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The Inflation of Free Market Falsehoods

Thomas Perrett explores how the current cost of living crisis has spurred a new wave of Thatcherite economics

Prime Minister Boris Johnson and Chancellor Rishi Sunak. Photo: Leon Neal/Reuters/Alamy

The Inflation of Free Market Falsehoods

Thomas Perrett explores how the current cost of living crisis has spurred a new wave of Thatcherite economics

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Britain faced the largest wave of rail strikes in a generation last week, following disputes over post-pandemic pay and working conditions. The Rail and Maritime Transport Union (RMT) advocated for a 7% pay rise for rail workers ahead of an expected 11% increase in inflation. More strikes could follow.

The RMT has argued that the source of these disputes “is the decision by the Tory Government to cut £4 billion of funding from our transport systems – £2 billion from national rail and £2 billion from Transport For London… We want a transport system that operates for the benefit of the people, for the needs of society and our environment – not for private profit”.

The union has also accused the Government of “attacking terms, conditions and working practices in a form of internal fire and rehire” and conspiring to “savage the Railway Pension Scheme and the TFL scheme, cutting benefits, making staff work longer, and poorer in retirement, while paying increased contributions”.

The Prime Minister responded by saying the strikes caused “significant disruption up and down the country” and “all sorts of unnecessary aggravations”. He stated the RMT had made it “more difficult for people to get to work, risking people’s appointments, making it more difficult for kids to sit exams”.

The strikes have followed an extended period of flatlining real wages and soaring inflation, which has reached a 40-year high of 9.1%.

Ahead of a recent Cabinet meeting, he warned that “sustained higher levels of inflation would have a far bigger impact on people’s pay packets in the long run, destroying savings and extending the difficulties we’re facing for longer”. 

The Wage-Price Falsehood

In Blackpool earlier this month, the Prime Minister delivered a speech in which he claimed that pay rises would “fan the flames of further price increases”.

“If wages continue to chase the increase in prices, then we risk a wage-price spiral such as this country experienced in the 1970s,” he said.

There are some parallels between the late 1970s and the current economic climate – high inflation brought on, in part, by external geopolitical tensions, allied with union activity.

Indeed, Johnson recommended implementing tighter monetary policy to control inflation, as Margaret Thatcher had done. “When a wage-price spiral begins there is only one cure and that is to slam the brakes on rising prices with higher interest rates,” he explained.

However, the presumption that high levels of demand have increased prices and that resolving an inflationary crisis must also involve curtailing the bargaining power of unions such as the RMT, misattributes the cause of inflation. 

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Economist Grace Blakeley recently observed in Tribune that the “consensus since the 1980s has been that interest rates are the only tool available to policy-makers in the fight against inflation. Raising interest rates increases borrowing costs, which is supposed to discourage investment, reducing demand for raw materials and labour and bringing down prices”.

Disputing the effectiveness of hiking interest rates, Blakeley argues that “the only thing that the Bank of England would achieve by raising interest rates would be to engineer a recession, which might help the fight against inflation but only because it would increase unemployment and constrain growth”.

Boris Johnson saying that inflation is due to rising wages shows that the Government has reverted to a time-honoured Thatcherite tradition of attacking organised labour under the guise of mitigating inflation. 

The inflationary crisis has not been caused by rising demand, but by skyrocketing corporate profits, among other factors.

While real wages have fallen at their fastest rate in more than two decades, high prices for oil and gas in the wake of increasing post-pandemic demand and the war in Ukraine have allowed fossil fuel companies to rake in record profits. Shell’s profits in the first quarter of 2022 rose from £2.6 billion to £7.3 billion, a near tripling of the same figures for last year, alongside similar profits for ExxonMobil and BP.

A combination of supply chain shortages, rising energy prices and subsidies for large corporations by central banks has driven prices to record levels. According to the trade union Unite, UK-wide company profits account for 58.7% of the inflation which has taken place in the last six months, with labour costs accounting for just 8.3%.

Meanwhile, the Government has been criticised for issuing a meagre tax on firms experiencing record profits. The Chancellor’s decision to tax fossil fuel profits at an extra 25% has coincided with an 80% tax break to overall fossil fuel investment, according to Greenpeace, as Britain still has the lowest government tax take from oil and gas companies in the world.

This has also stymied the Government’s ability to phase-out future fossil fuel production, as companies are incentivised to make significant future investments in extractive processes.

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A Pretext for Thatcherism

The myth of the wage-price spiral has often acted as an incentive for the implementation of free-market economic policies. Margaret Thatcher’s attacks on the trade union movement during the 1980s also followed a period of inflation and concerted strike action. Thatcher’s dismantling of collective bargaining rights in turn prompted the long-term wage stagnation that has, in part, motivated present conflicts.

As I have previously discussed in these pages, Boris Johnson’s Government seems intent on reviving elements of Thatcherite economics such as the ‘Right to Buy’ scheme, which alongside the deregulation of the financial sector has caused house prices to skyrocket relative to earnings, helping to lock successive generations out of the housing market. 

Indeed, free market lobbying group Conservative Way Forward (CWF) reportedly influenced the Prime Minister’s speech in Blackpool, as Conservative MPs mobilised to launch a tax cutting pressure group.

CWF is connected to Conservative MP Steve Baker, who also leads the Net Zero Scrutiny Group, a climate-sceptic organisation, and has criticised Johnson’s Government for allegedly implementing a “Miliband level of taxation” – in reference to the proposed policies of former Labour Leader Ed Miliband.

The RMT’s strikes have demonstrated that, not content with symbolic gestures, key workers are determined to fight for material change to pay and working conditions in the aftermath of the pandemic. 

Yet the Government, having paid lip service to the necessity for fairer wages, appears determined to revitalise the economic policies of the 1980s by hiking interest rates and pinning the blame for rising inflation on organised labour.

Despite evidence that corporate profits and supply side shortages, exacerbated by the war in Ukraine, have caused prices to soar, the Government can see no alternative but to revive the corpse of Thatcherism.

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