Power, not prices

We’re heading for a cost of living crisis because of big price rises for essential items such as gas and food. Everybody knows this. Which is unfortunate, because it’s not quite true.

Of course, I don’t deny that prices are rising. They are. What’s doubtful is that they are the sole cause of falling real incomes.

Simple statistics tell us this. Since quarterly data began in 1955 fluctuations in annual inflation (measured by the consumption deflator) have explained only 4.2% of the variation in annual growth in real households’ incomes; for longer-term changes such as three or five-year ones the explanatory power is even lower. This tells us that rising prices alone have been only a tiny cause of changes in real incomes.

What’s more, our period of highest inflation actually saw real household incomes do well. Consumer prices more than tripled during the 1970s, in part because the oil price rose by a factor of ten. But real households’ disposable incomes then grew by an average of 3.4 per cent a year – more than twice as much as they grew in the ten years before the pandemic, a period of low inflation.

Inflation on its own, therefore, is not a sufficient explanation of falling real incomes. Sometimes, as in 2016, real household incomes fall when inflation is low. And sometimes they rise when inflation is high, as in the 70s.

So, what does explain variations in real incomes?

Power, that’s what. There are two big differences between now and the 70s.

One is that back then many workers had the bargaining power to extract pay rises to maintain their real incomes in the face of rising prices. In the mid-70s the wage share in GDP rose sharply. It was capitalists and shareholders who suffered a crisis, not working households.

The other was that government borrowing rose markedly, which helped support incomes. Because that increased debt was devalued by inflation (in those naïve days before index-linked gilts) this meant there was in effect a transfer of real resources from gilt investors to other households.

Today, things are different. Except in a few industries, workers don’t have the power to protect real wages that they had for a while in the 70s. ONS data show that average weekly wages rose 4.2% in the year to November and that median monthly pay rose 5.3% in the year to December. Both measures fall short of CPI inflation.

What’s more, fiscal policy is being tightened. The OBR foresees cyclically-adjusted net borrowing falling by 4.4 percentage points of GDP in 2022-23. Higher NICs, the cut in Universal Credit and public sector pay restraint are all taking real incomes from households.

Real household incomes are not, then, falling solely because of inflation. They’re falling because people lack the market or political power to protect themselves from external shocks in the way they did in the 70s. Back in the 70s, working people were portrayed as greedy knaves; today they are seen as pawns, victims lacking agency (to borrowing Julian Le Grand’s terminology (pdf)). There’s a reason for this change.

A fall in some people’s real incomes at a time when GDP is growing – as is likely this year – is a transfer of real resources, from those without power to those with it. Inflation is a means (often unintended) whereby this transfer occurs. It is not the sole cause of it.

The “classical dichotomy” – the idea that real variables affect only things and monetary variables (such as prices) only monetary ones – is sometimes wrong. But not always; it usefully reminds us to think about real factors, not just monetary ones.

Those who attribute the cost of living crisis to inflation are therefore wrong. But their error is an old one. It’s what Georg Lukacs called reification, the process whereby:

A relation between people takes on the character of a thing and thus acquires a ‘phantom objectivity’, an autonomy that seems so strictly rational and all-embracing as to conceal every trace of its fundamental nature: the relation between people.

It’s what Marx called commodity fetishism – the way in which relations between people assume “the fantastic form of a relation between things.”

Even well-meaning talk of inflation, therefore, is ideological: it effaces a brute fact about capitalism, that some people have more power than others.  

Comments

[ltr]

https://news.cgtn.com/news/2022-01-22/The-case-for-strategic-price-policies-171AF24WDgk/index.html

January 22, 2022

The case for strategic price policies
By James K. Galbraith

With a single commentary * in The Guardian (and an unintended assist ** from New York Times columnist Paul Krugman), economist Isabella Weber of the University of Massachusetts injected clear thinking into a debate that had been suppressed for 40 years. Specifically, she has advanced the idea that rising prices call for a price policy. Imagine that....

* https://www.theguardian.com/business/commentisfree/2021/dec/29/inflation-price-controls-time-we-use-it

** https://twitter.com/paulkrugman/status/1477247341212184577

James K. Galbraith is chair in Government/Business Relations at the Lyndon B. Johnson School of Public Affairs at the University of Texas at Austin.

[rsm]

Why does "strategic price controls" sound like arbitrary prioritization by the authoritarian left?

Rather than try violently to repress nominal inflation, why not index fully? Can we keep real purchasing power stable no matter how high or fast nominal prices may rise, using stable units of purchasing power to keep track of prices?

[Carlo]

Perhaps no power, but power to just walk.
That's well known from the US. Here is Germany. Think of the effects.
https://www.manager-magazin.de/karriere/arbeitsmarkt-jeder-vierte-kuendigt-ohne-neue-stelle-1642843528-a-69648aa3-1bd8-4de7-9977-028de313c249#ref=rss

[ltr]

https://www.nytimes.com/2022/01/13/business/economy/inflation-price-controls.html

January 13, 2022

Price Controls Set Off Heated Debate as History Gets a Second Look
A discussion over whether price controls would work to stem inflation is sweeping progressives. So far, it has little political acceptance.
By Ben Casselman and Jeanna Smialek

America’s recent inflation spike has prompted renewed interest in an idea that many economists and policy experts thought they had long ago left behind for good: price controls....

[ltr]

https://fred.stlouisfed.org/graph/?g=tC10

January 30, 2018

Real private weekly earnings for United Kingdom, 2000-2021

(Indexed to 2000)

Real earnings simply stopped increasing after 2007. This should be a constant lament and complaint from Labour.

[ltr]

A question about "power" or possibly trying to hold on to power; why is the Johnson government so antagonistic toward Russia (as well as China)? The Foreign Minister is continually provocative or just antagonistic, but I do not know why. Does Johnson actually want British troops in Ukraine? Does Labour differ on foreign policy?

What am I missing?

[LJC]

https://fred.stlouisfed.org/graph/?g=tC10

Interesting that the decline in real earnings came about during the period of austerity, mostly under the Coalition Government, while the return to deficit financing before the 2015 General Election led to a rise in real earnings.

[Blissex]

«why is the Johnson government so antagonistic toward Russia (as well as China)? The Foreign Minister is continually provocative or just antagonistic, but I do not know why.»
The USA want that, and want it for "good" reasons...

https://en.wikiquote.org/wiki/George_F._Kennan

George Kennan "At a Century's Ending: Reflections 1982-1995" "Part II: Cold War in Full Bloom" page 118 (1997) ISBN 0-393-31609-2

"Were the Soviet Union to sink tomorrow under the waters of the ocean, the American military-industrial establishment would have to go on, substantially unchanged, until some other adversary could be invented. Anything else would be an unacceptable shock to the American economy."

For China, the USA also have the "good" reason that by splitting the global markets in two now, they get to keep and dominate by far the bigger and richer part for rather longer.

[ltr]

LJC:

Interesting that the decline in real earnings came about during the period of austerity, mostly under the Coalition Government, while the return to deficit financing before the 2015 General Election led to a rise in real earnings.

[ Important. ]

[ltr]

Blissex:

For China, the USA also have the "good" reason that by splitting the global markets in two now, they get to keep and dominate by far the bigger and richer part for rather longer.

[ What US strategy against China since 2011 has accomplished is a self-defeating strengthening of China's space exploration, technology and development programs. What US strategy against China since 2017 has accomplished is a general strengthening of Chinese technology and development.

Britain could gain immensely by working closely with China, just as Israel is now doing... ]

[ltr]

What Britain needs economically is to look outward as it did in developing for several hundred years, and looking outward means much beyond the United States. Of course Brexit was a mistake, but the mistake was made so look beyond the US and Europe for prime new growth opportunities.

Germany is looking outward, so join with Germany in this.

[ltr]

https://fred.stlouisfed.org/graph/?g=qcOI

January 30, 2018

Real private weekly earnings and Labor productivity for United Kingdom, 2000-2021

(Indexed to 2000)

[ Looking outward, along with Germany, would add to productivity in Britain. ]

[rsm]

《Britain could gain immensely by working closely with China》

Does Britain have an unlimited currency swap line with the PBOC?

[ltr]

Does Britain have an unlimited currency swap line with the PBOC?

[ Interesting question, the answer is "yes." The currencies of both countries are highly stable, and both countries have ample foreign currency reserves. Reserves of China being about $4.5 trillion. ]

[ltr]

The UK is ranked as the 4th most innovative country in 2021. This makes for a valuable trade partner for any country, but especially for a country rapidly developing technologically. The UK needs technology application to enhance productivity. That means lots of trade and investment opportunities.

[rsm]

Are the UK's surveillance systems "Made in China"?

[ltr]

Are the UK's surveillance systems "Made in -----"?

[ This is the voice of crazed racism, ceaseless crazed vile racism. The voice of crazed lying racism.

No more. ]

[ltr]

https://english.news.cn/20220127/63cd94a0c4634992b9cfbaecb7f6a911/c.html

January 27, 2022

British business community voices hope for stronger trade ties with China

[ltr]

Well, I am sorry about my name-calling and simply have to learn to avoid paying attention to comments meant to be angering and harmful and always just move past.

Britain however could have a highly beneficial trade and investment relationship with China and beyond complaining the US would not react. As for Britain in any event, general well-being calls for increased economic openness especially to the global "South" and China since China is so critically important a trader and investor.

[ltr]

January 27, 2022

The damage caused by Boris Johnson and Brexit goes way beyond his office parties

This post is not about the personality of Boris Johnson. Instead it is about whether things will change much with any successor. The general theme of this post is that the damage to the Conservative party caused by both Brexit and Johnson has been so great that any successor will be very restricted in the changes they can make even if they were minded to make changes.

In short, if Johnson goes, can the Conservative party mend itself? To assess this, we first need to outline the damage he has done, the damage Brexit has done and whether there are any silver linings. The next step is to speculate on whether any of the likely successors to Johnson might undo any or all of this damage.

Brexit has done obvious damage to the UK economy....

-- Simon Wren-Lewis

[ltr]

January 27, 2022

Coronavirus

United States

Cases ( 74,695,333)
Deaths ( 902,140)

Deaths per million ( 2,701)

China

Cases ( 105,812)
Deaths ( 4,636)

Deaths per million ( 3)