By Adam Peggs
The onset of the pandemic has fatally undermined justification for austerity over the last decade. Instead, we have seen vastly increased state spending, deepened public opposition to cuts and a government employing unusually un-Tory rhetoric.
But there has been a shift in recent months to concerns about the possibility of a wave of inflation. Some argue that fiscal consolidation – lower spending or higher cuts to reduce the deficit – is necessary, or will be soon enough. This could arguably involve tax rises on the rich – as favoured by much of the wider public. But given the actions of the current government and the dominant values and ideas in the halls of power, it is far more likely to result in broad-based tax rises on workers, a new round of cuts to social spending, or a combination of both.
In a recent blog, the Marxist economist Michael Roberts argues that inflation is accelerating and that this trend will drive down the real-terms cost of labour (that is the purchasing power gained from a wage). The possibility of simultaneous rises in interest rates and wages could be the “basis for a new slump”. For employees, inflation is often a negative because it reduces purchasing power – unless wage rises outstrip the rate of inflation. With the impact of the Covid recession on workers’ incomes, it is certainly the case that the real value of wages has fallen since spring 2020. The benefits of this to capital are obvious.
Roberts argues that while inflation is “bad news for Labour”, “moderate inflation is not bad news for capital”. In a similar vein, Tim Barker, argues that economic elites are not worried about inflation. Here it is implied that this is part of a deliberate economic strategy on the part of ruling classes, to spend on economic activities supported by ‘organised business’ and to pass the buck on any inflation to the working class. From the point of view of the wealthy, this isn’t a bad economic strategy. You could even call it trickle-down inflation.
Crucially, the US inflation rate reached 5% in May, while many European countries are experiencing inflation levels above the average for recent years. However, in the UK this trend isn’t visible. Here, the Consumer Price Index was only 1.5% in the 12 months to April 2021. Though this is not the lowest level in recent years, it is still comfortably below the Bank of England’s 2% target (which, officially speaking, is considered the ideal).
However, the UK is also experiencing soaring house price inflation, with increases in house prices in the last year currently standing at approximately 10% (perhaps as high as 13%). This is a consequence of government policies which have enriched those with housing assets at the expense of those with little or no wealth. While this situation could change, the trend in inflation here doesn’t quite resemble the US (the stark differences in public spending are key here). It does however pose the risk that down the line the costs of this crisis are passed on to renters and prospective house-buyers through even more bloated housing costs.
Roberts argues that it is profitability that decides investment and production, not “effective demand”. He quotes Marx’s argument that wages are the dependent variable not the determining factor in capitalist production: “The rate of accumulation is the independent, not the dependent, variable; the rate of wages the dependent, not the independent variable”,and“The rise of wages… is confined within limits that not only leave intact the foundations of the capitalistic system, but also secure its reproduction on a progressive scale.” In simpler terms: capitalism ensures that higher wages cannot drive economic growth.
This is a challenge to Keynesian ideas, despite Marx’s writing long preceding them, that rising wages can boost demand and facilitate an economic boom. This is sometimes called ‘wage-led’ or ‘demand-led’ growth. In my view, there is something to such ideas but they make assumptions which risk running up against the limits of a capitalist economy. Not least the fact that we have repeatedly seen owners of capital willing to accept lower growth and even periods of economic stagnation if the trade-off involves low wages and labour market restructuring. While governments could plausibly take a different view to the wealthy, they would likely have to overcome tempestuous financial markets, capital flight or investment strikes.
Roberts also notes that “wages cannot rise to the point that they seriously threaten profits” – otherwise governments will intervene with incomes policies. Such policies were used to manage or restrain wage growth as practised by the Labour governments of the 1960s and 1970s. Of course, if the ‘demand-led’ growth argument holds up, such an approach might be unnecessary. While the 1970s is long behind us, there is still a prospect of wage restraint becoming a key pillar of the prevailing economic strategy.
As Grace Blakeley argues, we are at a “low point for the power of the organised working class, any increase in consumer prices is likely to be absorbed by workers in the form of lower real wages. So we’re unlikely to go from inflationary pressure into inflationary spiral.” Instead, rising inflation may well lead to a clamour for renewed austerity on the incomes of working people, if not on public services.
Given that a panic about the possibility of rapid inflation is already underway, it’s clear it would not take much for the Conservative government to make ‘runaway pay rises’ the key economic issue of the day.
Adam Peggs is a writer and activist based in Deptford, London.
Subscribe to the blog for email notifications of new posts