Inflation is back in the establishment media headlines, as prices are rising across the economy. But rather like generals fighting the last war, business and economic journalists are dusting off models of inflation last used in the early 1980s. The idea, for example, that “inflation is always a monetary phenomenon” worked well as a description of the crises of the 1970s when the class structure was flatter and simpler and when planet Earth still contained massive volumes of untapped resources; including decent reserves of energy-cheap energy.
Throughout the post-war years – and largely as a consequence of energy-cheap energy – the workers’ share of the profits from manufacturing and trade had risen. Various national versions of America’s suburban dream became available to skilled and semi-skilled workers across the developed states. Where the wartime generation rented small terraced houses, the post-war generation bought roomy semi-detached homes. Where the wartime generation walked to work, the post-war generation drove a car or rode a motorbike. Where the wartime generation holidayed at a nearby seaside town, the post war generation took package holidays in Mediterranean resorts.
Insofar as it existed at all, unemployment was a choice or a “frictional” period of a few weeks as workers moved from one employer to another. Only those few with complex problems, such as disabled people, people with mental illness or people with drug or alcohol dependency tended to be long-term unemployed. And the lack of a pool of unemployed labour empowered trade unions by undermining management’s ability to threaten the sack. If workers were fired they could easily find work elsewhere. And firms that sacked workers often struggled to find replacements.
It was into this situation that the energy and currency crises of the early 1970s emerged. And the immediate result was inflation as firms sought to offset falling profits with higher prices; only for unions to seek to offset the rising cost of living with action to drive up wages. And so an inflationary wage-price spiral developed until firms began to go bust and workers began losing their jobs. The end of the decade saw “stagflation,” as prices continued to rise even as millions of workers lost their jobs.
Critics of the post-war Keynesian economic consensus tended to focus on just one element of the crisis – money printing. Having seen the rise of fascist and communist parties out of the ashes of the depression of the 1930s, western governments had committed themselves to maintaining full-employment in the post-war years. To achieve this, states and central banks became investors of last resort – stepping in to build (with newly printed currency) new infrastructure or to operate unprofitable public industries to absorb otherwise unemployed workers. Eventually though, states printed more new currency than there was capacity to absorb it. And so the new currency began to act like a stealth tax; stealing the value of the currency already in circulation. Although this looked like rising prices, in reality it was a fall in the value of money.
The solution to the problem, then, was to somehow remove the excess currency from the system. There are several ways in which this could be done including, for example, various new taxes on the assets of the very wealthy. However, such taxes remain theoretical to this day. Instead, governments opted to raise income and spending taxes, cut public spending and to dramatically increase interest rates. That is, they chose to implement measures which would disproportionately hit small businesses and ordinary working people.
At this point, the economics textbooks should have been updated to better describe a new landscape of increasingly precarious employment, greater reliance on debt and the widespread offshoring of manufacturing. The failure to do so is one reason why the neoliberal order was brought to its knees by a sub-prime mortgage crisis; since sub-prime mortgages were an inevitable consequence of the new world order – if workers could no longer afford mortgages and banks would go bust without people to lend to, then one way or another, the rules governing lending were going to be weakened or even dispensed with entirely.
When oil shortages began to drive prices higher from 2005, central banks applied the 1980s solution; they raised interest rates. This left millions of people who were already struggling in the face of higher prices with the additional burden of higher monthly interest payments. Those at the bottom began to default, triggering a cascading banking and financial sector collapse as bank “assets” (i.e., our debts) turned out to be worthless.
The economics textbooks ought to have been revised once more to take account of the post-2008 landscape, but they weren’t. And so central banks and governments continue to turn to demand-side solutions to crises that are increasingly occurring on the supply-side.
One key revision which is urgently required is an updating of the class structure to take account of contemporary conditions:
Gone are the giant proletarian armies of shipbuilders, steelworkers, coal miners, dockers and railway workers. At the same time, more modern industries like car manufacturing, power generation and petrochemicals have been automated and slimmed down so that they provide a tiny fraction of the jobs of the 1970s. In their place in the western economies has risen a new raft of underpaid, white collar bullshit jobs, together with low-paid and insecure precariat employment in retail, hospitality and social care. The old white collar middle class has shrunk into a smaller managerial salaried class, clinging onto the shrinking pool of well paid jobs in the islands of prosperity in and around the university towns; many of the former middle class jobs being pushed down into the bullshit sector or being automated away entirely. There is also a new “fake bourgeoisie” of resentful poorly employed and unemployed university graduates whose numbers far exceed the number of genuine degree level jobs in the economy. Where national elites used to run national politics and determine the course of national economies, today we find disgruntled national business owners bristling with resentment at their declining status compared to a global elite of godzillionaires like Warren Buffett, Elon Musk, Jeff Bezos and Bill Gates; an elite class which now determines the politics and economic direction of most of the world.
Another key difference which needs to be factored in is the difference between what we might call “real GDP” as opposed to the debt-fuelled GDP measure used by economists and central bankers. As Tim Morgan explains:
“In the twenty years before the pandemic – from 1999 to 2019 – reported ‘growth’ of $71 trillion (110%) in world economic output was accompanied by an increase of $206tn (198%) in aggregate debt. Annual average growth of 3.5% in global GDP was made possible by annual borrowing which averaged 10.0% of GDP. Each dollar of ‘growth’ was bought with close to $3 of net new debt.”
One key ramification of this is that governments grossly overestimate the ability of their populations to withstand additional taxes and spending commitments. We witnessed it most dramatically in October 2018, when the French government unleashed a hornets’ nest of protests following the introduction of a seemingly innocuous environmental tax on diesel fuel. On paper, French drivers should have been able to absorb the hit. In reality, millions of workers who had been driven out of the cities by rising housing costs depended upon their diesel cars and vans to commute to work. The additional tax was effectively a tax on having a job; and workers responded with several years of “mouvement des gilets jaunes” protests. In a calmer manner, the citizens of Switzerland voted to reject more or less the same taxes; hinting at the difference between imagined GDP and true rates of prosperity.
A final key difference is in the massive inequality gap between those at the bottom and those at the top. In the wake of the crises of the 1970s, there remained very little difference between the mean and the median wage. Today, a sizable gap has opened between the two measures:
This reflects the change in the class structure; with a small minority of high earners skewing the average figure upward, where the median figure marks the point where there are an equal number of workers either side. Moreover, inequality in wealth has grown even larger as a result of the policies pursued by the central banks in the wake of the 2008 crisis; with asset prices rising far faster than the official rate of inflation.
Long before the pandemic, a few of us had noticed that in these changed circumstances we were beginning to see an “energy death spiral.” Because of the way official inflation rates were being measured, steep rises in the cost of essentials like food, transport and energy were being offset by falls in the prices of discretionary items like smartphones and televisions. Contrary to the popular narrative, energy supply companies like British Gas and SSE have been running domestic energy supply at a loss, and require mass consumption to make it worth the effort. But as prices rise, so mass consumption is squeezed from both sides. At the top, those who could afford it took advantage of government subsidies to deploy solar panels to cut their costs. At the bottom, an increasing number of households simply shivered in the dark. As a result, the cost of supplying electricity and gas has been falling on a shrinking middle. Ultimately, as more and more households cut their consumption, the energy companies will go bust.
As a result of the response to the pandemic, this trend has accelerated. More worryingly, as shortages of goods and materials grow across the economy, similar death spirals are opening up. The initial response to shortages has been to raise prices; fuelling current mainstream fears of 1970s-style inflation. This though, is merely the superficial short-term manifestation of a much deeper crisis. Unlike the 1970s, there are no cheap untapped energy and mineral resources waiting to be brought into production to kick-start another round of economic growth. On the contrary, the world’s large fossil fuel deposits are depleting and their only replacement comes from small and expensive deposits. Worse still, ore grades have been in decline for decades; meaning that ever more energy has to be used just to maintain production… energy that is no longer available!
The initial inflation resulting from our pandemic shortages will reverse simply because death spirals will follow. More and more people will be forced to limit their spending to essential items only; and a growing number at the very bottom will not even be able to afford essentials. At the same time, those at the top will seek to avoid rising costs – for example, buying state subsidised electric vehicles just at the point where petrol and diesel are becoming too expensive. Nor should we be surprised if Soviet-style black markets open up to provide the wealthy with access to goods that will simply be unobtainable to ordinary people.
For the moment, governments seem oblivious to this predicament; believing it can be resolved with currency printing and public works. The Great Reset – based on energy technologies which don’t exist – and the Green New deal – based on technologies that cannot hope to meet the challenge – are the two broad tracks taken by western governments. But in the absence of a new energy source cheaper and more energy-dense than diesel, the collapse of almost all non-essential mass consumption is inevitable.
As you made it to the end…
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