Guy Standing

If there is one area where the Labour Party should come together it is in the strategy to revive the economy of the sea. Under common law, going way back, the sea, the seashore, the seabed and all in the sea belonging to the country are part of the commons, that is, the property that belongs to everybody, equally. Yet the sea has been subject to a greater ‘enclosure’ than land, and has been subject to a process of privatisation and financialisation that nobody who calls themselves a progressive should accept. This will become even more important since the sea is projected to double its contribution to global GDP to over 10%.

Consider a few facts. Since 1982, the UK owns four million square miles of sea under what is called its Exclusive Economic Zone. That part adjoining Britain is three times its total land area. But successive governments have overseen the privatisation of the blue economy and given vast subsidies to corporations, costing taxpayers billions of pounds and enhancing the profits of foreign capital and financial firms.

Take the seabed. It has always been accepted as a commons, with the government and monarchy required to act as the Steward, expected to respect what is known as the Public Trust Doctrine, that is, to act in such ways as to ensure the commons is kept intact and in good condition. So, why has the left kept quiet while the Crown Estate has been auctioning off thousands of square miles of our seabed, earning an income flow estimated to be £9 billion, while selling rights to multinational capital? More auctions are planned. Details are given in my book, The Blue Commons: Rescuing the Economy of the Sea. Labour should make it clear that it will block further privatisation of our seabed.

Then there is fishing. Starting in 1967, the government operates a complex system by which it hands over what are private property rights as ‘fish quota’ to selected fishing companies. A trick played was that the amount of quota given to companies was based on recorded past catches. Until quite recently, small-scale fishers were not required to keep records of how much they caught.

So, when the current system came into effect, they were excluded from the main ‘pool’ of quota. A result is that today just 25 firms own over two-thirds of all the quota, and five families, all on the Sunday Times Rich List, own 29%. They are given virtual ownership of the fish, denying all small-scale fishermen the right to catch much at all. This was not the fault of the EU’s Common Fisheries Policy; the Leave Campaign lied that it was.

Making the situation worse, the government hands out £120 million a year in subsidies, most going to the corporates. And they have treated the law with contempt. Thirteen of the top 25 firms were caught clandestinely breaking the quota rules, catching 170,000 tonnes of illegal excess fish worth £63 million. They received fines but nobody was imprisoned because under British law it is merely a civil offence, not criminal. And they were allowed to keep their quota. The book gives later cases.

The government slashed the budget of the Marine Management Organisation, the body responsible for policing what happens at sea. And there are just 12 coastguard vessels to monitor 773,000 square kilometres – one for every 64,000. This is de facto deregulation. It should be seen in the context of one fact. Because economic growth has been given precedence over preservation of the commons, subsidies have helped fisheries become more ‘efficient’, meaning more fish are taken than is sustainable. As a result, the hourly catch today is just 6% of what it was a century ago. At current rates, our children will have no British sea fish to eat.             

Then there is aquaculture. Over half the seafood we eat today comes from onshore and offshore fish farming. This is another sphere where foreign capital has come to dominate. It is a form of enclosure. Giant fish farms are doing ecological damage, and big companies, most notably the Norwegian Mowi, only bear half the production costs. In Norway, the government is imposing a 40% levy on the cash-flow of such firms. Labour should match that.  

Then there are our ports and harbours. Thatcher privatised all ports, and most have fallen into the hands of foreign capital, much of it Chinese and much controlled by private equity, a form of finance notorious for seeking short-term profit maximisation, asset stripping and ecological disdain. At the time of writing, there is a scandal in the Teeside, where local fishermen have had their livelihoods destroyed by the port owners dredging and dumping 250,000 tonnes of sediment in the sea, killing off crabs, lobsters and other crustaceans. The port and the river authority are run by the subsidiary of a Canadian private equity company. All ports should be nationalised or at least mutualised.   

Then there are the giant cruise ships and container ships. They use the most polluting ‘bunker diesel’ and keep their engines going all the time they are in port. They cause more pollution than all the cars on our roads. Yet they are allowed to do it. A study showed that throat cancer and other ailments linked to their pollution mean that around Europe these boats are responsible for 50,000 premature deaths each year.

Then there are what will be two big ‘blue growth’ areas. Mining in the sea is very profitable and deep sea mining for minerals needed for electric batteries and much more is about to take off on a major scale in 2023, for reasons outlined in the book. Marine scientists are acutely concerned. But mining companies and big finance investing in them are lobbying effectively.

Here is a predicament Labour must address. Under the United Nations’ Convention on the Law of the Sea, adopted in 1982, the International Seabed Authority was to draw up a Mining Code and regulate what happens in the Deep Sea. The ISA was set up in 1994, but after 28 years it still has not drawn up the Code. This is significant, because the Code is meant to ensure that income from the deep sea is shared by all humanity, so that capital is not the sole beneficiary. Powerful interests have ensured the Code does not exist. Labour should demand it be drawn up without further delay.

Perhaps above all, the development of intellectual property rights in the sea should cause all of us alarm, as it relates to what will become a huge part of the global economy. There are already 13,000 patents in ‘marine genetic resources’, vital for future medicines among others, guaranteeing their owners monopoly profits for 20 years. Over 47% of the patents are possessed by one corporation, the German chemical giant BASF; 76% are possessed by three countries, Germany, the USA and Japan. Britain is nowhere. Labour must have a policy to redress that.

Finally, Labour should develop a strategy that combines revival of the blue commons with a shift to what could be called eco-fiscal policy, by raising revenue from levies on profits from activities that use and deplete common resources. The proceeds should be channelled into a Blue Commons Capital Fund, along lines of what has been done in Norway. From the Fund, Common Dividends could be paid out, as a form of common property right, a basic income by another name. It can be done.      

picture credit : Ed Dunens flickr      

Guy Standing is Professorial Research Fellow, SOAS University of London and a Council member of the Progressive Economy Forum. He is author of various books, including The Precariat: The New Dangerous Class and The Corruption of Capitalism: Why Rentiers thrive and Work does not pay.

The post Labour must Revive the Blue Commons appeared first on The Progressive Economy Forum.

The main rate of inflation in the UK, the Consumer Price Index, fell from July’s 40-year peak of 10.1% to 9.9% in August. This reflects the impact of sharp declines in the global price of oil over the summer, which fed into the falling price of motor fuel. However, food prices are continuing to rise, and the increasing price of food made the biggest single upwards contribution to the overall figure.

The graph below, from the Office for National Statistics, shows the impact – excluding food and energy price rises from the overall figure would bring the reported rate of inflation down by about 4%.

It’s worth stressing that this general picture is the same across the globe: the surge in oil and gas prices, pre-dating Russia’s invasion of Ukraine (see the graph below), and the very rapid rise in food prices are common everywhere. The graph below shows the same measure of inflation across the G7 economies. The common experience is obvious, although Britain is the worst-affected by the rise:

It’s likely, although not a given, that oil and gas prices will continue to fall over the next few months, easing pressure on inflation significantly. (Goldman Sachs has a particularly optimistic view of this, expecting natural gas prices to “tumble” across Europe in the next few months.) In the UK, the energy price cap, to be introduced by government to limit the October increase in typical domestic energy bills to £600 is forecast, by government, to take 4% off the expected rate of inflation over the end of the year. Some of the predictions of a 20% or even higher inflation rates look less likely to come true – though subject to substantial uncertainty, not least around events in and related to the Russia-Ukraine war.

But this doesn’t mean the great inflationary surge is over. Far from it. There are two points to bear in mind. First, inflation is cumulative. If the rate of inflation today is lower than it was last month, that doesn’t mean prices in general are falling. It means the overall rate of increase is less fast. Those higher price rises are likely to be permanent – prices went up 10.1% in the 12 months to July, and went up 9.2% in the twelve months to August. They’ve not actually fallen. Unless incomes from wages, salaries, benefits and pensions rise rapidly, those high particularly high prices earlier in the year will represent a permanent loss to most people’s living standards. And prices, bear in mind, are still rising.

Second, inflation is unlikely to settle back down to the 2% or so level it has been at for the last two or three decades. The reason for this has less to do with the explanations usually offered, around wages being too high (if only!) or there being too much money in the system. It has to do with the way in which our global, money-based economy responds to continued environmental shocks. Many economic activities are getting harder to undertake, as the environment we live in changes. Extreme weather events are becoming more common. Resources, whether mineral or agricultural, are depleting, pushing up prices. Recent shocks to the food supply include:

• South Africa’s biggest locust plague for 25 years attacked farms in the eastern part of the country in April 2022, following “Biblical” plagues across East Africa in 2020. The worsening outbreaks are thought to be linked to increasingly volatile weather conditions associated with climate change;
• The Environment Agency forecasts that extreme heat in 2022 is will reduce UK production of “carrots, onions, sugar beet, apples and hops” by 10-50%;
• Europe’s “worst drought for 500 years” is forecast to reduce output for maize by 16%, soybeans by 15%, and sunflowers by 12% compared to the average for the last five years.

Some of the impacts of climate change can be quite unexpected, like extreme heat drying out the Rhine and so restricting goods transport across Europe, pushing up the price. But whatever the source, or the specific impact, these environmental shocks keep happening, pushing up the real costs of economic activity. In a global economy dominated by credit money, this translates into rising inflation – increased costs becoming rising prices which then pull more money into circulation.

This has, notably, nothing to do with wages: in fact, faced with shocks like this, the best thing to do in the short term is insist wages must rise to compensate, with profits adjusting to carry the strain of reduced outputs and higher costs, rather wages and household incomes. Wealth, rather than household incomes, can act as a better short-term shock absorber and when British companies have over £950bn stashed in their bank accounts – up  £500bn from 2010– there is no good reason to not put that money to better use. In the long term we need far more resilient energy, food, and transport systems – something likely to start with on-shoring production and the switch into renewables.  

The post Inflation down slightly, but the crisis continues appeared first on The Progressive Economy Forum.

The IMF reports that inflation globally continues to be driven by rises in the price of food and energy:

Food and energy are the main drivers of this inflation… Indeed, since the start of last year, the average contributions just from food exceed the overall average rate of inflation during 2016-2020. In other words, food inflation alone has eroded global living standards at the same rate as inflation of all consumption did in the five years immediately before the pandemic.

They show the breakdown of the contribution of both to global price rises on their “Chart of the Week”, as below:

Whilst inflation in other sectors (the IMF economists pick out service prices in the US) has picked up a little, it is overwhelmingly the impact of price rises in two essentials that is responsible for the rise in prices felt across the world. And because these two are essentials, with few options for substitution in either for most of us – everyone has to eat! – their combined impact on living standards is being keenly felt across the globe.

That squeeze on living standards, in turn, translates into falling sales of non-essential items. As prices for things we pretty well have to buy increases, those on lower incomes across the world – which is to say, almost everyone – are reducing what they spend on things they can choose to buy. If, as in Britain, your household energy bill has gone up £1,000 in the last few months, there are limits to how much you can plausibly reduce that consumption, especially with winter in the Northern Hemisphere approaching. People have been cutting back on expenditure elsewhere – for instance on going out for meals, or Netflix subscriptions. The price rise is, in other words, inducing a fall in demand and therefore pushing economies into recession. The National Institute of Economic Research reports Britain is already in a recession, and the US and other advanced economies are widely expected to follow suit.

This is not, according to the standard model of the macroeconomy, what is supposed to happen, or how inflation is supposed to operate. The standard models depend, critically, on inflation appearing as a result of changes in demand. If total demand for goods and services is pushed above what the economy can supply – if, for instance, the government borrows and spends a great deal of money – inflation will rise as firms chase that additional spending with price rises, rather than expanding output.

But what we can see now is something like the opposite of this process. Rising prices of specific goods and services, where consumption isn’t an option but a necessity, is causing falling demand for other goods and services as consumer shift their expenditure around. Inflation isn’t occurring from demand factors, but from changes to the supply of critical goods and services.

This has important consequences, the most obvious of which is that the usual mechanisms to regulate demand will no longer work, or at least be very limited in their impacts. Raising interest rates, as many central banks are now doing, is intended to dampen demand in an economy, since borrowing becomes more expensive (and saving more desirable). But if inflation is arriving as a result of supply shocks, changing demand won’t do much beyond perhaps pushing up unemployment. For the Bank of England and other central banks to be pushing up interest rates now risks creating “stagflation”: a recession, combined with high rates of inflation.

Traditional demand management no longer effective

The flip side of this is that, if policies to restrict demand have little impact on inflation so, too, do policies that stoke demand up. In the standard model, for the government to propose (as the British government did last week) to borrow around £150bn more than it planned, and to use this as a subsidy to household consumption (in this case, by keeping domestic energy prices lower than they would have been) would normally stoke up inflation a great deal. This time, the expected effect is likely to be exactly the opposite: any extra cash earned by households will simply compensate them for the loss of disposable income from rising energy prices, rather than adding to their earnings. Overall demand will be returned to where it was (almost) without the price hike. And since the spending is intended to cut domestic energy prices, inflation will automatically be reduced as a result – perhaps by around 4%.

The usual rules of “demand management”, in other words, do not apply in a world with idiosyncratic shocks to supply of the kind we’ve been seeing – and will continue to see in the future as the environmental crisis worsens. The implication is that government interventions against the operation of the market are likely to become more, not less, frequent in future. When price spikes are extreme, as we’ve seen in energy prices, they start to call into question the functioning of the market system itself – if the expected 80% rise in UK domestic energy prices had been allowed to go through entirely, the shock to demand in the rest of the economy would have been disastrous. Price controls, once utterly taboo in polite policymaking circles, are coming back into favour as a result.

The post Global inflation still driven by food and energy prices. Recession is the likely result. appeared first on The Progressive Economy Forum.

Talk over the last year has been about the disruption to the supply of goods services as lockdowns and restrictions hit production and transport, damaging complex supply chains and creating bottlenecks right the way through the system. As economies opened after the initial shock, rapid increases in demand hit these supply chain disruptions, dragging up prices. This is fairly widely accepted amongst economists as an account of why inflation has risen so precipitously, across the world, from early 2021.

But it’s here that the two or three standard stories start to fall apart. For some Keynesians, these supply chain disruptions were only going to be temporary: a rebalancing of the economy, after covid, as the growth restarted. And in the mainstream Keynesian world, if supply was going to quickly expand, increasing demand – for example, by major government spending increases – was nothing to worry about. Many mainstream economists argued that inflation would only be transitory, as a result. They were wrong.

More pessimistic were the monetarists and the believers in “cost-push” inflation. The former, today a somewhat diminished group, argued that the extraordinary increases in the money supply over 2020, as governments used Quantitative Easing (QE) to help ease their economies through the shock of lockdown (and, implicitly, to help pay for their own expanded spending), would inevitably result in rising prices. “Inflation is always and everywhere a monetary phenomenon,” as Milton Friedman famously argued: he meant that increases in the money supply, more than “real” output increases, would lead to more money chasing the same amount of goods and services, bidding up the prices charged by suppliers. But with QE in operation since 2009 in major developed economies, on a huge scale, inflation over more than a decade in those same developed eocnomies has variously been about as high as today, moderately above zero, and, for a while, actually negative. There is no obvious link between issuing more money and getting more inflation: the causality is not there. Friedman was wrong.

And finally there are those arguing that cost-push inflation would take hold. This depended on the view that rises in a few goods and services would lead to workers demanding more pay to compensate, which would then, in turn, raise costs for businesses and so lead to more price rises. Cost-push could be the mechanism whereby one-off price spikes, caused by the one-off shock of covid, could turn into general and sustained price increases. This isn’t implausible: at the centre of covid’s shock to the economy is its disruption to how work is performed, and one element of that has been the sudden appearance of tight labour markets and at least some workers demanding more pay as a result – or simply walking off their job in the “Great Resignation”.  But labour markets overall, although disrupted in peculiar new ways by covid, are not showing much sign of general wage increases: with inflation rising, the opposite has kicked in, with real wages on average now falling behind price rises. Plausibly, this could change in the future, if pay demands pick up. But we are not there yet and, after a decade of flat or even falling real wages for most people, rising wages today should be the least of anyone’s economic concerns. It’s high time workers took a bigger slice of the pie.

Environmental shocks as a driver for inflation

Instead, as I’ve argued before, I think we are seeing the first years of a new form of inflation, one unknown, I’d suggest, in the years since World War Two when inflation became a general phenomenon in the developed world. (Prior to this point, prices had tended to track the general economic activity – rising in booms and falling in slumps. After WW2, inflation became pretty much continual.) It is price rises driven by successive, seemingly idiosyncratic shocks that have arisen as a result of environmental instability. Covid is the most obvious example of this; if we think of the virus as a disruption to the environment that economic activity takes place in, we can see it has acted as an enormous ecological supply shock – and one whose impacts are unlikely to fade any time soon. But in the same way we can see that (for example) the extreme weather events that have disrupted coffee or wheat production, or semiconductor manufacturing, are also smaller-scale examples of this kind of ecological shock. Each one seems idiosyncratic – some unique event disrupting production at some point in time. They’re nearly always reported like this, as CNN do here for disruption to coffee production – as just another extreme weather event that will fade away and allow normality to return.

But of course we know “normality” isn’t coming back. All the environmental modelling tells us extreme weather – along with desertification and greater constraints on food production – will worsen over time, as the climate rapidly changes. That means we should stop thinking about this or that extreme weather shock as a one-off disruption to production, whose impact will eventually wash out of the system, and as simply one more shock in an environment that produces them at an increasing rate. Prices rise as a result of one shock and then, as that impact fades away, another flood or drought occurs, disrupting prices of some other good or service. Taken in total, the overall impact is to force up prices: inflation remains permanently higher on average, but most likely more volatile, as result.

The existing mainstream models don’t deal with this. Putting up interest rates isn’t going to put out wildfires. (Indeed by making investment more expensive, and so restricting future supply, over the longer term higher interests could actively make inflation of this kind worse.) The best responses involve both building in more resilience to supply – removing just-in-time methods and creating more slack in the system overall. But also, if we have a concern for social justice, attempting to spread the costs of these shocks more evenly, leaning them towards the broadest shoulders. That would mean pay rises for most of those in work and more comprehensive insurance for those not in work – preferably as a form of Universal Basic Income.

And if idiosyncratic shocks are driving general price rises, there is a solid case for specific and selective controls on prices subject to shocks, redistributing the cost of those rises. Interestingly, the UK government appears to be looking at one such mechanism, intended to regulate household gas prices when the wholesale gas price spikes. Their plans are (inevitably) geared towards trying to protect company profits – thus exposing taxpayers to more risk than is needed – but at least in principle the idea of price regulation and social insurance against shocks is a good one to think about.

The post The economic mainstream is getting inflation wrong appeared first on The Progressive Economy Forum.

Latest inflation figures from the Office for National Statistics put average price rises in the 12 months to September at 4.2%, its highest rate of growth since November 2011. Back then, a post-financial crisis surge in prices pushed inflation to above 5%, and it stayed high until mid-2014 when OPEC’s decision to maintain oil production helped bring down prices across the globe.

Whilst last year’s lockdowns and subsequent recessions kept inflation very low, as we would expect – with spending falling dramatically, there is little to no pressure to raise prices – reopening since earlier this year has coincided with a dramatic rise in prices. Despite some optimistic claims that this would be “transitory” shift in prices, dependent solely on the unusual demand conditions caused by reopening, nearly 12 months it is harder to sustain the view.

Some of this is due to Brexit, which even prior to Britain’s exit from the EU had pushed domestic inflation up as a result of the fall in the value of the pound, relative to other currencies, after the 2016 referendum. But most of it is from the bigger impact – global, even – of covid-19. Developed countries across the world are seeing similar combinations of supply chain stresses, shortages of key goods, rising energy prices, and higher inflation.

The big question in all this is whether these price rises will fade away as the initial shock of the pandemic wears off – perhaps stretching out into next year, but not much further – or whether they will become entrenched, moving us into a permanently higher inflation regime.

Incorrect models and tighter monetary policy

More conventional Keynesian economists would be far happier with a temporary surge in prices, since the usual belief is that price rises register an economy that is “overheating”: too much demand chasing too little supply and that (therefore) governments should either cut their own spending, raise taxes or, if they are unwilling or unable to do either of those two, to raise interest rates. So persistently high inflation tends to lead to demands for interest rate rises – which, of course, are now starting to happen. Central banks’ own mandates are typically, in this era of their “independence”, modelled on the “Taylor Rule” linking interest rates to inflation, with rates increases mandated as inflation also rises. The Bank of England avoided this temptation at last month’s rate-setting meeting of its Monetary Policy Committee, but the voices demanding a tightening of monetary policy are getting louder.

Latest in this growing chorus is the Financial Times’ widely-read chief economics commentator, Martin Wolf, who sees today the first glimmerings of a return to the 1970s: “as price rises became more general and real wages were being eroded, workers became increasingly militant. Finally, a general wage-price spiral became all too visible.”

Under circumstances where strike numbers in Britain remain close to their lowest since records began, where union membership in the private sector is amongst the lowest in the developed world and – crucially – where average wage growth has been near-zero for a decade, a “general wage-price spiral” should be the last concern anyone has right now. Frankly, a little more “union militancy” would be good for the economy – pay rises would pull back on skyrocketing inequality, and put more money into the hands of people who are more likely to spend it.

But Wolf, instead, sees the problem of pay rises as being one in which inflation can move from being merely “transitory”, driven by exceptional post-lockdown circumstances, and moves into a permanent or at least long-run problem. He cites US economist Jason Furman as noting a tightening of labour markets, with “seven unemployed workers for every 10 openings”. Rattling around in people’s heads is the idea that, if pay rises are won by workers, these will turn into firms putting up prices, causing further demands for wage increases, and so forcing firms to raise prices again, and so on. This is the “wage-price spiral” Wolf refers to.

But the evidence from the last decade is that the British labour market, at least, has not been functioning like this. From mid-2014 onwards, as the OPEC “reverse oil price shock” worked its way through the global economy, inflation has consistently undershot both forecasts and the Bank of England’s own target – and this despite ultra-loose monetary policy of near-zero base rate and huge Quantitative Easing. Austerity, and the public sector wage freeze, certainly played its part, undermining the ability of those seeking work or in employment to bargain for higher pay. But so, too, does the “flexible” labour market, especially after 2010, with its mass creation of deeply insecure, low-paid work like the notorious zero hour contracts.

A model of the economy that didn’t include this extraordinary undermining of labour’s bargaining position – that instead assumed something closer to the labour market institutions of the 1970s were still in place – would be one that persistently overestimates inflation. This happened in the 2010s, and, to the extent that people think a wage-price spiral is a realistic possibility, and blame inflation on it, I think it’s happening again today. And to the extent that this leads to inappropriate calls for monetary policy tightening, it will cause problems today, too.

The real causes of persistent inflation

However, Wolf and others are right to worry about inflation becoming persistent, even if the mechanism they imply isn’t quite there. One part of this is the argument made by Charles Goodhart and Manoj Pradhan about demographics: that the exceptionally loose labour markets of the last forty years, the product of two enormous one-time expansions of the global labour force as China and Eastern Europe were integrated into it, are now tightening as this demographic exception approaches retirement. There is no second China out there. There will be no further loosening of labour markets in the future. And so wages, and – in their argument – prices and interest rates will finally start to rise.

It’s an interesting (and intuitive) argument that, incidentally, calls into question some cherished beliefs about the role of central bank “independence” in promoting low inflation over the last two decades or so. And for those with one eye on inequality, it holds out the possibility that the great shift in power towards capital and away from labour that characterised the neoliberal period may finally be coming to an end. This would, of course, over time move us back towards a kind of 1970s world, with higher inflation, higher interest rates – but also, potentially, stronger worker organisation able to win higher pay and better conditions, just like Wolf and others think already exists.

But the other part is significantly less positive. What Wolf calls “special factors”, citing the “surging price of gas” are likely to become less special over time. If there’s a disconnect between some conventional macro modelling and the reality of how labour markets have behaved in the last decade or more, there’s an even bigger disconnect between macro modelling and the reality of environmental decay. As a point of construction, conventional macroeconomic models tend to assume that, whatever is happening today, strong forces in the economy will pull it back to a stable growth path in the long run. But for this to happen, the conditions for growth to occur must themselves be stable. When all our environmental models are saying (for example) that extreme weather events, crop failures and disease outbreaks are all going to become more frequent, the assumption of environmental stability no longer applies.

So if (for another example) there is a frost in Brazil that has damaged coffee production, helping drive its price up to a seven year high today, that is a one-off shock that we would expect to fade away over time – prices would rise once, but the impact on inflation would disappear, since inflation measures price increases over time. But this seemingly one-off, specific environmental shock will be followed by other, similar shocks in the future, most likely at an increasing frequency: more droughts, more frosts, more wildfires and so on. The result will be a sustained increase in costs and prices: or, in other words, higher inflation.

It’s environmental breakdown that we should be worrying today’s inflation hawks, not the possibility of workers winning pay rises. And the prescription for dealing with this kind of ecological ratchet on prices is the exact opposite to the hawk’s usual package: not interest rate rises, but low rates to encourage investment and expand supply – particularly targeting ecological investment, as the People’s Bank of China is now doing. And not panic about rising wages but an insistence that the costs of ecological decline should be borne fairly, with pay increases across the board – paid for out of profits and interest as needed.

The post Inflation is here to stay, but not for the reasons you think – a response to Martin Wolf appeared first on The Progressive Economy Forum.

Good news as the Bank of England’s Monetary Policy Committee (MPC) voted to once again hold its base rate steady at 0.1%. This comes a day after the US Federal Reserve Board, the equivalent rate-setter for the US, voted to also leave rates untouched.

After months of warnings that a rates rises was imminent, with inflation now well above the Bank’s 2% target, this was a wise decision by policymakers. As the Bank’s governor, Andrew Bailey, has previously pointed out, with inflation coming in from the shocks to supply over the last 18 months or so, there is little fiddling with interest rates can immediately do:

In considering how to use monetary policy, it is also important to understand the nature of the shocks that are causing higher inflation. The shocks that we are seeing are restricting supply in the economy relative to the recovery of demand. This is important because monetary policy will not increase the supply of semi-conductor chips, it will not increase the amount of wind (no, really), and nor will it produce more HGV drivers. Moreover, tightening monetary policy could make things worse in this situation by putting more downward pressure on a weakening recovery of the economy.

He’s absolutely right: interest rate rises would do little to dampen the inflation we have today, but would hurt the economy more generally. But this didn’t stop Bailey making hawkish noises over the last few months. Nor did it stop the Bank’s new chief economist, Huw Pill dropping very substantial hints to the FT that he was minded to push for rates rises.

Nonetheless, by a 7-2 vote the MPC’s great and good – which include Bailey and Pill – have decided to hold off on interest rates, no doubt helped along by the Fed’s decision. Not everyone is happy. Some of traders lured into thinking they had a one-way bet on Bank of England rates rises have been whinging to the press, claiming that Bailey’s “credibility” would now be on the line.

Pressure will be on the MPC to shift rates upwards at their December meeting, since it is wholly unlikely that inflation will be coming down any time soon. But it must be resisted: the far bigger risk to the Bank’s “credibility” is, as Charles Goodhart and Majoj Pradhan have argued, if the Bank decides to incrementally raise interest rates but fail to materially influence inflation – as it surely would do.

Bailey has let it be known that rates rises will be heading down the line “in coming months”. But if the logic of holding steady today – that inflation is the result of supply factors, not demand – the same will hold in a few months’ time. For those who take a pessimistic view of likely future supply constraints, the same will hold at any point in the foreseeable future.

Interestingly, the Bank itself also looks increasingly pessimistic. Its forecasts for damage from covid-19 have been revised upwards, to the (in my view, still far too low) level of a 2% permanent loss to GDP from the virus, up from 1% and matching the Office for Budget Responsibility’s assumptions. And the Bank’s view of supply growth in the medium term is low, set at 1.75% as compared to 2.75% it has been estimated as in the decade before the financial crisis.

As this reduction in potential growth suggests, the economic slowdown had happened before covid. What seems likely (although the Bank do not yet accept this) is that covid, alongside the growing frequency of extreme weather, crop failures, and further disease outbreaks as the planet’s climate changes will all turn into hard barriers to supply growth (and therefore long-run growth overall) in the near future. Either way, its short-run forecasts for growth have been revised down for the next four years, hitting just 1.1% growth by 2024 (Table 1.A).

The post Bank of England holds rate steady, more pessmistic about the future appeared first on The Progressive Economy Forum.

The UK’s official measure of inflation, the Office for National Statistics’ Consumer Price Index (CPI) came in slightly lower than widely anticipated, falling from 3.0% in August to 2.9% in September. This is good news, not so much for the (slight to non-existent) impact it implies for most people’s living standards, but because it will help stay the hand of the Bank of England’s Monetary Policy Committee (MPC), otherwise poised to start cranking up interest rates for the first time since covid-19 struck.

Like Pavlov’s dogs, the tinkle of the inflation bell has set the hounds on the MPC slobbering over the prospect of rates rises, writing in its September report that “The MPC’s remit is clear that the inflation target applies at all times” and so “some modest tightening of monetary policy… was likely to be necessary.” Bank of England Governor Andrew Bailey has doubled down on the message since. This is despite Bailey also recognising that such rates rises would be useless, telling the financiers and academics of the Group of Thirty that “monetary policy cannot solve supply-side problems”. “Supply-side problems” describe precisely the kind of inflation we have right now: driven primarily not (as in the traditional models) by “excess” demand pulling up prices, but by severe supply-side constraints. In other words, covid and other shocks have made it harder and more expensive to use energy, transport goods, make things, and to ask people to perform some tasks (working in bars, for example). The result is that prices have risen.

It takes a small feat of cognitive dissonance to both recognise this supply-side reality, and then carry on acting as if we faced a demand-side problem. But interest rate rises would be worse than useless – and quite plausibly even worsen inflation, setting the setting the British economy up for the dreaded “stagflation” over the foreseeable future. We could expect overall growth to be squeezed by interest rates rises as a result of borrowing becoming more expensive. But because borrowing is more expensive, investment will be squeezed: yet the one thing that might, plausibly, begin to ease supply-side problems is investment. By investing in new equipment, new buildings, new technology and so on, investment by companies is one of the ways that the supply of goods and services can grow over time, and the price of those goods and services be brought down. So by making investment harder today, we are reducing the potential supply of goods and services in the future – but restrictions in supply are precisely what is causing inflation today.

Future instability

For now, a slight decline in the rate of inflation might stay this prospect. But there is a bigger issue. The MPC believes that “that current elevated global cost pressures will prove transitory.” In other words, that the current upsets and dislocations to the supply of goods and services will prove to be a temporary blip before the economy returns to its “trend” path of continual growth.

But we know covid will remain with us now, in some form, for the rest of our time on the planet – barring some fantastical new virus-zapping technology, the disease will circulate in endemic form alongside the other six coronaviruses we are known to contract. The path to something like peaceful coexistence – SARS-Cov-2 circulating in relatively benign form – is hardly likely to be smooth, however, as more infectious variants circulate, vaccine effectiveness wanes, and indeed vaccine distribution globally remains disastrously bad. The hard, global shocks of the 2020-21 lockdowns are not likely to return with the same severity, but clearly life will remain unsettled for some time.

And we also know – or at least can forecast with a high degree of certainty – that the environment is going to become more unstable. The number of environmental shocks now hitting global supplies is dramatic: drought in Taiwan and frost in Texas restricting semiconductor production; drought in Canada hitting wheat production; frost in Brazil hitting the production of corn, coffee and sugar, driving up global food prices. Bailey, noting the chaos, has joked that he was expecting a plague of locusts to appear – but of course they already have,  swarming across the Middle East and East Africa last year, destroying crops and devastating farmers’ livelihoods on a scale not seen for 70 years. Climate change has been plausibly blamed, with cyclones in southern Arabia in 2018 providing the perfect damp conditions for a desert locust population explosion. These swarms then spread outwards over 2019 and into 2020; the cyclones, meanwhile, are linked to the Indian Ocean Dipole, describing the difference in sea surface temperatures between the Arabian Sea and the eastern Indian Ocean. Severe differences in these two temperatures, attributed to climate change, are thought to have driven both Arabian cyclones and bushfires in Australia.

None of this is “transitory”. These sorts of supply-side shocks are here to stay, and the environmental modelling we have says they will worsen with rising average global temperatures. Yet our conventional understanding of economics lags far behind the changed reality: the models economists use, including those in the Bank of England, predict a future in which whatever dislocations are happening right now, the economy returns smoothly to a stable, balanced growth path. It’s not just that the MPC are likely to be (sadly) wrong about the “transitional” nature of current supply shocks; it’s that economics in general has serious problem even conceptualising supply constraints as anything other than temporary and conditional. Economic modelling – the social science of economics as such – is built on the fundamental assumption of a benign global environment. What happens when that no longer applies?

The post Inflation, interest rates, locusts appeared first on The Progressive Economy Forum.

For instance, the best way to produce a roll back of greenhouse gas emissions is to penalise those emitting them so that they will be forced to curb them. Impose high carbon taxes or levies. Why is that not being advocated and done? Because industrial lobbies hold sway in pro-capitalistic governments. But the UK government has rigidly maintained a freeze on fuel duty for eleven years in a row, costing about £4.5 billion in lost revenue if they had just adjusted it to inflation. But it needs to be much higher to have any positive effect on pollution. Talking of net zero when you are doing that is infuriatingly hypocritical. You cannot be serious!

The seas are being polluted and made acidic because horrendously large container ships, ghastly 13-story cruise liners and vast long-distance industrial fishing fleets from the rich countries, including China, are plundering the oceans, pumping out poisonous diesel and other fuel and waste, killing people as well as precious marine life. They are only able to do that because they receive huge subsidies from their governments and regional bodies. Those subsidies could be stopped tomorrow morning. Why are they not? Because governments are in cahoots with industrial fishing companies. Why are giant fishing factories allowed to trawl the seabed, destroying areas of natural carbon sequestration, the biggest on our planet? Because governments are representing the interests of their capitalistic industries, and choose ‘jobs’ and GDP growth over preservation.

The solutions being proferred are no less dishonest. For instance, governments boast, as the UK’s has repeatedly done, that they are protecting the marine environment through setting up marine protected areas (MPAs). These are mostly fraudulent, since in many of them industrial-scale seabed trawling is being allowed. Nudge, nudge, Jim, we will call it protected; don’t worry. An international study found that destructive industrial fishing was much more prevalent in MPAs than areas not protected. Indicative of the pattern, Britain slashed funds for monitoring the sea, and today has just 14 vessels to patrol millions of square miles it claims to own. 

Then there is the protection of nature through so-called ‘national parks’, where the air is supposedly fresh, the wildlife thriving and you and I are free to roam. In the UK, severe budget cuts under austerity meant the maintenance and retention of those and others suffered terribly. There are 27,000 parks in Great Britain, and a survey found that 92% of all park managers had been unable to maintain them during the austerity era. That is deliberate action by government. Do not weep crocodile tears. Put the money back, and if necessary (which it is) raise taxes on the wealthy.

That is what must be done. But sadly, we cannot expect pro-capitalistic governments, funded by affluent plutocrats who live a life of absurd affluence because rentier capitalism is allowed to flourish, to do anything serious. What we can expect is plenty of earnest statements about the desperate plight of humanity and nature. It is tantamount to St.Augustine’s prayer, ‘Please Lord, give me chastity and continence, but not yet.’ In this context, it means let me not be the instrument of what must be done.

One trick they should not be allowed to play with success in what is called the geo-engineering vision, the view associated with Bill Gates and others, that we need not be too worried because capitalism will find technological solutions. Something close to a variant of this is a Green New Deal and the view of a future of ‘green jobs’ and renewable energy. This is a version of having your cake and eating it.

The existing public rhetoric risks strengthening what is known as Sinn’s Green Paradox, named after the German economist who first raised it. This is something like as follows: If you state that society is going to cut pollution or global warming by some future date, with the intention of phasing out fossil fuel consumption over a period of many years, you give incentives to energy companies to increase their short-term production.

It is relevant to note that while the three major energy corporations in Europe – Shell, BP and Total – have committed to shifting into renewables, and to whatever is meant by net zero by 2050, if not earlier, they have actually been increasing their investment in oil and gas exploration and production. The reason is quite simple: That is where the big profits are. And they know that profits from gas and oil are higher than from renewables, one reason being that the latter rely on a natural commons that at present is still free for anybody – air, wind and sunshine. The economic return to oil and gas will remain higher and be less risky.

The paradox is made greater by the eerie fact that the major energy companies are saying that their investment and production of renewables will depend on generating more cash (profits) from hydrocarbons, as BP announced quietly in one of its financial strategy reports last year. So, we should produce more fossil fuel energy now so that we can switch to renewables later. There should be no need to explain how catastrophic such reasoning will be.

The answer must be to reduce profits sharply and immediately, through steep carbon taxes and much tighter regulations. Unless this comes out of Cop26 in Glasgow in November, we should judge it a dismal failure. What hope can we have with our pusillanimous political leaders, most in posts because of their links to financial capital and big industry? Promising a future of ‘green jobs’ and even a fossil fuel non-proliferation treaty, committing countries to no new coal power power plants, no new oil and gas operations and no airport expansions, may be laudable but will amount to kicking the ball into the long grass.        

Keynesians have their humble pie to eat as well. Trying to accelerate GDP growth and move towards so-called Full Employment will mean more resource-depleting labour – jobs – and continued high priority to industrial investment and consumption. What we all have to realise is that so-called green investment is actually contributing to the ecological collapse. Take offshore windfarms. They require vast amounts of steel and minerals to build and operate, and they destroy pristine seabeds. Yet they are being given the go-ahead without proper environmental impact assessments.

Unless we have public statistics on the carbon footprint and ecological cost of building giant wind turbines, the cost-benefit estimates of renewables is dishonest. Making the resins for the giant wind turbines requires huge amounts of crude oil, while the copper, iron and other ores needed requires a vast amount of mining. Similarly, solar panels require a huge amount of non-renewable raw materials. And there is something rarely mentioned, as far as I can see, which is that wind turbines and solar panels have relatively short lifespans, in the region of 20 years, so requiring ecologically costly replacement long before the arbitrary target date of 2050. As for the prospect of generalised electrification, the need for millions and millions of batteries will require vast quantities of lithium, which requires an extraordinary amount of water to produce. Lithium mining is ecologically lethal.

While vital, a key lesson is that energy switching cannot be the main answer. We need a society in which there is less demand for energy per se. It is a facile error to pin all or most of the blame and responsibility on the fossil fuel industry. It is the way we live and work in the 21^st century that must change as well. That means nothing less than the dismantling of global rentier capitalism and the income distribution system that it embodies. We must start by acknowledging that if most of the income from GDP growth goes to the owners of private property – financial, physical and ‘intellectual’ – we will continue to depend on high growth to raise living standards of those in poverty and insecurity, which will be fatally self-defeating. We need policies to capture the rent, to recycle the rent and to dethrone GDP growth from its pedestal of policy thinking. Nothing less will do.

Guy Standing is a Professorial Research Associate at SOAS University of London, is a PEF council member and a Fellow of the Academy of Social Sciences; he is author of The Corruption of Capitalism: Why Rentiers thrive and Work does not pay (London, Biteback, 2021). Email: guystanding@standingnet.com

photo credit : flickr Tony Salas

The post The Threat of Extinction: Dismantle Rentier Capitalism Now appeared first on The Progressive Economy Forum.

Jan Toporowski

TO PURCHASE THIS BOOK click here and use AGENDA25 to obtain a 25% discount

The post The Return of the State – authors introduce their chapters appeared first on The Progressive Economy Forum.

Robert Skidelsky

Will Hutton

The post The Return of the State – Council members explain the purpose of the book appeared first on The Progressive Economy Forum.