I posted this thread on Twitter this morning:
We face the biggest group of strikes in recent history today. That is not surprising. A belligerent and out-of-touch government is deliberately trying to crush the living standards of public sector workers when paying up makes total sense. A thread…..
The government says there is no money to pay public sector employees. That is nonsense. Of course there is money available. The government creates our money supply. It can create all the money required to pay people. They are lying when they say there is no money available.
The government says paying people will create ‘inflationary expectations' and more pay demands but the only thing that will do that is not paying now. People who settle for less than inflation will of course be back for more pay in the future. Paying in full now will prevent that.
The government says it's unfair to taxpayers to pay now. But the simple fact is if prices rise by 10% and pay rises by 10% then on average profits will rise by 10% and so taxes will rise by 10%. That's not rocket science, but it means inflation-matching pay rises fund themselves.
If, alternatively, prices rise by 10% and wages by 5% then profits rise disproportionately and as they are taxed much less than work government revenues fall and so pay increases are not funded by tax, but the wealthy get a lot wealthier.
There are three consequences of that failure to pay in full. First, the wealthy save their extra money, and there is little or no economic stimulus to the economy as a result, which there would be if a pay rise was given instead.
Second, that means we get into a recessionary spiral because people cannot spend as much in real terms and savings rise, which means money is taken out of use in the economy. The result is, again, lower tax, and so downward pressure on wages (again) and all government spending.
Third, people will come back for pay rises in the future in that case when inflation would otherwise have been eliminated because they will want to restore the value of their wages, but the government will have made it harder to pay up then by effectively cutting tax revenues.
In other words, not paying inflation-matching public sector pay rises right now is the surest way to a) tip us into recession b) harm public sector services c) force people out of employment in them d) reduce growth prospects e) reduce tax revenues f) increase inequality.
And, I stress again, the money to pay these rises now can be created instantly, and that the money in question will be recovered out of additional taxes in due course if that is done.
All that it takes for the government to agree to this is that it understand six things. The first is that the inflation we are suffering now was not created in the UK. We do not, as a result, need to fight it as if it was created by activity in the UK economy.
That, secondly, means we don't have to assume there is an inflationary wage spiral in existence which the government has to crush when that is not the case and there is instead a one-off price shock which people quite reasonably want protection from.
Third, that also means the government should stop its macho ‘we're fighting inflation' stance because as a matter of fact it isn't doing that. Inflation is going away this year because international prices are stabilising. It should stop pretending otherwise.
Fourth, it should in that case also stop the deeply damaging steps it is taking to supposedly tackle inflation like destroying public services and imposing ruinous interest rate rises that will create recession but do nothing to stop inflation, at all.
Fifth, it should instead make the pay deals demanded now, but with the caveat that when inflation disappears pay bargaining returns to a more normal basis.
Sixth, it appreciates that its job is to a) do this b) explain this c) protect the public services d) reassure everyone that this is simply an isolated price shock we have to get through fairly and it will be gone in a year (as it could be).
Most important though there could be added e) there is nothing economically threatening in this. The government is trying to play a role as defender of the economy in all this, hyping the idea that only brave Jeremy Hunt can save us from perpetual inflation. That's nonsense.
This inflation is a singular reaction to a war. That is it. All that this inflation requires is good management, including ensuring people get the pay rises they need to manage its consequences. That is what a responsible government would do. But ours is not responsible.
Instead, ours want to a) crush wages and b) increase profits for large companies whilst c) destroying public services so that d) they can be privatised so e) they and their mates can profit from this whilst f) we all pay for it.
And there is also g) they want to massively boost bank profits by totally unnecessarily increasing interest rates so that h) they can get jobs after government with those banks who will be grateful that i) inequality has risen.
In other words, instead of offering the glaringly obviously necessary pay rises that are required in the public sector, which will pay for themselves, this government is using Putin's war as an excuse to launch its own war.
Its war is on a) the public sector b) the people who work in it and c) other working people, all of whose are to be fleeced to increase the wealth of a few. This is class warfare, disguised in false anti-inflationary rhetoric.
No wonder we are the only economy heading for a recession. Other governments are managing the fallout of war. We're seeing that war used as an excuse for an economic war on the people and institutions of this country.
So of course today's strikes are justified. And the public support for them is also right. They are the counterattack against a government that is trying to crush the people of this country, wholly unnecessarily.
And what is deeply worrying is that Labour seems to want to sit on the sidelines of this, just as it did under Corbyn on Brexit, and just as disastrously.
One day we might get good government in this country. Right now we are being offered government by those seeking confrontation for their own gain who are officially politically opposed by those too timid to point this out. What a mess.
But those on strike have worked out what is going on. They know pay rises are needed now, and can be justified. So good luck to them. They need it. But we all need them to succeed.
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What you write reinforces yesterday’s post on public understanding of economics.
However, on sky news a trade unionist on the picket line pointed out that much of any pay deal would come back as tax. Progress if too slow.
But James Meadway has created some crass economics in his time too
Indeed, he has. But this time, he is on the money, as it were.
See what Mike Parr had to say
Meadway is not on the money
Anyone who denies the rile of the government as a money creator is not on the money, and he does
Oops. I missed that. My bad.
Would it be possible to put numbers to this, in order to quantify the various factors involved? Numerical results for government spending and the resulting tax offset would make your point hard to dispute.
I think it would be very helpful to do this as an aid to the media. In particular, it might aid the BBC who were recently forced to commission a review into how their journalists may be misleading the public – https://www.bbc.co.uk/mediacentre/2023/thematic-review-taxation-public-spending-govt-borrowing-debt-output
This has a link to the full report by Michael Blastland and Andrew Dilnot.
The report, which did not go nearly far enough in my opinion, was a response to a letter from economists, “Economists urge BBC to rethink ‘inappropriate’ reporting of UK economy” – https://www.ippr.org/blog/economists-urge-bbc-rethink-inappropriate-reporting-uk-economy
The findings were even discussed by the aforementioned James Meadway in the Guardian – https://www.theguardian.com/commentisfree/2023/jan/31/bad-economics-bbc-tory-austerity-uk-politics
The BBC’s review included consulting a long list of external interviewees –
https://www.bbc.co.uk/aboutthebbc/documents/thematic-review-taxation-public-spending-govt-borrowing-debt-appendix-external-interviewees.pdf
They seem a rather “eclectic” mix, ranging from Mark Littlewood of the Institute of Economic Affairs and Professor Patrick Minford to Professor David Blanchflower, which might help to explain the rather “average” results.
Can someone please give a plausible explanation of how increasing the pay of teachers, nurses, doctors, firemen, and other public sector workers, leads to inflation? Which prices are going to rise as a result, which would not otherwise have risen anyway?
As we both know, none will
Your comment now adapted into a tweet….
Raising public sector workers’ pay could even be deflationary if council tax and central government taxes were raised in response to this. It would mean less money is available for consumption by the “laws” of demand and supply. There would be less money chasing the same supply of goods unless the public sector workers went on a spending spree which is highly unlikely as some of their extra pay would go on debt repayments, financing already risen prices, and saving.
So, the main counterarguments appear to be:
* public sector workers who are paid a little more will increase demand which will directly and immediately increase prices as any fule kno from the first graph they saw in their first economics textbook (I suspect this simplistic thought is the widest held, but does not address which prices might increase, or how much, and what about private sector workers who outnumber the public workers 4:1, and the supply chain, and debt, and food banks, and how about stimulating demand in a recessionary environment)
* it might inspire increased pay demands from private sector workers which might increase inflation (and this despite public sector pay settlements significantly lagging private sector pay demands)
* public sector workers are already well paid or over paid (seriously!! – but the problems of recruitment and retention show the market already knows the wages are too low for the conditions)
* it would have to be financed by “printing new money” which would lead to further inflation (so tax it back – much of it will be taxed away immediately when income tax and NICs are paid, and most shortly afterwards when VAT is paid on purchased, and eventually as tax on the profits of retailers, and so on)
* we don’t want to repeat the 1970s! (or, some might add, live in Zimbabwe, or Weimar Germany)
Thanks
My view (and I agree with all of the above) is that we seem to be heading for a bonfire of the economy given that recession is being reported as either on its way or already here.
We’ve had a lot of people leave the public sector for the private sector and I wonder how many of them will still have jobs at the end 2024? The recession that is self induced now as far as I can see, is going destroy a lot of people’s lives. And thus, the Tories are walking into a realm of callousness that goes beyond stupidity.
Even if the Tories claim is Hegelian and that the suffering is necessary and that there is some sort of trade off or that we should seek some sense of perverse enjoyment or pride in that, you only have to look at what is happening to those higher up the wealth ladder to know that it is a complete and utter sham.
All in it together?
Definitely not.
We know – and, as importantly, the Government knows that “we can afford it”. So what are we left with is a risk of a price-wage spiral”.
First, it is only a “risk”. Second, “what prices go up if teachers and nurses get a pay rise?” private health insurance and private school fees make up only a tiny part of the CPI basket. Third, the mechanism by which private sector wages are restrained by keeping public sector pay low is a steady drain from public to private sector. With over 100,000 vacancies in the NHS do we really need more ex-nurses stacking shelves of operating the tills at supermarkets?
So, the risk of a wage-price spiral does exist but it is tiny; the risks of failing to pay NHS and other public sector workers are no longer risks – they are reality. A reality that needs addressing today.
Finally, the government tactics look stupid. They will have to settle at some point and a tight-fisted settlement will only come back and bite them a year closer to the election. You raise this point in your blog and I am not sure I have heard it elsewhere (perhaps I should “get out more”). My conclusion is that they government wants continuing strife with workers for electoral gain. First, this is a wrong calculation; second, it is callous and cynical beyond words.
Agreed
I’m no expert in this field but I’m trying to learn, and it seems to me that in addition to Richard’s very cogent arguments these recent articles are relevant and provide further ammunition:
http://bilbo.economicoutlook.net/blog/?p=51204
http://bilbo.economicoutlook.net/blog/?p=51201
https://michael-hudson.com/2023/01/inflations-drivers-on-the-geopolitical-hour/
Thanks for this post. I came to your blog today specifically in response to listening to this lunchtime’s R4 World at One’s reporting on today’s strike action . I wasn’t in the least surprised that a businessman and a Tory peer were wheeled in to provide support for the idea that to give in to strikers would lead to higher inflation but it left me open mouthed in frustration. This idea has been repeated often enough since the beginning of the rail strikes for it now to seem part of national consciousness and as such it has immense power. Who, apart from the unions themselves, and you, Richard, is publicly making the case for paying public sector wage rises?
So much for BBC economic impartiality
Andrew and Clive make very good points about the weak relationship between public sector pay; at least such as teachers, nurses, firemen (how much do rises there impact on CPI)? The Conservatives must be challenged to answer two questions that follow from these points and your Blog Richard:
1) Does the Government believe public sector pay is a significant cause of inflation, or whether prvate sector pay is a significant cause of inflation; and if the latter is significant what they propose to do about it; and if it is not what makes public sector pay more prone to create inflation.
2) If the Government believes public sector pay is uniquely culpable in generating inflation, they need first to prove their case from hard evidence; and second they must go on to demonstrate how we are ever going to be able to provide first rate public services, staffed by well resourced people who are decently paid (since it follows that any actual improvements above inflation will be deemed inflationary; in spite of being the only way to keep experienced staff, or attract good quality candidates to join, since we know they are leaving in droves and there are huge staff shortages; consequences familiar in the private sector, but which they are much freer to fix).
I have been on strike today. I work in a university and today was the second time having been on strike at the end of last year.
Maybe the question that should be asked is why I, as someone who works in administration (in Finance to be precise), am choosing to strike. I am paid well and am able, so far, to weather the cost-of-living-increase storm. I have chosen to strike because I just don’t buy the excuse that universities cannot afford to pay more. I have chosen to strike because I just think there is something extremely dodgy in the valuation of the pension scheme. My experience has been that when the university I work for wants to spend money it finds that money. My experience has been that, although it says that staff are a high priority, its actions defy those words. I just don’t feel that I am valued. Same as many staff. We are a resource to be used until we decide enough is enough and we either retire or leave or, to use a modern phrase, ‘quiet quit’.
Just because you earn a certain salary doesn’t mean that you should not receive a decent pay rise. Those at the very senior levels still get them. So should those further down the pay scales. You get the nice words of ‘you’re valued, we need you’ but when it comes time to demonstrate that with something tangible such as a pay rise the silence is deafening.
Whether we will get an inflation matching pay rise is still not certain despite movement from what was originally offered. I hope it gets sorted soon as, indeed, I hope that all other disputes get sorted soon. Instead of a race to the bottom we should be working together to ensure everyone has a better standard of living. We can do better, we should do better, we must do better.
Rant over.
Craig
Rant welcome
There is another factor worth examining. The shortage of NHS staff (total vacancies) was 133, 400 in September 2022 (HoL Report), but could be 165,000 by now; so it is rising: obviously since pay is such a major problem people are leaving, or are not inclined to join such an ill-resourced, stressful and (because of Government action or inaction) an unrewarding career. In teaching in England, the shortages are currently 40,000 teachers (all grades). These shortfalls turn into unspent Government budgets.
In the NHS, if I assume a £25k average salary (I think I have taken a cautious figure), then the cost of the unfilled jobs is £25k x 133.4k-165.0k = £3.3Bn-£4.0Bn (say). A similar calculation for teachers produces another £1Bn (roughly) shortfall. That is, effectively £3.5Bn-£4.5Bn unspent. Since the jobs are “open”, the Government must have the money. Since these jobs are unfilled and the shortages are rising this unspent money is going to rise. The same calculation could no doubt be carried out in a wide range of public sector areas, increasing the amount of money that must be available to government within current budgets (unless they are budgeting to fail to fill the jobs they offer).
The total sum available from this source is not sufficient to transform the pay offer, but it demonstrates the gaps, and weakness in the Government case. There is no prospect that labour shortages will not continue to rise, to increasing levels of shortfall given the continuation of the current pay policy; compunding the pressure on those who stay, and making the public sector less and less attractive bot to the employes, and to new entrants; it is a vicious spiral that will not end. The government is wrecking the public sector; presumably deliberately. What other conclusion is possible?
I do not claim to have done sufficient research to make a comprehensive case; I am merely sketching a rough hypothesis,
A fair one
So what is government up to? Surely they aren’t so stupid as to think that their policies and actions are beneficial to the country and the majority of its people. There has to be a sinister plan here.
Wholeheartedly agree with your analysis. I believe the government knows all this too. Its calculation is cynical beyond belief. It sees that the next election is lost and has decided to inflict as much harm as possible, at maximum profit to itself and its mates. It probably has no plan beyond this other than to make life as difficult as possible for the incoming government. In effect, it has given up. Labour, unbelievably, has made no challenge. Its absence of any alternative vision may well condemn it to one-term in power only, by which time Starmer will have achieved his aim of not changing anything. And so we sink deeper as a nation. We need desperately to break out of this cycle but our political system will not allow that. We need to change our political system.
Think inflation, and that means CPI. The perplexing issue here is that health is only 1.8% of CPIH. Recreation, culture, restaurants and hotels together account for circa 20%. Think about that. Spending on football is probably near, as high or higher than on health. Then think about the importance of the NHS (which does not play a signficant part in CPI), and its role in economic life. The impact on working people’s capacity to work is a function not just of an individual’s health, but that of their household or family. The NHS may be thought of as the unconsidered, and often unmeasured gatekeeper to the availability of the pool of labour in the economy. I use this as a mere, rough hypothesis. What do I mean? We measure the wrong things.
We do not measure the right things. The political success of neoliberalism depends on people endlessly being fooled into measuring the wrong things.
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I agree with most of your post but am mystified by your remark on Jeremy Corbyn and Brexit. He campaigned vigorously for Remsin all over the country. I heard and saw him at a meeting in Cornwall and at a huge rally. I don’t see how he could have done more.
Utter nonsense
The Corbyn team st this out – and told me they always intended to do so
He failed on this