Even with an economics qualification it is hard to fathom the action of the Bank of England yesterday. They predicted a longer recession than in the global recession of 2008-09, and one comparable in severity to the early 1990s recession.
They predicted real wages falling by 8 per cent and unemployment rising by one million. Real household incomes will decline more than 5 per cent, the biggest decline on records that extend back to the 1960s.
Yet this was backdrop not to an interest rate cut and emergency measures to protect households and the economy, but instead to a half per cent rate rise – the largest rise since 1993.
Pressed to explain this madness, Bailey threatened pain as necessary in order to prevent even worse pain in the future.
We have heard this before. Most obviously in the aftermath of the global recession, Chancellor Osborne (backed up by a previous Governor) pounded workers with his austerity policies. The result: the worst pay squeeze for more than two hundred years, the weakest recovery and worse rise in public debt for a hundred years. And lo and behold, we weren’t all in it together at all. Wealth soared by £6 trillion.
As if that wasn’t enough, we were warned again that Brexit would make us poorer, and that at some point we would need to pay for the measures that protected the economy during the pandemic.
But even at face value Bailey’s argument doesn’t stand up. In interview after interview he fetishized ‘second round effects’. He said of course central bank policy can’t affect global prices, resulting from global supply chain straining after the pandemic and now Putin’s war in Ukraine. But instead the Bank of England must be vigilant against pay rises and the danger of inflation becoming ‘embedded’.
But leaving aside soaring City bonuses, regular pay rises are growing at only 4.3% one third of the predicted 13.3% peak in inflation. In real terms pay is collapsing.
Instead the Bank of England are hammering interest rates in the face of a pay rise in theory that is barely happening in practice. We might remind ourselves that this is the same theory that gave us the global financial crisis and austerity.
In fact this theory is completely back to front. We have repeatedly warned that without wage increases, working people will simply stop spending on anything non-essential and this risks tipping us into recession. And indeed this is exactly how the Bank of England explain the terrible recession that they now expect to happen – they even call it a ‘key judgement’
We have heard that some firms in the face of labour shortages are finally being forced to pay workers better and improve working conditions and even introduce new investment. And that they have been able to raise prices to pay for this. But equally we are now hearing that this may be a vanishingly small window as firms look down the line and see demand collapsing.
A few months ago Bailey caused outrage when he warned workers against attempting to secure decent pay rises. Today he went one further and blamed workers who have been successful in securing decent pay increases for causing the hardship to those who have been unable to do so.
We have not heard a peep from the Bank about companies raking in excess profits, or the fact that any increased pay growth is driven by the top end only, or vast city bonuses. Even on the basis of the Bank’s own theory, pay can rise without causing inflation if companies rein in their profits. And both pay and profits could rise if productivity improved, though there is obviously a woeful record here.
Never was there a better advertisement to join a trade union.
Turning Bailey’s argument on its head: join a union so you don’t lose out. Give us widespread sectoral collective bargaining so that more workers are protected, and for those that aren’t we need a decent minimum wage, and strong social security to help the unwaged.
If there was ever any sign that our present model is bankrupt this is it. And in the meantime Tory leadership candidates appeal only to failed dogma and false heroes, they attack the Bank of England in effect for not operating savagely enough. They don’t look at their own part in causing this immense disaster, or to material action to find a new way forward.
On the other hand trade union leader after trade union leader wins public sympathy as they warn a system that gives so little to those who do the work and so much to those that don’t is a broken system. We know from the past that a better-balanced society means a better economy. Just ask Clement Attlee.
We failed after 2008 to get that change. This cannot be allowed to happen again.
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