Monetary policy mayhem, or how not to solve the ‘cost of living’ crisis (part 3 of 3)
High inflation is terrifying economic policy-makers, but here’s how they could be treating the causes not the symptoms of the UK’s economic weakness
Part 1 of this post criticised the ideas and practices that are leading the Bank of England to exacerbate, rather than alleviate, the cost of living crisis. Part 2 discussed a radical change to monetary policy that, if enacted, would raise revenue to deliver more support to those suffering the greatest hardship.
But it argued also that monetary policy alone will be insufficient. This third and final part collates a range of policy ideas that would address rising living costs – and transform capitalism in the UK in the process.
1. Give people money
The most urgent and obvious solution to the rising cost of living – which will deepen hardship and poverty among millions of households – is to increase benefit payments. The real value of benefits for people unemployed or in low paid employment has been stagnant or falling for a very long time. There is no evidence that higher benefit payments will disincentivise work – and around 40% of Universal Credit recipients are in employment anyway.
A higher minimum wage is also now justifiable. The Progressive Economy Forum advocates a £15 minimum wage by 2024. This would of course lift many in-work claimants out of the benefits system. It would generate a £25 billion benefit to the public finances (mostly higher tax payments), which could be reinvested in living cost support for the most deprived households. Strengthening employment rights to allow (some) workers to fight for pay rises would have a similar impact.
2. Take money away
Devotees of the ‘wage-price spiral’ – including the Bank of England’s governor and chief economist – will argue that increasing pay is a self-defeating response to rising living costs, since it risks higher inflation. The Conservative government has made the same argument in response to the RMT’s pay demands. But they are wrong. The UK workforce is already among the least protected and lowest paid in Western Europe – and yet inflation here is expected to be worse, and last longer, than on the continent.
If there is a need to take demand out of the economy, the government should start at the top. Wealth taxes (or similar proposals such as the lifetime income super tax) could dampen demand, and most importantly, take pressure off the supply constraints which have triggered the current inflationary wave.
If it helps, we can think of these measures as ‘windfall’ taxes (discussed further below) targeted on those who have actually benefited from the pandemic, not least from fiscal policy interventions to prevent insolvencies.
They would also help to reduce carbon emissions, by reducing consumption among the groups who pollute the most. Although this would obviously not be a quick fix for climate change, it is worth noting that supply chain volatility related to environmental breakdown is an important cause of the current wave of inflation.
3. Regulate inflation
Meanwhile, Andrew Bailey is fretting about the inflationary impact of decarbonisation. There is of course an important point about spikes in prices for one fossil fuel that might occur as others become permanently or temporarily less available, whether due to environmental policies or wider factors.
However, the bigger picture is that our access to energy is controlled by a relatively small number of highly profitable firms. The existing energy price capping system in the UK is inadequate, allowing profitability to be maintained despite the rising cost of fossil fuel inputs (at the expense of consumers and small business, and increasingly, governments). It needs to be significantly strengthened.
We could tell a similar story about food prices, which are linked to the cost of energy inputs in food production, but also the profitability of a concentrated food retail industry.
Furthermore, London mayor, Sadiq Khan, has promised to control rent increases for private tenants in London. There is a significant risk of a rate-rent spiral if landlords are able to pass on an increased cost of borrowing to their tenants, rather than assuming any financial risk arising from their investments. Rent controls should therefore be widely adopted.
4. Curb profits
As Financial Times economic commentator asked, in response to the Bank of England’s call for workers to suppress wage demands:
The wage-price spiral depends on not one but two mechanisms: wage demands trying to catch up with price rises and price increases to pass on rising wage costs. Calling for wage moderation can only be read as an attempt — or perhaps a wish — to weaken the first mechanism. But what about the second?
Sandbu is probably too quick to imply that wages are the main source or rising costs for business at the moment, but the main point about the narrowness and biases of the notion of a wage-price spiral stands.
As such, we can also curb inflation, and therefore alleviate living costs rises, by encouraging firms to moderate their profit expectations. As discussed in part 1 of this post, inflation is essentially a product of class relations whereby profits are protected at labour’s expense. This dynamic has become entrenched globally since 2020.
Price caps are one way of curbing profits. It can also be achieved via the tax system. A recent paper by Chris Hayes (Common Wealth) and Carsten Jung (Institute for Public Policy Research) called for windfall and excess profits taxes to control inflation. The former would target profits from extreme and sudden price rises, and the latter would target profits resulting from firms enjoying a privileged position within uncompetitive markets (discussed further below).
One-off windfall taxes could be a source of revenue for the public sector, with funds reinvested in rebuilding and reshoring supply chains, and/or green technology and infrastructure, so that inflationary conditions are less likely to recur.
However, the rationale for an excess profits tax would not be to raise revenue, rather to encourage firms to moderate their behaviour, by increasing staff pay or reinvesting profit in socially useful ways.
5. Take charge
One of the arguments against price controls is that they require the state to become more involved in production, since the regulated price may not be set at a rate which allows the private sector to operate profitably.
Generally speaking, however, this is the direction of travel for most capitalist economies anyway, not least because of the failure of the market to accurately price climate risks. Public ownership is likely to proliferate in strategic sectors – this should include ‘foundational’ industries where profiteering is most destructive. We should embrace also Marianna Mazzucato’s ‘entrepreneurial state’ approach whereby the public sector would retain equity stakes in firms benefiting from public R&D, enabling both a fair allocation of reward, but also a check upon rent-seeking and market-distorting behaviour in the tech sector.
It is worth noting too the role of ‘shareholder primacy’ in driving profit maximisation, and therefore dividends, in place of long-term investment. This dynamic has itself been driven by the growing role of asset managers and passive investment in company ownership, which financial regulators have been slow to recognise.
6. Make markets free
Some of the policies discussed above would be focused on correcting the inflationary impact of market abuses – yet preventing these abuses occurring in the first place should also be prioritised.
This is the realm of competition or anti-trust policy. UK competition authorities need to be given powers to assess the potential for excess profiteering arising from market structure. It is relatively straightforward for food retailers and energy companies, for instance, to justify price rises when they can point to sector-wide supply problems; but their capacity to retain a certain level of profit in these circumstances is indicative of the absence of genuine market pressure.
Germany is already moving in this direction. The UK needs to follow suit - as the chief executive of the Competition and Markets Authority, Andrea Coscelli, has told us himself. It is important of course that subjecting firms in concentrated sectors to greater competition takes place in conjunction with a higher (and enforced) minimum wage and stronger employment protection, to incentivise investment.
7. Reform policy-making
The Industrial Strategy Commission (which I served on with Kate Barker, Diane Coyle, Richard Jones and Andy Westwood) recommended strengthening competition policy as part of a comprehensive industrial policy programme, due to its role in incentivising long-term investment. The present circumstances suggest we made the right call (fwiw).
One of our other recommendations was for an Office for Strategic Economic Management (OfSEM), supervising policy design and performance in relation to industrial strategy, along the lines of the OBR’s role in relation to fiscal policy.
An institution in this mould is clearly required now. It would be tasked with ensuring that the relevant government bodies are focused on the long-term health of the UK economy, beyond the pursuit of narrowly defined departmental objectives, and offer a buffer against the vested interests which tend to have undue influence over UK economic policy-making mechanisms.
OfSEM’s status as a supervisory rather than operational or delivery body would be important. The Bank of England tends to view inflation only through the lens of its responsibility for monetary policy, and the Treasury tends to view economic problems through the lens of its responsibility for the public finances.
OfSEM would have a whole-of-government approach. Bringing the Department for Business, Energy and Industrial Strategy (BEIS), and local and regional authorities, to the top table of economic strategy would be particularly valuable.
While we originally proposed OfSEM in order to ensure there was a government body focused on the very long term – which Whitehall can understandably lose sight of – its role would be equally vital at times of short-term crisis, when policy-makers might be required to do things which sit between or outside normal policy silos.
The politics of prices
Can the UK get anywhere close to delivering the decisive action, and long-term commitments, now required? I fear not. At the moment, we seem to be getting smaller – economically, territorially, demographically, morally – from one day to the next.
In 2021, Boris Johnson promised a high-wage, low-tax economy. We can now discard the former promise. By endorsing the notion a 1970s-style wage-price spiral, he has made clear his government will prioritise profiteering while the pay of workers in the private sector declines sharply in real terms.
We can probably discard the latter too, despite the centrality of tax cuts to his post-partygate economic policy agenda. Ironically – although we should never fully discount the potential for a neoliberal spasm by a right-wing government facing election defeat – macroeconomic policy orthodoxy will warn against injecting additional demand into the economy through tax cuts, for the foreseeable future. And although the Treasury will resist, Johnson’s instinct will be avoid confrontation with public sector workers by offering something as close as possible to inflationary pay rises in the months ahead.
This should be the ideal moment for the Labour opposition to capitalise on its poll lead. Yet this advantage is built largely upon two factors: the Johnson government’s inability to shake off a sleazy image, and its incompetence in managing public services such as the NHS. In contrast, the incredibly narrow nature of the UK media’s discussion of the economy means it remains difficult for Labour to talk about sensible economic policy adjustments without being accused of extremism and naivety.
But nobody ever said politics was easy – Labour needs to find a way through this impasse. The pitfalls of being on the wrong side of the cost of living debate are more dangerous to the party than it seems to realise.
This is partly because the government is taking forward some of the policies discussed in this post. It is raising taxes, and introducing a windfall tax. It is nationalising energy companies, and boosting benefits and offering direct financial support for energy bills.
Obviously, it is not doing enough. What it is doing is ad hoc, temporary, and designed to disrupt the profiteering and rent-seeking at the heart of rising inflation as little as possible.
But this is what policy change looks like as paradigms break down. It is a messy process, and contradictory policy discourses are competing for primacy, but a new policy orthodoxy is emerging inexorably. The real debate now is whether it will enable a new progressive settlement, or instead use state power to entrench inequality.
Boris Johnson’s boosterism has often been derided as buffoonery on the left – understandably so, given how willing he has been to cast aside his ambitions for our country when they are pitted against a personal ambition to stay in power.
But the left needs a dose of something similar now; a positive demonstration of what government can do for society in the face of mounting economic challenges.
The left needs to find the courage to tell people, for instance, that climate change is going to radically change the way we live, that immigration benefits our public services, that protecting asset prices while wages stagnate will destroy younger generations’ life chances, that higher taxes can be part of responsible economic stewardship, and that ‘your money’ is in fact part of a collectivised and contingent monetary system which has been mismanaged by the Treasury and the Bank of England for decades.
We will need to do things very differently, but we have the power to ensure different is better.
This would foreground genuine boosterism: recognising that the mess we are in is not inevitable, but the product of too many poor choices and missed opportunities. The left should be ambitious about the benefits economic policy reform could bring. Things could yet get worse, but we have an opportunity now to put things right, and forge a path to a more prosperous, equitable and sustainable future.