Boris Johnson and the Bank of England are petrified of a wage-price spiral. They are so concerned that they are publicly asking people to turn down pay rises, with the Bank’s Governor asking people to show ‘restraint in pay bargaining’ so that inflation doesn’t ‘get out of control’.
The PM has said that ‘when a country faces an inflationary problem you can’t just pay more and spend more’. The Bank’s governor, Andrew Bailey, has stated similarly that ‘the same point holds on restraint, holds for everybody’. Put simply, after two years of the pandemic everyone will have to pull together again, grit their teeth, and accept being that bit poorer.
Except pensioners. Thanks to the triple-lock, they’re getting a raise. 10% or more, actually, in line with inflation. As always, the main thing to remember is that the purpose of a system is what it does: In Britain the system drains the young of time and money in order to fund a dominant pensioner voting bloc. So, faced with a crumbling economy, British politicians will turn the screws on workers to make sure that older voters don’t have to downsize their home.
It’s easy to become inured to just how much Britain hates its young people. Young graduates will face marginal tax rates of 50% from next year. Young people live in crowded houseshares while satisfied Boomers block the construction of new homes. Our birth rate remains chronically low because young people who want to start families can’t afford them. Now, after locking them in their homes for two years to halt the spread of a disease which barely affected them, British politicians are once again turning round to mug the young to pay the old.
From a fiscal point of view, the first point is that any transfer to the elderly has to be paid for somehow.
Inflation, as Milton Friedman observed, is everywhere and always a monetary phenomenon. What’s happening today fits the description neatly: after years of loose monetary policy, supply has been constrained by logistical snarl-ups and soaring energy costs. We have too much money chasing too few goods. Nature abhors a vacuum, and markets abhor shortages; when supply is constrained and demand is high, prices rise until the two are balanced.
That wages don’t keep pace with these prices is the point; it’s this reduction in real spending power that brings the economy back into balance. If all wages were index-linked and moved in line with inflation, then we’d either see firms start to negotiate pay cuts – difficult – or lay people off. Whichever mechanism it happens through, the spending power of workers decreases.
When the Government raises pensions in line with inflation, it is explicitly stating that the spending power of pensioners won’t be subject to this adjustment. There isn’t a huge amount of spare capacity in the economy that we can jolt into action through spending more, and any such increase would raise inflation to new heights anyway. That means that this preservation of spending power comes at the expense of somebody else.
The options are simple: you can fund the increase through higher taxes, which means workers paying more; you can print money, which drives inflation, eroding the spending power of wages; or you can add to borrowing, which induces people to give up current consumption (saving) in exchange for more in the future – adding in turn to tax bills tomorrow.
But no matter how you look at it, the Government is proposing a large increase in the share of output allocated to pensioners, at the expense of everyone else. It’s particularly strange in this light that it wants the rest of us to avoid any attempt to maintain our purchasing power.
It’s not even as if demanding pay restraint is good policy. Not only would it fail to work as intended, it wouldn’t target the actual cause of spiraling wages and prices. If we see a period of spiraling inflation, it will be because people have lost faith in the Bank of England’s ability to keep it under control, and begin to assume inflation will remain high.
With this in mind, perhaps the one of the most important things Boris and the Bank can do is avoid giving the impression that they’re flailing around for policy levers without any real idea of how to bring inflation back under control – say, by asking people to forgo pay rises.
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