{"id":64053,"date":"2022-07-29T08:42:28","date_gmt":"2022-07-29T07:42:28","guid":{"rendered":"https:\/\/www.taxresearch.org.uk\/Blog\/?p=64053"},"modified":"2022-07-29T08:42:28","modified_gmt":"2022-07-29T07:42:28","slug":"the-inflationary-cycle-weve-got-is-not-driven-by-wages-but-by-excess-profits","status":"publish","type":"post","link":"https:\/\/www.taxresearch.org.uk\/Blog\/2022\/07\/29\/the-inflationary-cycle-weve-got-is-not-driven-by-wages-but-by-excess-profits\/","title":{"rendered":"The inflationary cycle we’ve got is not driven by wages – but by excess profits"},"content":{"rendered":"

I have just posted this thread<\/a> on Twitter:<\/em><\/p>\n

\n

Tories are arguing that wages must not rise as strongly as prices or we will get an inflationary spiral. But that\u2019s ridiculous. All price increases add to the income of the companies charging them. What the Tories are saying is business should profit, not workers. A thread\u2026\u2026<\/p>\n

As a simple, straightforward, fact of life money does not disappear into black holes. When one person spends it another one gets it. That\u2019s just the way it is. It is, however, astonishing how many economists and politicians do not recognise this fact.<\/p>\n

The reaction to inflationary price increases - which are now happening on everything from energy costs to margarine - is an indication of this lack of understanding, especially on politicians' part. What they seem quite unable to understand is that someone gains from these.<\/p>\n

This should not be very hard to work out. Let me play a game of \u2018just suppose\u2019, as economists do. Just suppose there is a company that charged \u00a3100 for its product. The split of that \u00a3100 was \u00a340 for bought-in products for resale, \u00a340 to the company\u2019s employees and \u00a320 to profit.<\/p>\n

Now the company\u2019s supplier increases its prices by 10%. So it has to pay \u00a344 for the products it buys in. It then claims this means it must increase its own prices by 10% as a result. So, it ups the price it charges to \u00a3110. That\u2019s how general inflation works.<\/p>\n

Now the company\u2019s employees demand a pay rise. They are offered 5%, and without a union are forced to accept it. So, the cost of employing its workforce has now increased to \u00a342.<\/p>\n

But what has happened to profits? Of the \u00a3110 it now charges, because everyone has increased prices by 10%, \u00a344 is going to other companies and \u00a342 to its workers. And that leaves \u00a324 over as profit, which is an increase of \u00a34 in terms of profit.<\/p>\n

But note the percentage increase in profit. It\u2019s gone up by 20%, because that\u2019s what a \u00a34 increase in profit compared to the \u00a320 it previously earned means.<\/p>\n

So where has that extra profit come from? \u00a32 has simply come the increase in the pre-existing 20% profit share resulting from the price increase. But what if the other \u00a32? That\u2019s come from forcing workers to take a lower than inflation pay rise.<\/p>\n

The workers in this company needed a 10% pay rise to keep up with the costs that companies in the economy were charging them. But they did not get it. They only got 5%. So they got a \u00a32 increase, not the \u00a34 they were owed.<\/p>\n

But, the \u00a32 did not disappear. The \u00a32 went somewhere. And the only place it could go was to company profits. As a result they did not just go up, but they actually went up by double the rate of inflation.<\/p>\n

The result is that his company has, by forcing a below inflation pay rise on its workers, but by imposing inflation level price increases on its customers, seriously increased its profits, and so the well-being of those who share them (the shareholders) at cost to its workforce.<\/p>\n

In response you will hear all sorts of excuses. These will include things like \u2018but pension funds own shares, so this benefits the workers after all\u2019 and \u2018but it\u2019s not a lot\u2019 and that those complaining are \u2018engaged in class warfare\u2019. But those claims are nonsense.<\/p>\n

Pensions funds used to own a lot of shares, but don\u2019t nearly so much these days. And who cares if \u2018it\u2019s not a lot\u2019 when it means workers get 5% and shareholders get 20%? Pointing that out is not \u2018class warfare\u2019: it is commenting on what\u2019s happening.<\/p>\n

Of course, it could also be said that this is \u2018just suppose\u2019 and that this is not what is happening in the real world. Except that it is exactly what is happening in the real world. Shell and Centrica, which owns British Gas, announced massive profits yesterday.<\/p>\n

And many of the manufacturers of the data-to-day food and household goods that many people buy have announced 10% or more price increases. MacDonald's has increased the price of a cheeseburger by 20%. Amazon prime has gone up by 12.5%.<\/p>\n

And there are, for the record, no equivalent wage increases to match these increasing prices.<\/p>\n

And as an aside, also do not suggest that because energy costs have gone up by more than 10% this changes the story. It doesn\u2019t. It just earns that those companies have increased their profits compared to what they pay their workers by an even bigger amount.<\/p>\n

So what Tory MPs are actually doing is justifying a big shift in the way in which the rewards in society are being shared right now.<\/p>\n

Precisely because many employees in the private sector are getting pay awards way below the inflation rate, but 10% price increases are becoming commonplace, there is a permanent shift going on where profits are being inflated and employees are being left behind.<\/p>\n

And let\u2019s not pretend that those profits are being used to reinvest in the businesses that are enjoying them. Shell is paying out most of its profits to shareholders: Centrica is paying extra dividends.<\/p>\n

That not only means that not only are employees losing out, but that the better off in society (including those with serious pensions, most of whom are better off) are winning from this.<\/p>\n

It is absolutely right that there is right now class war going on: the wealthy are taking the opportunity of this inflation to screw everyone else. That is what is happening.<\/p>\n

And the Tory claim is that this does not cause inflation. Except that is completely wrong. The average price of a Bentley has just gone above $200,000. Why? Because the wealthy have been bidding the price up with all their extra income, that\u2019s why.<\/p>\n

Whilst many of those who have to work for a living will have to choose between food and heat this winter, the wealthy will have so much extra money that they will be the people who can afford the new prices being charged - and have \u00a0money left over to bid prices ever upwards.<\/p>\n

The reality is that workers cannot be creating an inflationary cycle, because they do not have the means to do so. But the way in which this inflation is panning out, giving those already wealthy way above average pay rises, is feeding straight into a serious inflationary cycle.<\/p>\n

What to do about it? Three things, I suggest. First, we need big increases in corporation tax. These need to be 30% on large companies and 25% on smaller ones, with an extra 10% on banks and energy companies who are likely to be winning heavily from this inflation.<\/p>\n

Second, we need higher rates of income tax for the top 5% of income earners. This is essential to cancel the inflationary impact of the additional earnings they are enjoying.<\/p>\n

And we need to equalise the taxes on income and wealth - because it is absurd that the taxes on wealth like capital gains tax are charged at much lower rates than those charged on income.<\/p>\n

But there is also a bit more to it than that. We need government support for workers to get fair pay rises, which requires Boards to be established to check that this is the case, industry by industry. We had them until the 1990s.<\/p>\n

And we need legislation that makes it easier for people to be members of trade unions in the private sector.<\/p>\n

Alternatively, we can ignore all this and watch people suffer, as a result of which some will undoubtedly die this winter through a lack of money to pay for the essentials of life.<\/p>\n

That\u2019s the choice we have got. But the process begins by calling out the total Tory lie that workers must not be paid inflation-matching pay rises because with will create an inflationary cycle. It can\u2019t, and it won\u2019t.<\/p>\n

But what is happening is that there is a disguised really big inflationary pay boom going on as a result of the booming profits of the companies that are upping prices and not sharing the gains with their employees. The profits they\u2019re making are fuelling inflation.<\/p>\n

And the people who are gaining are those who are already best off. It\u2019s time to call them out because it is true that they are engaged in class warfare against most people in this country, and it\u2019s time for the country to fight back.<\/p>\n","protected":false},"excerpt":{"rendered":"

I have just posted this thread on Twitter: Tories are arguing that wages must not rise as strongly as prices or we will get an
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