From the TUC

Living Standards Declinism & the Primacy of Politics

27 Aug 2013, by Guest in Economics

Hopi Sen is a self declared ‘cost of living sceptic’, by contrast I am something of a ‘cost of living evangelist’. This is an issue I’ve been writing about for several years and which I’ve gone as far as to make a radio programme about. I think boosting living standards is the defining political challenge of the age and the core variable against which economic policy should be judged.

As a ‘cost of living evangelist’, recent weeks have provided some welcome developments but also some cause for concern. On the positive side both the government and the opposition appear to be focusing their economic message more and more around ‘the cost of living’ rather than wider questions around growth and the deficit. This is to be welcomed.  But on a more negative note, Hopi’s scepticism appears to be spreading.

I’d go as far as to say we are witnessing the rebirth of a persistent theme in modern British political economy – the notion of declinism. But whereas previously this was based on Britain’s comparative rate of GDP growth, it is now focussed on living standards and there seemingly inevitable fall.

Chris Dillow agrees with me that the reason we are experiencing a “cost of living crisis” (and I make no apology for describing the longest real wage squeeze since the 1870s as a crisis) is because to weak nominal wage growth rather than high inflation.

But Chris thinks the primary driver of this is an excess supply of labour and suggests that parties committed to tight fiscal policy and ‘welfare reform’ will struggle to deal with this excess supply. In other words the long squeeze in real earnings looks set to continue.

Interestingly enough, Janan Ganesh, writing in today’s FT comes to much the same conclusion.

He agrees that the real issue is an oversupply of labour (although he argues this at the global level) and concludes that:

It is painful for many people, even tragic, but governments do not help them by pretending they can do more than mitigate the problem at the margins.

Both Chris (in another post) and Janan also seem to think that the experience of the 1950s and 1960s – which saw strong wage led growth – was as aberration unlikely to be repeated anytime soon. As Chris has written:

In the 50s and 60s, wage-led growth was feasible because capitalists invested in the confidence that high aggregate demand would be sustained. But in the 70s, this changed as they fretted about the squeeze on profit margins…

Perhaps the ability of capitalism to provide full employment requires freakish historical circumstances of a sort we saw only in the 50s and 60s. And perhaps it is only wishful thinking by both rightists and social democrats that stops them seeing this.

How depressing.

Even more depressing is that whilst other solutions other than simply bringing down the oversupply of labour exist (see this recent TUC Touchstone pamphlet or (for a shorter version) this post), Chris thinks they are not viable.

Policies to increase minimum wages and strenthen collective bargaining would be resisted by capital, and it’s possible that even if such measures were enacted, capital would respond by cutting investment and demand for labour; we cannot be confident that wage-led growth is feasible.

I’m not so sure these policies are complete anathema to capital. There are many businesses for whom lower margins but higher volumes would be a decent trade off , and it’s not exactly like firms are queuing up to increase their investment spending  at present. Stronger domestic demand, under pinned by faster nominal earnings growth, could easily provide a catalyst for the running down of corporate cash piles. In other words – I still think wage-led growth is possible.

Equally, as Janan notes, there are countries exposed to the same global factors and technological changes as the UK that have managed better wage growth – one example being Sweden.

In some ways this debate mirrors the economic debate of the 1930s, in which both the traditional left and traditional right appeared to have no answer to crisis. As Mark Blyth has written (in an essay on Sheri Berman’s Primacy of Politics):

One of the most interesting aspects of the period discussed in Primacy was how both orthodox Marxists and orthodox liberals were, as Karl Polanyi put it, at one with Ricardo and Marx in their understanding of the economy. Both theorists (and both movements) were classicists, materialists, and both admitted no doubt as the ubiquity of economic forces and the futility of political intervention. Both ‘did nothing’ for different reasons, due to different (but strangely similar) interpretations of the same social reality; and both were destroyed in the maelstrom that followed their passivity.

A serious response to the cost of living crisis begins with recognising that the driver is weak wage growth rather than high inflation and looks at ways to increase wage growth. There is of course a role for ‘good macro policy’ (a fiscal stimulus, given the current output gap, would push up growth and employment – and hence nominal wages) but a wider solution strays into what I think of as ‘political economy’ and what Blyth (and Berman) call the primacy of politics.

We know the type of policies that are required – corporate governance reform, policies supportive of collective bargaining and an increasing wage share, looking at how the minimum wage can be strengthened and the living wage extended, how the tax system can encourage business models that are better for the national economy and the wider role of industrial policy in rebalancing the economy towards higher waged, higher skilled, higher productivity jobs.

None of these are impossible but none of them will happen by themselves.  The most important thing so is not simply accept that the squeeze on living standards is irreversible or the result of ‘economic forces’. As I’ve recently written in another context, political economy trumps macroeconomics.  Given the political will, a lot more is possible on living standards than the sceptics suppose.

4 Responses to Living Standards Declinism & the Primacy of Politics

  1. Tanweer Ali
    Aug 28th 2013, 6:10 am

    Though I’ve never yet described myself as an evangelist I agree with almost everything you’ve written here. In terms of getting the politics right, Labour needs to focus its message on living standards, but also to frame an economic narrative that goes beyond simply seeing all issues through the prisms of GDP growth and the budget deficit. A debate that concentrates on real issues that face ordinary people in real-life households (as opposed to a debate centred around a narrative that places the state in the position of a sort of ‘super-household’) is one that the left can win.

  2. gastro george
    Aug 28th 2013, 6:20 pm

    It strikes me that declinism is a major part of the narrative of modern “mainstream” economics. It’s a flag that’s signalling to the general public that we can only expect perpetual austerity. As such, is it accompanied by other memes like “there is no money”. So we should just become accustomed to falling living standards because they are, well, inevitable.

    Except, of course, they’re not, and it nicely sidesteps the inconvenient fact that the 1% are doing rather nicely, thank you.

  3. gastro george
    Aug 28th 2013, 6:23 pm

    “… it’s possible that even if such measures were enacted, capital would respond by cutting investment and demand for labour …”

    Or possibly not. I find it hard to believe that any sane business man would ignore increased cash in people’s hands.

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