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.  

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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.

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The policy is uniquely flawed, with multiple faults. Of course, if government throws over £60 billion of subsidies to a minority of firms and workers, that will be popular with the recipients. But a scheme should be judged by what it does for the many, not the few, and for its opportunity cost.

The government’s furlough scheme was possibly the most regressive social policy in modern history. Recall that it paid 80% of the wage of those earning up to £3,000 a month. So, it meant that somebody earning £3,000 received £2,400 only if they did no labour, whereas somebody earning £800 a month received £640. So, a high-wage earner received nearly four times as much as a low-income one. And for a low-income earner losing £160 would make it less likely they could service debts or pay the rent, risking homelessness and abject impoverishment. Under the scheme, those laid off or without employment contracts obtained nothing, as did those on Universal Credit or legacy benefits. My grandmother would have described this as ‘nutty as a fruitcake’.

If the Left believes in policies that reduce inequality and that increase economic security for everybody, the CRCS should be regarded with contempt. Perhaps, 11 million people gained income from it or the equally regressive scheme for the self-employed. That means only a minority of the labour force benefited, or a much smaller minority of the population. One could understand the IMF backing such a policy, because it props up capitalism. But why should the Labour Party, the TUC and progressive commentators do so? Surely, they cannot be indifferent to inequality

The inequities are also extensive. Suppose you worked in a firm struggling to survive and had your earnings cut by 30%. You were penalised relative to those furloughed, who only lost 20%. In which economics textbook or ideology would that be regarded as fair? The scheme was also unfair to those who lost jobs, who obtained much less in benefits, simply due to bad luck.

There is also something Labour and others should take up. With benefits for the unemployed and others in poverty, the government imposes strict conditions on those wanting help, or sanctions them by denying them benefits. In the case of help to firms, they do not apply any behavioural conditions. That is double standards.

So, for example, under the furlough scheme Donald Trump received over £3 million for furloughed staff on his luxury golf resorts, but his managers laid off hundreds of staff anyway. Trump is a multi-billionaire and surely could have afforded to cover the wages. No whiff of means-testing for corporations. Major multinationals making billions of pounds in profits gained from the furlough scheme, while the near destitute had to prove destitution before obtaining a pittance.   

Furlough schemes generate huge moral hazards. They pay people not to do what they might wish to do, creating a new ‘poverty trap’. If you did some labour, you would probably lose more than you would gain. And they pay high earners on condition they do not work, while welfare claimants receive a pittance only if they do everything possible to find work. How does that make sense?  

Immoral hazards are worse. When the CJRS was introduced, I predicted in the Financial Times that it would be subject to massive fraud. Even the head of HM Revenue and Customs said so. Sure enough, an early survey found that one in three on the scheme was actually working. Another survey suggested the figure was much higher. Later, the HMRC estimated that over £6 billion had been paid to organised criminals or fraudsters. In one case, a man was caught having invented a huge number of employees and fake national insurance cards, having received millions of pounds under the scheme. He was surely not alone. And, as is well known, high earners were more able to ‘work from home’ while receiving furlough support than low earners, further contributing to the scheme’s regressive character.

Belatedly, the HMRC set up a taskforce of 1,265 staff to try to combat fraud; there have been over 26,500 investigations so far, representing a waste of resources that could have gone to the impoverished queuing at food banks. Most who cheated will go undetected, because adequate evidence will be hard to obtain or not merit the cost of investigation. Confronted by the evidence, the government had the temerity to say the priority had been ‘to get money to those who need it as fast as possible’. That was not what the policy was intended to do. It gave nothing to those most in need. But what was meant was that the likelihood of fraud was tolerated in the interest of speed. It is surely amoral to support a policy that is prone to massive fraud. Any furlough scheme would have that feature. Yet progressive commentators seem indifferent to fraud.

Then there are the economic effects. If you pay people not to work at all, it encourages inactivity rather than merely reduced production and short-time working. Furlough schemes depress production more than it would otherwise be. And they prop up ‘zombie firms’. In the past two years, the bankruptcy rate has declined during what was a major recession. A German bank estimated that 2.5 million jobs covered by the UK’s furlough scheme were ‘zombie jobs’, i.e., were unviable anyhow. Sunak implicitly recognised that by introducing a ‘job retention bonus’ of £1,000 if firms kept employees once the subsidy ended.

Furlough schemes also discourage firms from restructuring in the face of the pandemic. They also deter labour mobility. If somebody is offered 80% to do nothing, why move to a firm in which they might earn 70% of what they were receiving? And there is bound to be ‘deadweight’ – paying for employees who would have been covered by their firm. The CEO of Bet365, who received £300 million in 2019, could easily have paid laid-off employees.  

In sum, a minority do well, but furlough schemes worsen inequality, are inequitable and contribute to economic inefficiency. Above all, by diverting funds from providing universal basic security they erode the societal resilience so vital in an era of pandemics. No progressive should support them. A new furlough scheme would ‘certainly make no sense’.

Guy Standing is author of The Corruption of Capitalism: Why Rentiers thrive and Work does not pay (2021). He is Professorial Research Associate, SOAS University of London, and a council member of the Progressive Economy Forum.      

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PEF Council member Prof. Stephany Griffiths-Jones is a member of Chilean President Gabriel Boric’s group of economic advisors. With Boric winning a resounding victory in the Chilean Presidential elections, we reproduce here a translation of Stephany’s recent interview for CTIX magazine Chile. Conducted before the second round of the election, Stephany discusses the left’s economic programme for the country, and the challenges a new President is likely to face.

Interview conducted by Andy Robinson. Original (in Spanish).

Stephany Griffith-Jones, one of the most eloquent promoters of the role of the state and public banks in the equitable development of South American economies, joined a group of advisers to Gabriel Boric, Chile’s presidential candidate, before the start of his second round campaign for the Presidency. The decision to appoint Griffith-Jones – a professor at the University of Sussex and collaborator with Nobel Laureate Joseph Stiglitz at Columbia University in New York – is proof that Boric build on not only ideas from the 2019 protest movement, but also experts close to Concertación and Nueva Mayoría, who led the centre-left governments of Chile’s slow transition from dictatorship.

It is also proof that, at the age of 35, Boric is aware of the importance of working with experienced economists such as Griffith Jones, Born in Prague in 1947, great-niece of Franz Kafka, and whose family emigrated to Chile the following year, we spoke about Boric’s dilemmas in needing to both respond to the demand for change in Chile, and to stabilise the economy.

It seems that Gabriel Boric is facing a problem. He is a candidate for change, a movement that has taken to the streets of Santiago to protest the neo-liberal model. But if he wins, he will come to power in a difficult budget situation that leaves little room for progressive budget policy…

Yes. At the moment the budgetary situation is very difficult. The fiscal deficit is already at 13% of GDP… Piñera went from one extreme to another in his response to the pandemic. He did nothing at first, and a lot of low-income people were in real trouble. This is where the first withdrawals from pension funds were introduced, to help low-income people in great difficulty. [Chile’s Congress authorised raids on the country’s privatised pension funds during covid, turning them into a “piggy-bank”, with about $50bn or 25% of their value withdrawn to date.] But then, in 2021, Piñera went to the other extreme. He gave generous support, perhaps too much, to many, even people who were not so poor. And consumption skyrocketed. Chilean GDP will grow this year between 11% and 12%. The economy is totally overheated.

What should be done?

Boric has committed himself to significantly reducing the budget deficit in one year and respecting the budget already approved by Parliament. It is a sign of his moderation. In the coming years, he wants to raise taxes gradually and increase the collection of existing taxes – higher direct taxes, and lower indirect taxes. Indirect taxes, such as value added tax, account for more than 50% of Chile’s total tax revenue, well above the OECD average. There is also a commitment to combat tax evasion, which in Chile is twice the OECD average, but this requires more tax inspectors.

The problem is more general. Latin America is experiencing a moment of polarization. It is necessary to break a model that was very unpopular, but the economic reality of countries like Brazil or Chile leaves very little space, and both Lula and Boric have moved closer to the centre.

Yes, at first many people thought that Boric would be too radical. But now perhaps the greatest fear is that he can not do enough.

Despite this, he is portrayed as radical in many media …

It’s true. The media talk about far right and far left. We must reject this false dichotomy, because Boric is a Social Democrat. [Right-wing candidate Jose Antonio] Kast is an extremist. In economics, he is quite radical; to reduce taxes when the deficit is 13% of GDP is downright daring. In politics, he is even more extreme. One of his deputies said that women should never have had the right to vote. Unbelievable. Kast proposed restricting the right to abortion, even for women who were raped, and forgiving Pinochet-era torturers.

But Boric is a European-style Social Democrat. I met him first at a conference to discuss the Scandinavian model of government. He has been more on the left, but he is aware of the current budget problems and is very open to discussions with all sides. That said, he is very committed to the need for redistribution.

Given the polarity and rejection of the system, do you think it can be a double-edged sword to enjoy the support of the main political figures from Concertación?

No. That’s very positive for Boric. Leftists will vote for him anyway. The problem is attracting the votes of most of those in the middle. Although the most important thing is to attract young people who demonstrate, but sometimes do not vote. Participation in the first round was very low. In the past, the center and the left always won when they merged. It can be expected to be the same this time. Boric acknowledged the contribution of the Christian Democrats (PDC) and it was a very good move. He met Ricardo Lagos [centre-left president from 2000 to 2006] and Michelle Bachelet [centre-left President from 2006 to 2010, and from 2014 to 2018]. They were wonderful to him. Much of the center and left have already joined the campaign. And the Christian Democrats support him even though they say they would not enter government with him. It is also true that the fact that Kast is percieved as disastrous made the reunion easier.

It is strange to compare the victory of the left in the Constituent Assembly with the results of November in the parliamentary elections. How did this happen?

Yes, 78% of voters voted [on 25 October 2020] in favor of a new constitution. Voting in the Constituent Assembly [over 15 and 16 May 2021] was a great victory for the left. But then, just a year after the referendum, the same voters voted for a parliament that was divided between left and right. There is therefore a lack of consistency. If Boric wins, he will have problems with Congress, which will likely try to block proposals such as the budget and tax reform.

Will there be more leeway afterwards?

I think so, after the first year. Boric and his supporters are very committed to the ecological transition. Chile is lucky because it has lithium, which is essential for batteries, and copper, which is essential for the energy transition. In addition, there is great potential for further development of solar and wind energy. It is necessary to give priority to certain sectors for that transition, supporting their development, and Kast does not understand this. Development banks must be mobilized for the green transition. And financial regulation can be used to incentivize commercial bank loans to companies with low-carbon investments.

Public investment is key. For example, Boric wants to invest heavily in building an extensive rail network. Then there is hydrogen. Hydrogen can be produced sustainably in Chile because there are many ways to generate renewable energy. We can use green hydrogen in mining to have green copper.

Is there not a risk that the energy transition will create demand for metals and lead to more extraction and dependence on the export of raw materials?

The idea would be to move up the value chain. Manufacture batteries, incorporate more technology and knowledge. Scandinavian economies, which in the past were like Chile, dependent on exports of raw materials such as wood, managed to move up the value chain and develop rapidly. So it is necessary, for example, to produced more refined copper, to manufacture higher value-added cables.

Why would the left do it better than the right?

Because public investment and the development bank are essential for the green transition, and then catalyzing private investment in this sector is key. Kast doesn’t understand this. He caricatures the state as a dark and negative force, but those are the ideas of the past.

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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?

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LONDON – Amid all the talk of when and how to end or reverse quantitative easing (QE), one question is almost never discussed: Why have central banks’ massive doses of bond purchases in Europe and the United States since 2009 had so little effect on the general price level?0

Between 2009 and 2019, the Bank of England injected £425 billion ($588 billion) – about 22.5% of the United Kingdom’s 2012 GDP – into the UK economy. This was aimed at pushing up inflation to the BOE’s mandated medium-term target of 2%, from a low of just 1.1% in 2009. But after ten years of QE, inflation was below its 2009 level, despite the fact that house and stock-market prices were booming, and GDP growth had not recovered to its pre-crisis trend rate.

Since the start of the COVID-19 pandemic in March 2020, the BOE has bought an additional £450 billion worth of UK government bonds, bringing the total to £875 billion, or 40% of current GDP. The effects on inflation and output of this second round of QE are yet to be felt, but asset prices have again increased markedly.

A plausible generalization is that increasing the quantity of money through QE gives a big temporary boost to the prices of housing and financial securities, thus greatly benefiting the holders of these assets. A small proportion of this increased wealth trickles through to the real economy, but most of it simply circulates within the financial system.

The standard Keynesian argument, derived from John Maynard Keynes’s General Theory, is that any economic collapse, whatever its cause, leads to a large increase in cash hoarding. Money flows into reserves, and saving goes up, while spending goes down. This is why Keynes argued that economic stimulus following a collapse should be carried out by fiscal rather than monetary policy. Government has to be the “spender of last resort” to ensure that new money is used on production instead of being hoarded.

But in his Treatise on Money, Keynes provided a more realistic account based on the “speculative demand for money.” During a sharp economic downturn, he argued, money is not necessarily hoarded, but flows from “industrial” to “financial” circulation. Money in industrial circulation supports the normal processes of producing output, but in financial circulation it is used for “the business of holding and exchanging existing titles to wealth, including stock exchange and money market transactions.” A depression is marked by a transfer of money from industrial to financial circulation – from investment to speculation.

So, the reason why QE has had hardly any effect on the general price level may be that a large part of the new money has fueled asset speculation, thus creating financial bubbles, while prices and output as a whole remained stable.

One implication of this is that QE generates its own boom-and-bust cycles. Unlike orthodox Keynesians, who believed that crises were brought on by some external shock, the economist Hyman Minsky thought that the economic system could generate shocks through its own internal dynamics. Bank lending, Minsky argued, goes through three degenerative stages, which he dubbed hedge, speculation, and Ponzi. At first, the borrower’s income needs to be sufficient to repay both the principal and interest on a loan. Then, it needs to be high enough to meet only the interest payments. And in the final stage, finance simply becomes a gamble that asset prices will rise enough to cover the lending. When the inevitable reversal of asset prices produces a crash, the increase in paper wealth vanishes, dragging down the real economy in its wake.

Minsky would thus view QE as an example of state-created financial instability. Today, there are already clear signs of mortgage-market excesses. UK house prices increased by 10.2% in the year to March 2021, the highest rate of growth since August 2007, while indices of overvaluation in the US housing market are “flashing bright red.” And an econometric study (so far unpublished) by Sandhya Krishnan of the Desai Academy of Economics in Mumbai shows no relationship between asset prices and goods prices in the UK and the US between 2000 and 2016.

So, it is hardly surprising that, in its February 2021 forecast, the BOE’s Monetary Policy Committee estimated that there was a one-third chance of UK inflation falling below 0% or rising above 4% in the next few years. This relatively wide range partly reflects uncertainty about the future course of the pandemic, but also a more basic uncertainty about the effects of QE itself.

In Margaret Atwood’s futuristic 2003 novel Oryx and Crake, HelthWyzer, a drug development center that manufactures premium-brand vitamin pills, inserts a virus randomly into its pills, hoping to profit from the sale of both the pills and the antidote it has developed for the virus. The best type of diseases “from a business point of view,” explains Crake, a mad scientist, “would be those that cause lingering illness […] the patient would either get well or die just before all of his or her money runs out. It’s a fine calculation.”

With QE, we have invented a wonder drug that cures the macroeconomic diseases it causes. That is why questions about the timing of its withdrawal are such “fine calculations.”

But the antidote is staring us in the face. First, governments must abandon the fiction that central banks create money independently from government. Second, they must themselves spend the money created at their behest. For example, governments should not hoard the furlough funds that are set to be withdrawn as economic activity picks up, but instead use them to create public-sector jobs.

Doing this will bring about a recovery without creating financial instability. It is the only way to wean ourselves off our decade-long addiction to QE.

Robert Skidelsky

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The pandemic has exposed how dependent on care we are not only as individuals, but as a society. But our care system, already struggling well before the outbreak of the coronavirus, has failed to cope. Care work is poorly-paid and insecure, whilst the entire system suffers from chronic underfunding. Government promises to fix the system have concentrated only on funding, which is important, but falls well short of a comprehensive plan for care.

This new essay from PEF Council member Susan Himmelweit puts today’s crisis in its border context. A new approach is needed, recognising the immense importance of care to our economy and society, with care work properly supported in all its forms, effective support from the public sector, and an integration of the care system into our wider social and physical infrastructure.

The post New PEF publication – Care and the Pandemic 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.

Early reports suggest that the reopening of indoor hospitality in England has driven a hiring surge as employers try to meet the expected demand across the sector. Job search website Adzuna has reported a trebling in the advertised vacancies since March but the impact of unlocking – and a much-anticipated surge in consumer spending – has spread well beyond the most tightly-restricted sectors. The monthly survey by the Chartered Institute of Personnel Development reports two-thirds of employers are looking to take on more staff, with just one in ten expecting to make redundancies. Over in the US, the combination of falling cases, a major improvement in vaccinations and the massive boost from the stimulus package – with more spending on the way – is having a similar effect, as employers report labour shortages across the economy.

All of this should be good news for those who work: other things being equal, tighter labour markets should mean better pay and conditions as employers seek to attract the workers they need. After a decade where incomes from labour have been severely depressed across the developed world – in the UK, average real wages and salaries are scarcely above their level a decade ago – this looks like a moment of hope for labour.

The “demographic reversal”

Intriguingly, it occurs at the point at which an interesting and important new book by two somewhat unorthodox economists, Charles Goodhart and Manoj Pradhan, argues that the 40 year period we have just lived through has come to an end. The great expansion of the global labour market since the late 1970s – in both the opening of Eastern Europe and, spectacularly, the opening of China – they argue saw the balance of power shift decisively in favour of capital, with wages and salaries forced downwards by the new abundance of cheaper labour across the globe. They argue that demographic changes are ending the period of cheap and abundant labour, heralding a future of higher pay (and higher inflation) as the balance swings back. It’s interesting, even optimistic, but not completely convincing: demography alone is rarely destiny, and it underplays the dimension of control over labour that – as much as pay alone has always been crucial to the real functioning of labour markets under capitalism. It is not only that you want to pay a worker to perform a task: it is essential that the task is performed in the way that you, the employer, expect it to be performed. Mechanisms for controlling labour have ranged from the firm-level imposition of management commands, to the economy-level presence of unemployment as a disciplinary threat, to the direct management of people, as China’s hukou system creates, and as migration controls often try to impose.

Covid as a disruptive factor

The issue of control brings us back to covid – a profoundly disruptive factor in the organisation and management of the economy. Whilst a number of countries that suffered most in the first wave, Britain amongst them, now appear to bringing the virus under control, global cases reached their peak only at the end of April, driven by the devastating surge in India. But even some countries that seemed to get through the first 12 months of the pandemic in better shape are now reporting surges in cases, with both Singapore and Taiwan hastily expanding social distancing measures.

Covax, the initiative to supply vaccines to the world’s poorest, co-ordinated by the World Health Organisation, has never been ambitious enough, with only a fraction of available vaccine supply being provided by the richer countries. But even this initiative is now struggling to meet its own targets. Fewer vaccines means more infections, and more infections raises the possibility of new variants spreading – as we have seen in England with one of the SARS-Cov-2 mutations first seen in India being placed on Public Health England’s “variants of concern” list. There are rumours of a return to lockdowns in England, perhaps on a regional basis – with local leaders like Andy Burnham understandably furious at economic damage this will almost certainly cause in already hard-hit parts of the country.

We are a long way from being out of this crisis, and further economic disruption should be expected – certainly whilst the production and distribution of vaccines remains inadequate. But for as long as this involves a disruption to how and where work can be performed – which is, at its core, the source of social distancing’s deep economic impact – we are likely also to see a struggle over how that work is conducted. A recent survey by German thinktank the Rosa Luxemburg Foundation found a growing number of labour protests, including strikes, with health and safety concerns at their centre, shifting away from the more usual focus on pay. Control of work may well come to define the new frontier for tensions and conflict between capital and labour: one side introducing a raft of new surveillance technology, for example, the other insisting on greater control over time and protection at work.

The post More vaccines, more vacancies, but trouble ahead appeared first on The Progressive Economy Forum.

UK government figures out today show a 1.5% shrinking in the size of the economy in the first three months of the year – huge by pre-covid standards, but better than was widely expected, with rapid growth in March as schools reopened and some economic life resumed. That last month is likely to be a foretaste for the summer, as the lockdown and social distancing measures are eased through to June.

We know from last year that easing restrictions produces almost an automatic recovery in the economy, as people return to work, and start spending more money. Unlike last year, where a foolhardy government rush to normality helped produce a further surge in cases and subsequent, damaging lockdowns, the vaccine rollout this year has been a dramatic success. Hospitalisations and deaths from covid have fallen sharply, and the sense of uncertainty that hung in the air has reduced. Put all this together, and there is every reason to expect all the main economic indicators – from GDP to employment – to look rosy, right the way through to autumn.

But even this short-term recovery is likely to be highly uneven. The government and the Bank of England have put a great deal of faith in those who have saved money over the last 12 months. Supported by furlough or, more likely, working from home, many have been able to carry on earning during the pandemic, but have had fewer opportunities to spend on anything from restaurant meals to pints in the pub to holidays. As a result, some £160bn of exceptional savings – over and above what people normally save in a year – has built up, nearly all of it simply sitting in bank accounts, waiting to be used. The theory, pushed by the Bank of England, is that with confidence about the future returning, a great deal of this will be taken from those bank accounts and spent in a great rush of pent-up consumer demand. Deutsche Bank are even more optimistic, thinking 10% of the savings pot will be rapidly drawn over this year.

You can argue about the likely scale of this – and the Bank of England’s household survey in November said 70% of households intended to hold to their savings – but the rush to spend itself is likely to cause difficulties. With so much economic activity now shifting permanently online, a surge in consumer spending will not lead to a rapid revival in our high streets in the way it once did. This effect is likely to be reinforced by the shift to working from home, with the BBC reporting that almost all of Britain’s 50 biggest companies anticipate most staff returning to the office a few days a week. But with fewer office workers around, town and city centre shopping will take a hit, as Bloomberg’s new “Pret Index” demonstrates. This shows Pret sandwich sales as a share of January 2020’s figures and, as the table below shows, whilst more rural or suburban locations are almost back to pre-pandemic levels, city centre and transport hubs have been walloped.

This is an acceleration of a major, existing trend, rather than the pandemic introducing something wholly new. A market-led recovery, via consumer spending alone, is likely to leave many (already struggling) high streets. Government support is needed, not least in making sure the 250,000 retail workers that management consultants McKinsey expect to “transition” (nice euphemism) from the sector can find work. Beyond that, however, we need to reconsider what it is our high streets are for. At present we rely on the overspill from commercial activities – you and I going out to shop – to help support the public space they provide. If those commercial activities suffer, the public space suffers. It is time to consider more active government interventions: turning less busy streets into public parks, for example, or providing shared office space and community facilities in disused buildings.

Looking further ahead, we can perhaps already see some of the changes that covid-19 has wrought. With various restrictions on contact likely to remain in place for some time as the virus continues to circulate (and mutate) globally, service business in particular are likely to face significant new costs and uncertainties into the future. Manufacturing, however, is far easier to make covid secure: and, partly as a result, the recovery in manufacturing output and employment has been far more rapid here and (for example) in the US, with the UK Purchasing Managers Index of manufactured goods orders hitting a 27 year high in April. Politically, this is no bad thing for the government, which has set great store in its promises of new manufacturing jobs, particularly in the North and Midlands and particularly in low carbon technologies. But for an economy that remains so heavily skewed towards services, it points to a longer term drag on productivity and growth, once the initial sugar rush of ending lockdown has faded.

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