Even with an economics qualification, it’s hard to imagine the Bank of England’s action yesterday. They predicted a recession longer than the global recession of 2008-2009, and comparable in severity to the recession of the early 1990s.
They predicted a fall in real wages of 8% and an increase in unemployment of a million. Real household incomes will fall by more than 5%, the biggest drop since the 1960s.
Yet that was not the backdrop for lower interest rates and emergency measures to protect households and the economy, but rather a rate hike of half a percent – the most steep rise since 1993.
Pressed to explain this madness, Bailey threatened pain if necessary in order to prevent even worse pain in the future.
We have heard this before. Clearly, in the aftermath of the global recession, Chancellor Osborne (supported by a former governor) hit the working people with his austerity policies. The result: the worst wage squeeze in over two hundred years, the weakest recovery and the worst increase in public debt in a hundred years. Well, we weren’t in the same boat at all. Wealth soared £6 trillion.
As if that were not enough, we have again been warned that Brexit will make us poorer and that at some point we will have to pay for the measures that have protected the economy during the pandemic.
But even on the face of it, Bailey’s argument doesn’t hold water. Interview after interview, he fetishized the “second round effects”. He said central bank policy could of course not affect global prices, due to the strain in the global supply chain post-pandemic and now Putin’s war in Ukraine. But instead, the Bank of England must be vigilant against wage increases and the danger of inflation becoming ’embedded’.
But outside of the city’s soaring bonuses, regular wage increases are only up 4.3%, a third of the forecast inflation peak of 13.3%. In real terms, wages are collapsing.
Instead, the Bank of England is hammering interest rates in the face of a rise in wages in theory that barely happens in practice. We might remember that it was the same theory that gave us the global financial crisis and austerity.
In fact, this theory is completely upside down. We have repeatedly warned that without a pay rise, workers will simply stop spending on anything non-essential and this risks tipping us into recession. And indeed, that is exactly how the Bank of England explains the terrible recession it now expects – it even calls it a “key judgment”.
We have heard that some companies facing labor shortages are eventually forced to pay workers better and improve working conditions and even introduce new investments. And that they were able to raise the prices to pay for that. But we are also hearing now that this may be an extremely small window as companies look to the future and see demand plummet.
A few months ago, Bailey caused outrage when he warned the workers against any attempt to obtain decent salary increases. Today he went further and blamed workers who managed to get decent pay rises for causing hardship for those who couldn’t.
We haven’t heard a word from the Bank about companies raking in excessive profits, or about any increased wage growth being driven solely by the high end, or about the city’s vast bonuses. Even based on the Bank’s own theory, wages can rise without causing inflation if companies limit their profits. And wages and profits could rise if productivity improves, although there is obviously a dismal track record here.
There has never been a better advertisement for joining a union.
Reverse Bailey’s argument: join a union so you don’t lose. Give us widespread sectoral collective bargaining so that more workers are protected, and for those who are not, we need a decent minimum wage and strong social security to help the non-wage earners.
If there was ever a sign that our current model is bankrupt, this is it. And in the meantime, Tory leadership candidates are only appealing to failed dogmas and false heroes, they are in effect attacking the Bank of England for not acting savagely enough. They do not look to their own part in the cause of this immense disaster, or to material action to find a new way forward.
On the other hand, every labor leader wins public sympathy when he warns that a system that gives so little to those who do the work and so much to those who don’t is a failed system. We know from the past that a better balanced society means a better economy. Ask Clement Attlee.
After 2008, we failed to get this change. It cannot happen again.