brits are much less rebellious than say the French – making the ruling class here less worried that people might resist and are therefore prepared to suffer more as a result.
…I know it’s not very deep or analytical, but is it not possible that this is all nothing more than the Tories, their big business and finance backers etc, just looking to wreak as much havoc, and make as much profit as they can, before they inevitably lose power at the next GE?
Possible, yes
Superb post, Richard.
Watching the TV news reports on the economy just now, is painful. When you know how it all really works.
It’s like being a tenant in a large building where various fires are breaking out, and the whole building is in danger of going up. The building management company are in complete denial about the causes of the fires, and refusing to activate the sprinkler system or replace defective fire doors and extinguishers, because it would hit the profits of their shareholders. They’re claiming, with crocodile tears, that the only solution is for the tenants to pay more rent, and stop demanding repairs and maintenance.
The tenants are getting uncomfortably hot and a bit frightened, but most of them know very little about the causes and control of fire, so they tend to believe the managers. Made worse by the local news outlets (which are controlled or influenced by the managers or shareholders) repeating what the managers say, without question. They even feature so-called experts “explaining” all this nonsense, who are either equally ignorant or toe-ing the line in order to keep their jobs. (This includes you, Robert Peston, on ITN last night, shameful).
I’ve tried shouting at the TV, but they take no notice of me.
So good I am oposting it on the blog
As I recall the Warren Buffet quote he finished it with the statement “and the rich have been winning”
I do wonder why politicians of supposedly progressive or left parties cannot, in interviews, reframe questions and resort to the basic arguments. As you illustrate above it isn’t exactly rocket science. Instead they all accept the illogical arguments which are trotted out as accepted fact.
Something has gone deeply wrong with the way politicians are selected and held to account. Some of this is about changes to party membership that allows small factions to dominate, resulting in majoritarianism (a side effect of FPTP when 2 parties no longer reflect opinions). But that not all of it.
Another, if I was to hazard a guess, is that UK politics now attracts more power seekers than those with “public service” as their main motivator. There are those who seize the chance to capture a party and impose minority views, there are many others who just see Westminster as a stepping stone to a career that takes them to where the power they seek resides – that is in multi-national business, especially international finance, its often actually overseas. In the c19 power resided in the UK so people stuck around and for example wanted to be PM several times because that was where power resided.
We have a massive problem – with the people who stick around of the wrong sort, those who use the stepping stone and clear off, and the sheer amount of power that has been amassed to stop progress.
Thanks for this detailed and thoughtful post Richard.
I have started to see it amongst people I know – when they see how much their mortgage is going to increase by, perhaps doubling or even trebling, then they need to take a hard look at the proposed raise in salary their employer is offering and see if finding another job would be a better idea. I’ve seen a couple of occasions recently where their employer has offered them more to make sure they stay and are not detrimentally affected.
Of course employers will want to keep their experienced and talented staff, which is usually much cheaper than finding someone else to replace them, and hoping they won’t want the same higher salary. So they will offer wage increases to keep people, and wages will naturally rise.
I don’t know who the Bank of England think they are aiming their wage restraint comment at, but presumably it’s the public sector who have less power to negotiate wages.
It is worth asking though – why should any individual give a s**t whether the Bank of England thinks they are paid too much or not? Is that even in their economic remit to try to dictate wages? I think they are seriously overstepping their boundaries here, and it will come back to haunt them.
I hope it will
But meanwhile, people will suffer
Some people have had above inflation wage rises, but no other public sector workers. :
MPs had a 28% pay rise since 2010
Water company CEOs a 20% rise (after dumping sewage in rivers)
Senior Bank of England officials an average £4,300 pay rise despite record inflation and interest rates.
Prices that have gone up include energy, oild and supermarket prices, but it can’t be due to the masses whose spending power is less than what it was 10-15 years ago. That leaves companies profiteering.