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The self-destruction of yesterday’s common sense

To bring J.K. Galbraith up to date, we might say that “the modern neoliberal is engaged in one of man’s oldest exercises in moral philosophy; that is, the search for a superior moral justification for selfishness.”  So it is that we have begun to see what I call “the downward dump” – the process by which the inhabitants of Versailles on Thames begin to blame the worst off in society for an unfolding economic disaster that they neither understand nor have the power to reverse.

It began, predictably enough, with Tory leadership contender Rishi Sunak – the man who spent two years spending public money like a drunken sailor – blaming people on benefits for the current cost-of-living crisis… conveniently forgetting that the official number of unemployed people is at a historic low, since most benefit recipients these days are in low-paid and insecure work.  In any case, you’d need to be inhaling something a lot stronger than fresh air to map out exactly how people receiving £96 per week somehow managed to drive a 900 percent increase in the international wholesale price of gas, or how people who cannot afford to run a car managed to drive the price of oil up to $120 per barrel.

Sunak was, of course, playing to his electorate – those insane enough to actually join the Tory Party rather than simply getting duped into voting for it.  Sunak knows full well that insofar as there has been domestic inflation, it is the result of state funding of schemes like his “Eat Out to Spread the Covid About,” in which the government picked up half of the bill for people to go out for a meal.  But he also understands the deep prejudices of that section of the 100,000 or so Tory members who are not in the party just to get their snouts in the corporate welfare trough. 

The vacancies that Sunak claims people could take up have been in decline for several quarters from the high point last autumn when specialist sectors like lorry driving struggled to find new applicants.  Moreover, the bulk of the vacancies were in what used to be thought of as “student jobs” – the often low-paid, part-time and precarious positions that pre-pandemic students used to take up to offset the costs of going to university.  The vacancies also tended to be located in the big metropolises where lower-paid workers cannot afford to live, so that there has been a geographical mismatch between the location of the spare workforce and the location of the job vacancies.

Dame Sharon White, chairwoman of the John Lewis Partnership made a more subtle but similar intervention, telling the BBC Today Programme:

“Regardless of what has happened coming out of Covid, if the labour market is that tight, if we continue to have far fewer people in work [or] looking for work – you’ve inevitably got more inflation and more wage inflation…

“I guess I would encourage…any government to really think much more about how to encourage more people back into work.”

The shared ideological position here is the old neoliberal trope from the 1970s – that it is greedy workers who have driven up prices by leveraging a tight labour market to demand excessive wages.  It would be a great story if only it was true.  Notice, by the way, that workers asking for higher wages is a threat to be countered while corporations jacking up their prices is seen as the natural order of things.  The reality is that people in the bottom half of the income distribution experienced a decade of falling wages between the Crash and the Covid, and the decline in real wages has encompassed all but the top twenty percent in the months since the lockdowns ended.

The only reason that we have yet to see large scale redundancies is that corporations have been able to use inflation to implement real terms wage cuts.  That is, if the corporation is raising its prices by the average nine percent but giving its employees a five percent rise, the workers are four percent worse off… one reason, perhaps, why the relatively few unionised sectors of the workforce are engaging in strikes.

The not entirely unfounded fear is that more of us will organise in order to demand higher pay, and that this will become an added cause of inflation later on.  It follows that some pool of reserve labour must be tapped into in order to lower demand and keep wages down.  In the 1970s, this was achieved via equalities legislation which brought large numbers of women and minority workers into the labour force.  In the 1990s it was done using low-paid migrant workers from eastern Europe.  Today, Dame Sharon White is looking to mobilise what she believes is a large pool of older workers. 

In any case, Dame Sharon is wrong.  The apparent reserve army of people aged over-50 is a myth resulting from Blairite reforms to the welfare system.  Blair brought in American insurance-busting, disability denier companies like ATOS to claim that anyone who was not paralysed from the neck down could be considered fit for work.  This created a disparity in the data, since more than a quarter of British people over-50 are disabled and/or suffering with a long-term limiting illness, even though official unemployment figures suggest that they are available for work.  The media myth of a pool of over-50s available for work is not born out in the official statistics:

“The increase in economic inactivity since the start of the coronavirus pandemic had been largely driven by those who were students, the long-term sick and those who were economically inactive for “other” reasons – Other reasons for being economically inactive include those who are waiting for the results of a job application; have not yet started looking for work; do not need or want employment; have given an uncategorised reason for being economically inactive; or have not given a reason for being economically inactive.”

The student problem is simply that fewer British youngsters see the value of taking on long-term debt to obtain a degree that is no longer a ticket to well-paid employment, and because fewer oversees students are attending UK universities.  The disability-sickness issue is simply that while the Department of Work and Pensions may say that someone is fit to work, the reality for roles like airport baggage handlers, Amazon warehouse employees or seasonal agricultural workers is that most sick and disabled people are not going to get past the interview.  More broadly though, the over-50s have historically been one of the few groups to experience widespread discrimination.  And in the wake of the 2008 crash, many of those who could, cashed in their pensions and settled for a lower-paid early retirement than they might have hoped for.  One suspects that this group will be extending a big middle finger to Sunak and White now that they have decided that they need older workers after all.

There may though, be another reason for their desire to increase the pool of low-paid precariat workers… disinflation (a slowing of the rate at which prices are rising) followed by deflation (falling prices).  Yesterday’s surprise fall in the US rate of inflation is further evidence of falling demand across the economy, and, crucially, points to the limits on how far firms can pass rising costs to consumers.  With oil prices falling, and with domestic demand flat, the UK could well experience a similar disinflation in the coming months – although this may be offset in the official figures by the huge rises in energy prices resulting from a combination of too high a dependence upon wind power and imported energy together with the sanctions on Russian gas.  For the UK, this sets up the nightmare scenario in which firms are unable to pass on rising costs to consumers, government and the central bank are unable to respond meaningfully to international price pressures, and public discontent – in the form of strikes and non-payment campaigns – undermine profitability.

Disinflation would certainly blow the recent Bank of England forecast of a 13 percent rise in the CPI rate out of the water.  But it wouldn’t be good news for companies which were struggling under the weight of supply disruption from two years of lockdown even before wholesale gas prices began to spike.  Firms which can neither afford the rising costs nor pass them on to consumers are going to go bust.  It is only a matter of time.  Rising interest rates not only do not help prevent this, but actually make matters worse by adding to companies’ debt servicing costs and/or raising the cost of the borrowing often required to invest in efficiency savings.

Nor does disinflation really help consumers.  Sure, having prices increase at eight percent is (slightly) better than having them rise at nine or thirteen percent.  But eight percent is still bigger than the three percent or so that incomes are growing by.  Life is still getting harder; it is just getting harder a little slower.  And people who are struggling to pay the increasing price of essentials are not going to accept the higher prices demanded by companies, they are simply going to buy less stuff.  For example, while the establishment media talks about the average energy bill rising to more than £4,200 per year, the reality is that the average energy bill is going to fall as people simply cut their consumption… something which will very likely result in another round of bankruptcies for energy supply companies unless government steps in to bail them out.

Even now, politicians, central bankers, economists and journalists are talking about the unfolding crisis as if it is temporary.  Sunak’s £400 rebate on energy bills – designed to protect the energy companies from falling demand – was originally designed as a loan to tide us over until gas prises returned to “normal.”  The Bank of England seems convinced that it can engineer a goldilocks recession in which just enough unemployment and bankruptcy is generated to bring inflation back to its two percent target rate by the end of next year.  Economists draw on the insane belief in infinite substitutability to claim that if Russian gas is no longer available, we’ll just invent something else to replace it.  And journalists gaslight everyone into claiming that it isn’t happening or, if it is, it won’t be that bad.

Saxo Bank’s head of macro analysis, Christopher Dembik though, argues that Britain is in a far worse  state than most people imagine:

“A few months ago, we warned the UK economy is one of the developed countries most likely to enter into a recession. There is no debate about it anymore. Last week, the Bank of England updated its macroeconomic forecasts for the years until 2025. These are frightening. The United Kingdom is projected to enter into a recession in Q4 2022. This could last five quarters and cause GDP to fall about 2.1 % – as deep as the recession of the early 1990s. But this is not the worst. Very often, the economy rebounds quite sharply after a recession. This is unlikely to happen this time…

“… new car registrations, which are often considered as a leading indicator of the overall UK economy, continue to drop. This also reflects the deep collapse in consumer confidence.  In July 2021, after the peak of the pandemic, new car registrations stood at 1,835,000. They now stand at 1,528,000, a sharp drop of 14%. This is the lowest level since the end of the 1970s. The recession will be long and deep. There won’t be an easy escape. This is the most worrying, in our view… What Brexit has not done by itself, Brexit coupled with Covid and high inflation have succeeded in doing. The UK economy is crushed…

“The United Kingdom is more and more looking like an emerging market country.”

The one question nobody seems prepared to ask is, on what grounds are claims that the unfolding crisis is temporary based?  Certainly, there is a naïve hope that our broken supply chains will somehow fix themselves.  Even more deranged is the expectation that when the dust settles in Ukraine, we can just lift the sanctions and Russia is going to be our friend again… or at least is going to return to sending us all of the oil, gas, coal and other commodities that our economy depends upon.  Philip Pilkington at UnHerd offers a more realistic view:

“Until now, the West has benefited from the cheap labour and raw materials provided by the developing world. But at a certain point it was inevitable that the developing world would decide it is done playing second fiddle to the West. That day appears to be here, with Russia and China ushering in this new age. Without easy access to cheap labour and raw materials, prices in the West will have to rise — and living standards will have to fall accordingly.”

This is the part that nobody wants to acknowledge.  The Thatcherite “solutions” that political chancers like Sunak are chanting like mantras are the cause of the crisis we now find ourselves in.  Britain has dined out on a mountain of debt built upon the once and done oil and gas profits from the North Sea.  In that period, we took on four pounds of debt for every pound of GDP generated.  And this figure understates the problem if we separate that part of the GDP figure created by financial sector alchemy from the “real” GDP of goods and services.  Over the same period, we exported most of our manufacturing industry to those parts of the world which are now rushing to join the emerging BRICS currency system, so that, as their economies grow, Britain will have little in the way of exports to trade for the basics like food, energy, and raw materials that we need.

It was the ideological extremism of market fetishism which allowed our critical infrastructure to be divided up and hollowed out to the point that it is unable to deliver.  A water industry that cannot store enough of our more than adequate rainfall to prevent widespread summer shortages.  An electricity grid that cannot provide enough power at precisely the times when we need it most.  Basic industries like building, steelmaking and farming, which turn out to have been over-reliant on Russian commodities.  And several manufacturing plants which cannot continue without shiploads of components arriving from China.

In the new multi-polar world that is emerging, Britain is going to be a big loser.  As the pound falls in the face of the new, commodity-backed BRICS currency, a prolonged period of import price increases will further drive up the cost of doing business.  But what politicians like Sunak and CEOs like Dame Sharon forget is that the workers’ pay which they seek to depress is also the consumer spending which they desperately want to increase.  Cutting workers’ wages – a solution which, sort of, worked four decades ago – when the UK still had a powerful economic base – will serve only to amplify a crisis which is already underway.  With careful planning and strategic investment over the next decade, we might resurrect some of the essential industry that an earlier generation so casually offshored, and we will have to learn to live without many of the desirable but non-essential items that we currently import.  But too much of our commodities, energy and food is imported for us to avoid a period of prolonged hardship.  And salvation will be impossible if we enter into an ideologically-driven wage-price race to the bottom, with extinction as our final destination.

As you made it to the end…

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