Prices are too high and wages too low.
The solution must be to bring down and control prices and increase salaries, benefits, wages, and pensions.
Huge profit margins for big businesses are on the rise, at the consumer’s expense. The deeper cause is the weak profiction and the weakness of the British economy.
This plain argument is often hidden or distorted by stream commentary in the media that the main cause is the war in Ukraine or because the government is printing too much money.
To deal with inflation includes wage increases, price controls and regulation of profits. Sustain public intervention to deal with the weakness of manufacturing. Britain must become self-reliant.
The route has to be the reverse of what Margaret Thatcher initiated 40 years ago. Reversing privatisation, selling public assets, deindustrialisation and deregulation of the financial sector.
The UK was the first to industrialise and the first to deindustrialise. Britain needs a new economic strategy to ensure the essentials of life, good jobs, and civilised conditions for all.
Some definitions
The economy, at the most basic level. is essentially who produces what and who owns it and it is sometimes presented as a very complex machinery that can only be understood by experts.
- Inflation is the rate at which prices are increasing on average. Typically lower. It generally affects the poorest since they spend more on essentials.
- Real terms is the economic figure after taking account of inflation. Considering a salary and adjusting for the rising costs of things.
- Supply- the goods created and Demand, how much those goods are wanted- in a country they get aggregated
Aggregate supply, Covid-19 and the war in Ukraine
As 2.5 billion people (at the height) lived under some form of serious restriction, the aggregated supply and demand were disrupted. People were not able to produce and spend as they would have. Investment stopped in the face of uncertainty.
Aggregated supply was disrupted and many businesses decided to declare bankruptcy or make staff redundant. Many countries plunged into recession. The government stepped in with the £70 billion furlough scheme. Aggregated demand also decreases since people can spend less.
As the restrictions lifted and people started to go out there was not enough aggregated supply (goods and services produced)
To this, it must be added the ecological crisis that took place in countries that produced for the industrialised north.
As a result of neoliberal policies going on for 40 years. The UK is a net importer of natural gas and nope imports 50%. Self-sufficiency in food has dropped from domestic production to 60% to this day.
this reflects the loss of the manufacturing industry, the resulting reliance and imports the extraordinary scale of privatisation, and dramatic changes in energy provision.
A shift of the economy towards services, giving more power to the financial sector at the expense of the financial sector.
Poor investment record over a long time, this will improve technology, falling behind France and Germany, same for labour productivity. In advanced economies, productivity will rise steadily, introduce new technologies and therefore bring prosperity so the moment it stops, stagnates, incomes fail to rise and the employment is of low quality.
The result of not manufacturing led to the need to be a net importer of goods and the loss of competitiveness. The blow to the productive sector of the British economy over 40 years has been of historical proportions. Deindustrialisations, wholesale privatisation and global financial speculation created the perfect storm.
Britain became dependent during the pandemic of essentials such as energy and food supply and did not reinvest in the health sector or public transportation and focused on profits/checks for the big company’s directors.
Prices began to rise in Britain in 2021 and large enterprises were able to make huge profits at the expense of workers.
In February 2022, Russia invaded Ukraine. They supply critical important commodities. This meant the costs of electricity dependent on gas coming from Ukraine went up to the detriment of the lower classes, especially during winter. In simple terms, it is more expensive to bring the necessary imports to the country.
All of this could have been balanced by reducing the wages but also the profits, but owners being owners, profits increased.
Brexit, despite having some impact on international trade was not a decisive factor in inflation.
In sum, everything that was key happened before:
- weakness of the UK on its supply side, worsened by the profiteering of several companies
- Long-term weakness on investment and productivity failures pre-Brexit
Mainstream media blames the world in Ukraine and the fact that there is simply too much money. Also, pensioners and workers receive too much money.
The problem is not too much money
Economists and politicians (from the right) blame inflation on the Quantity Theory of Money, putting it on the Bank of England for printing too much money. They blame quantitative easing but they are wrong and it is important to know why.
Quantitative easing is the programme implemented by the Bank of England to create a substantial amount of new money electronically. This so there is money available to banks at a low rate. This programme relies on commercial banks.
More and more money was pumped into the system but it was not until the pandemic that £895 billion, 5 times the budget of the NHS and 20 that of defense.
The monetarist, such as Milton Friedman explained this as being too much money. QE created price increases in the property assets since institutions were buying and trading, making trade more difficult for people to buy a house. In 2020, QE pumped more money, so the £70 billion furlough scheme put money into households but replenished business revenues. Many people save that money, but people saving is not causing those prices to rise.
The problem is not that wages are too high
Wages in Britain have been low for some time. Rising wages above inflation, the argument goes, does not force businesses to raise pricing. During the lost decade in modern British history the income never actually grew.
The GDP is a measure useful (though not perfect) to measure what is produced in a country. The national income for those who work and those who own wealth grew disproportionately from 2010 (Tories and Lib Democrats). Workers have been losing out to capitalists for a long time.
People on self-employment have risen but their average earnings have fallen since the crisis of 2007-09. Pensions and benefits being cut do not necessarily help the pre-pandemic social fabric.
There is not a “wages-price” spiral but a brazen attempt to secure even more profits.
The problem, Then, is that profits are too high
Big companies have benefited from the distance between rising prices, aggregated demand and lower income.
Profits for big companies have increased by around 60%, and increases in wages account for only 8%. What exists is a relentless rise in profits that take advantage of rising prices, boosting profit margins and keeping prices high.
Not everyone necessarily benefits, big companies raise the price and make a higher “markup” while small businesses need to cope with this.
The extraordinary rise in profits in 2020-221 is not the result of increased technological innovations or managerial efficiency, risk-taking or opening up new avenues of production mainstream economists like to say. What has been happening over the past decade is that lower wages and profits are channelled directly into big companies’ pockets. It is a national disgrace.
The arguments made by the Governor of the Bank of England are that we cannot raise wages since that will increase inflation even more when in reality there is no correlation of that. These arguments try to make a case that inflation will keep rising and there and increasing wages will not fix it.
How not to deal with high inflation
Through QE the Bank of England raises the base rate at which the banks lend to commercial banks. Big financial institutions don’t like inflation over 10%.
Businesses will be forced to close down since the theory goes, that aggregated demand goes down and prices go down too. What looms is a recession and combined with wages going down and inflation going up produces stagflation.
The proper answer is to protect the income of workers, shift the burden of confronting inflation onto profits and interviene to deal wit the profound weakness of the supply side.
Austerity policies will not work such as the ones proposed by Rishi Sunak.
For a real plan to tackle inflation: three main pillars
- Wages should be at least equal to the rate of inflation across the board. We need collective bargaining.
- Restrain big businesses’ profits. Regulation of pricing through taxation and price control.
- Deal with aggregated supply- restructuring political power in the country:
- Public investment to renew the country’s infrastructure
- Public ownership of key resources: energy, water, transport and more
There is a need to restructure the whole financial system and create a new consensus on political projects.
