THE ECONOMIC TIMES

Analysing The Political Economy


What They Don’t Want You To Know About Money and Inflation

By Economic Times Editor: Why it is that people in full-time work, who get annual pay rises still find it consistently harder and harder to make ends meet with the money they get? There are a number of reasons and theories but to explain this in two words, it would be the ‘triple-block.’ Here we explain why the standard of living in Britain has been going in reverse for decades. The triple-block is about earnings, inflation and productivity.

Productivity is simply a measurement of output per worker over a given time – per hour, day, quarter or typically per year. It is a measure of the efficiency of a person, machine, factory, system, etc., in converting inputs into useful outputs. Productivity is computed by dividing the average output per period by the total costs incurred or resources (capital, energy, material, personnel) consumed in that period. Productivity is a critical determinant of cost efficiency. The more productive a country is, the wealthier it is and supposedly, the wealthier its people are. The real test of the latter part of that statement is confirmation that standards of living have risen over time.

But there’s another story about productivity and the other elements that make up our standard of living that the press and broadcast media rarely report.

Just for a start, there is a relationship between productivity, inflation and collective bargaining. Collective bargaining is the negotiation of wages and other conditions of employment by an organized body of employees. In Britain, the power of the unions has been under assault for four decades. Secondly, corporations and their management have seen huge pay increase when workers have not and thirdly, there is a belief that everything should be measured by inflation – itself a con. For the vast majority of working people, this should be regarded as a ‘triple block’ to rising standards of living.

If income had increased at exactly the same rate as productivity by no more and no less over the last five decades, the vast majority of workers could be working just 12 hours a week & making the same income as they are making now full-time. Or they would be earning over 300 per cent more if they worked a normal 40-hour working week.

This is because productivity in the last five decades has increased through ingenuity, technology, efficiency through more advanced machinery, speed and so on – and all those things have allowed things to be manufactured or produced and delivered at a competitive enough price to be sold in a market where price discovery allows for profit-taking.

If the minimum wage (£8.91 pre-April 2022 – increasing to £9.50 for over 25s after this April) were simply adjusted for productivity gains over the last five decades it would be something like £24 per hour. Median weekly earnings for full-time employees reached a pre-pandemic £499 in June 2019, 0.8 per cent lower than it was the same month in 2008. If was also adjusted on the same basis average annual salaries would be about £75,000.

This sum sounds outrageously high and no one would think this is right. Except, there is one indicator that should dispel this idea and it is the ‘triple block.’ The examples below use the timescale 2000 to 2013 as this is where the best data is and includes pre and post-financial crash data. Like all numbers, they can be read in different ways and depending on who is producing them – be manipulated. So here goes.

Executive pay

In 2016 median average pay for an FTSE CEO rose 11 per cent to £3.9m. Just two years later it rose another 23 per cent to about £4.8m (stats High Pay CentreUK). From the year 2000, CEO pay had risen 80 per cent by 2013, their annual bonuses increased 313 per cent and average overall packages including pensions etc went up 232 per cent. The companies they managed saw pre-tax profits rise by 96 per cent.

The average pay for the average full-time permanent employee in the same time period increased by 43 per cent (stats OECD).

 

House prices

The average house in the year 2000 sold at £77,698 – in 2013 it was £189,002 (today it is touching £275,000). The problem is that if house prices rise 145 per cent in thirteen years and executive pay outstrips it by another 50 or so per cent, and average worker pay falls behind by minus 200 per cent (against rising house prices) – executives buy houses to rent to workers who can’t afford to buy them. The wealthy also put property into pension funds. That makes one part of society much wealthier and the other much poorer. Two-thirds of all the wealth in the UK lies in property (land) and pension funds (stats – ONS)

At the height of the housing market in 2007, something like 45 per cent of all new homes being constructed were bought by buy-to-let landlords. In 2020, the number of landlords totals 2.59 million – with the most (2,266,770) living in England. Scotland has 158,505 landlords, Wales 104,450 and Northern Ireland 64,995 (stats – Financial Secretary to the Treasury).

There is a myth in the mainstream media that the low number of properties built is the cause of the housing crisis. The crisis is caused by a combination of low-interest rates and higher multiples of income that qualify for a mortgage (as well as some unit shortages). Low-interest rates make buying property more affordable, while higher multiples push the amount people can borrow and both push house prices up. Around 38 per cent of 25 to 34-year-olds are homeowners, down from 55 per cent a decade earlier and 61 per cent a decade before that (stats – English Housing Survey). In 1980, legislation ensured income multiples could not exceed three times the main income earner of the property to be mortgaged. That multiplier put a brake on house prices as it was linked directly to wages. That piece of legislation was deregulated and today, it is not uncommon to read about income multipliers of eight times.

House prices, in particular, have done more damage to average wealth distribution in the UK than anything. Don’t blame buy-to-let landlords though. Most are reluctant landlords who invest in property because they don’t trust financial advisors, pension funds and banks.

 

Inflation

The Consumer Price Index (CPI) and Retail Price Index (RPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The trick here is that CPI does not include average accommodation costs – RPI does.

The government likes to pay out liabilities (like pensions) via CPI because it is generally about 1 per cent lower than RPI per year. On the other hand, the treasury likes to charge taxes based on RPI because it generates more money – and people believe this to be right -somehow.

If for you, wage inflation is not keeping up with real inflation then your income continues to be eroded against the cost of living. Losing just one per cent per year has a highly detrimental effect over ten years and is catastrophic over twenty years. In 1970, the average man on average wages could afford to run a mortgaged house, a wife (who probably did not work) and raise two children with managable debt. Today, about 40 per cent of households are now struggling to pay basic bills. In fact, the average unsecured household debt in Britain went up by an eye-watering £46.2 billion in pre-pandemic 2019.

So bad has the effect between pay, asset wealth and inflation got – the ‘triple block’ – that according to the Office for Budget Responsibility (March 2019), household debt is forecasted to be £2.425 trillion in 2023-24 – an increase of 45 per cent, currently sitting at £1.669 trillion. Yes – I had to read that several times as well. (stats – money charity/ONS/OBR). And these figures were collated, as mentioned, pre-pandemic. As it turns out, debt is accelerating even faster and household savings are plummeting faster than at any time on record.

 

What needs to change

The reality of all this is that while capitalism is the only really effective way of organising society successfully (as all forms of the extremes on both the left and right have failed), it has to be reformed and regulated to reflect that. The result of the system we have today is that the UK is now experiencing the longest fall in living standards since records began in the 1950s. It is also experiencing a (pre-pandemic) drop in life expectancy whereas in other Western countries it continued to increase. Inequality continues to worsen as a result.

There is no economic reason why we can’t have (almost) full employment, wage-led growth that keeps up with inflation and rising standards of living and health.

We need to change the system that has in reality been a four to five-decade conflict against workers and we need the right story to sell a newly invigorated version of capitalism.

Margeret Thatcher sold Britain a share owning dream, where privatisation and the free market would trickle down and raise all boats. It might have worked if politicians did not keep deregulating as they did. It has now failed so many, that the country is in dire trouble. The evidence of that failure is that in 2019/20 – 38 per cent of all households were taking more in benefits than were paying into the system to survive. Today, this is a crisis of daily life for 11 million households.

In America, corporate profits Q1 2020 (before Covid lockdowns) were $1,743 billion – two years later after the devastation of a global pandemic is to rose to an all-time high of $2,721 billion. In the UK, it’s the same picture. In Q1 this year, corporate profits were £128 billion but exactly 20 years earlier it was £59 billion, whereas wages have effectively stagnated at best, but in reality have fallen.

This means well over a third of households can’t afford to live even though they are working. This and the housing crisis along with homelessness are the inherent signs of political and economic failure. After all, what is the point of government if they can’t even house their own people?

Capitalism is NOT inherently inequitable, undemocratic, alienating, inefficient and destructive – the people who manage it are.

One of the greatest failures of capitalism ever experienced in Britain was the bank-led financial crisis of 2008/09. One of the greatest political failures was A) allowing it to happen through deregulation and B) engaging in a disastrous programme of austerity. Combined they were the bedrock of the societal division and breakdown that we see today in economics (for instance Brexit) and the government of Boris Johnson (populism). Inflation compounds this problem.

The triple-block is a multi-tool, that enables the transfer of wealth, giving it the ability to concentrate money at one end at the cost of the other. Inflation is key to this. Change means creating a vision of capitalism that works just as much for workers as it does for CEOs, investors and shareholders.

 

 

 

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