Rishi Sunak marked 100 days in office by claiming the country cannot afford “massive” pay rises for nurses. In a TV interview, the prime minister on Thursday said he’d “love to give the nurses” the money because it would “make my life easier”, but added: “Even if it’s not popular, it’s the right thing for this country to stay the course.” Mr Sunak was so unmoved by the biggest day of industrial action over pay in more than a decade that even the most popular of causes would not be entertained. Earlier that day the Bank of England hiked interest rates, causing more pain for hard-pressed households and businesses.
The recession now forecast as a result is the price workers are paying for inflation that is driven by supply costs in food and fuel being wrongly cast as driven by demand. This is no accident, as an insightful report by the Trades Union Congress makes clear this week. Since 1979, economic policies have seen a “doom loop in GDP, and a parallel ‘boom loop’ in wealth”. The doom loop starts with the government claiming that it has to “fix” the public finances, and proceeds by public spending cuts which then lead to lower demand and lower growth – with the cycle restarting. This flies in the face of evidence that infrastructure spending pays for itself through extra economic growth. Such inconvenient facts are dismissed.
The doom loop has seen Britain miss out on £400bn of growth since 2010 – a figure that means workers have suffered the worst pay squeeze for 200 years. The boom loop produces the opposite effect for the rich. Since the global financial crisis, “financial wealth” has risen by more than £800bn to £1.9tn. Net worth as a share of GDP in 2020, cornered by the rich, matched the peak in the 1930s. What differs from a century ago is that fortunes are now built on houses: a quarter of the wealth on the Sunday Times rich list is held by people in finance; a fifth by those in property. As much of this income is dividends and capital gains, it faces lower tax rates than income from work. It should be obvious that such inconsistencies must be ended.
Geoff Tily, the author of the report, relies on two liberal thinkers who did much to shape this paper’s thinking on economics: JA Hobson and John Maynard Keynes. It was their arguments that Labour deployed in 1945 so that the public debt of 250% of GDP did not stand in the way of transformative change. Mr Tily’s analysis today is that the excessive imbalance towards wealth from labour distorts economic activity and sees too low wages putting goods and services out of reach of too many – while the extremely rich don’t spend. As the economics writer Matthew C Klein says: “You can only throw so many million-dollar birthday parties.” The consequence is that production is excessive relative to deficient pay. Debt is used to sustain purchasing power. Wealth, meanwhile, is channelled into speculation. Riskier loans leads to the economy resembling a house of cards.
Many countries find themselves in similar sticky situations. Kristalina Georgieva, the International Monetary Fund’s managing director, recalled in 2020 that “the foundations for a more peaceful and prosperous world” were laid after the second world war. It would be better if such a cataclysmic event was not required to forge a new international system such as that created by the Bretton Woods conference. The layoffs in tech companies and deflating housing bubbles might be canaries in the global economy’s coalmine. Mr Tily points out that in a candid moment last October the IMF conceded the level of risk “is the highest outside acute crisis”. Crisis or not, he writes, there is a “desperate need to reset the economy to give priority to production and work” and to heed calls heard in the wake of the pandemic for a new social contract. Amen to that.
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