The cost of living crisis can be described very simply. Prices are too high and incomes are too low. Therefore, any proposal that doesn’t tackle either of these problems should be dismissed. The Bank of England jamming up interest rates addresses neither, and nor does its warning of mass unemployment and prolonged recession.
The Bank is offering fantasy economics, in which wage rises are responsible either now or later for prices rising. But with inflation already at 9.1 per cent, and forecast to hit 13 per cent this year, while average wages are predicted to rise by only 4.5 per cent, it obviously cannot be the case that wage rises are driving general inflation. Nor will they, on the Bank’s own forecasts, over the next year, with wage rises continuing to lag well behind the inflation rate. There is no “wage-price spiral”.
In reality, inflation today is the ugly product of two forces. First, instability in the rest of the world, from Russia’s invasion of Ukraine to ongoing Covid restrictions in China, are disrupting the supply of key goods. Second, extreme weather events such as wildfires and droughts, which are worsening over time, are adding their own costs and uncertainties to the mix. Not a single part of this global instability is affected by interest rates or wages in Britain. There is no interest rate in London high enough that it will end the war in Ukraine. There is no wage in Britain low enough that it will reduce the price of gas in Qatar.
This is a new kind of crisis for Britain – the first in the new, unstable time of the Anthropocene. We are used to living in a country with dependable weather in a world where terrible floods or fires might happen elsewhere, but which are never serious enough to truly affect us. That stable world has gone. The best we can hope to do with these huge elemental forces is protect ourselves against them. Yet it is here that our economic system is not only failing to provide that protection: it is worsening the problem for most of us.
This is because the next factor driving high prices and low wages is profiteering. Profits for the largest listed companies are up 73 per cent since the end of 2019, before the pandemic began. Of the price rises in Britain in the first six months of this year, almost 60 per cent can be accounted for by increased profits. Wages account for just 8.3 per cent. The Competition and Markets Authority found that even before the pandemic, “mark ups” – the addition to costs that firms take as profits – were rising sharply for the largest and most profitable companies. Every single last penny of excess profit earned by Shell or BP or the other profiteers is a penny taken from the wallets and bank accounts of the rest of us. Profits like those of the oil majors, made with no additional risk, no innovation, and no entrepreneurship of any identifiable kind, are what economists for 200 years have called “economic rent”: a parasitic claim on the rest of society, whether paid to 18th century landlords or 21st century oil barons.
Economics, as Adam Smith, the first modern economist once wrote, is a moral science. And what the profiteers are doing is an offence to basic morality. There are no technical solutions to moral problems – no clever forecasting model that can make the problem go away. Morality is about picking a side. Are you for extreme profits at the top, or for decent wages, benefits and pensions for the rest? Do we want protection, or profiteering?
So the people who know best how to tackle inflation and end the cost-of-living crisis aren’t in the Bank’s imposing headquarters on Threadneedle Street. They aren’t in the Treasury’s Edwardian offices on Whitehall. And they’re certainly not touring the country trying to persuade Tory party members that they are Margaret Thatcher reincarnated. The people who know best how to tackle the cost of living crisis are the Amazon workers in Coventry and Tilbury, walking out of their jobs after the company offered a derisory 35p pay increase. They’re the dockworkers in Felixstowe, who voted by 92 per cent to strike for better pay. They’re the ticket inspectors and train guards up and down the country, striking with the RMT against real pay cuts. And they’re the 70,000 who are committing, with Don’t Pay UK, to refuse to pay their energy bill when the new price-cap charges kick in.
The old order won’t resolve a new crisis. It is time for new forces to step up.
[See also: The Bank of England is recklessly driving the UK into a deep recession]