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Wages and the cost of living (again)

As inflation begins to kick off again, is it a return to the 1970s?

The government and the Confederation of British Industry are banking on an “export-led recovery”. They are hoping that, with the fall in the value of the pound making exports cheaper, there will be an increase in production in the sectors producing for export which will have a knock-on effect on the rest of the economy.

There is no guarantee that this will happen, especially as others – in particular, the US and German-dominated Euroland – are hoping for the same. But there is another side to a fall in the value of a currency. While it makes exports cheaper, it makes imports dearer.

When, in the days of formal devaluations, the Labour government of the day was forced in November 1967 to devalue the pound, by 14 percent compared against the dollar, the Prime Minister Harold Wilson made his famous remark about the “pound in your pocket”:

“From now the pound abroad is worth 14% or so less in terms of other currencies. It does not mean, of course, that the pound here in Britain, in your pocket or purse or in your bank, has been devalued. What it does mean is that we shall now be able to sell more goods abroad on a competitive basis.”

Technically, he was right. If you had a pound in your pocket it didn’t become 86p (in today’s money). But he was being disingenuous as he knew that the devaluation would make imports dearer and so lead to higher prices for imported goods. The cost of living would go up, leading to “the pound in your pocket” not being able to buy as much as previously.

It’s happening again now. The government has let the foreign value of the pound fall; the price of imported goods (such as oil and gas, and oranges and bananas) has gone ip. So, as a result has the cost of living. Figures for January for the Consumer Price Index showed a rise of 4 percent compared with the previous January, well above the 2 percent that the Bank of England is supposed to keep it at.

It’s going to continue. According to Sean O’Grady, the Economics Editor of the Independent (21 January), there is “mounting evidence that manufacturers are having to pass a rapid rise in import costs on to the consumers – with the acceleration in imported inflation at its highest since 1975, the year that recorded the highest import inflation in modern British history.” He went on to quote the CBI’s chief economic adviser, Ian McCafferty:

“Manufacturers have come under intense pressure to pass on rising costs: they have increased prices markedly in this quarter [last quarter of 2010], and expect to raise them at an even faster pace over the next three months. This will drive further inflationary pressure in the wider economy.”

What this means for workers is clear. Unless money wages go up too (by the same percentage) real wages – what wages can buy – will go down. Which is what the government and other apologists for capitalism want. As Bank of England Governor Mervyn King declared in a speech in Newcastle on 25 January that “the squeeze in living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.” He noted approvingly:

“Average real take-home pay normally rises as productivity increases - money wages normally rise faster than prices. But the opposite was true last year, so real wages fell sharply. And given the rise in VAT and other price rises this year, real wages are likely to fall again. As a result, in 2011 real wages are likely to be no higher than they were in 2005. One has to go back to the 1920s to find a time when real wages fell over a period of six years.” (
His emphasis)

People on benefits are protected to a certain extent by these being indexed to the Consumer Price Index, so if this goes up so do their benefits. So are workers in unions, as unions are usually able to obtain a wage increase at least equal to the increase in the cost of living.

Now voices are being raised to stop this. As if to show that the Keynesians are just as anti-working class as the Free Marketeers, Keynes’s biographer Lord Skidelsky and Michael Kennedy wrote to the Financial Times (29/30 January) claiming that “the indexed incomes policies of the 1970s were a national disaster”. They called for increases in the cost of living due to increases in the price of imported goods to be excluded from the Consumer Price Index. Which of course would mean a reduction in the standard of living for those with indexed incomes.

Tim Shepherd replied the following week (Financial Times, 5/6 February) warning that manipulating the cost of living index would be “a slippery slope that will reduce the credibility of the indices” (as if this hadn’t already happened – only last October the government changed the link for benefits to an index that goes up more slowly). But he too asserted that “real wages need to fall when the terms of trade move against an economy”.

The terms of trade compare export prices with import prices and “move against an economy” when more exports are needed than before to pay for the same amount of imports. But this is precisely what happens when the value of a country’s currency falls; it decreases export prices and increases import prices, so increasing the gap between them.

So it really could be the return to the 1970s that Lord Skidelsky and the others fear. Then, governments, both Labour and Tory, tried all sorts of ways to hold wages down – wage restraint, incomes policies, wage freezes, anti-union laws – and the workers and their unions fought back. Strikes were more frequent than today. The governments and the media described this as a wages-prices spiral, blaming the workers for fuelling it with their wage demands. But it was more of a prices-wages spiral, with workers trying to keep their wages going up in line with rising prices (caused, at that time, mainly by currency inflation).

Strictly speaking, an increase in import prices is not "inflation" as inflation is not any particular price increase but only (as the word itself suggests) an increase in the general price level due to an overissue of the currency. Currency inflation is still moderately practised by governments who often aim to keep it at around 2 percent a year. One of its effects is in fact to increase export prices along with all other prices and is a factor in whether a currency floats up or down relative to others.

If the rise in the cost of living is going to speed up as in the seventies then the workers’ response will have to be what it was then – to push, including by going on strike, for money wages to go up to maintain living standards, even though this time, given mass unemployment, employers will be in a stronger position.

What this confirms is that built-in to capitalism is a class struggle between workers and employers. But it’s not just over wages and working conditions. It’s ultimately over the ownership and control of the places where wealth is produced.

As capitalist ownership of the means of production is created and upheld by the state, the struggle needs to be carried over from the workplace on to the political field. It means organising not only in trade unions and the like to wage what is essentially a defensive struggle. It means organising politically to put up candidates against the parties of capitalism (Tories, Labour, Liberals, Greens, Nationalists) with a view to wresting political control from them and using it to declare private, class ownership of the means of production null and void so that they become the common property of society as a whole. This is why, in addition to trade unionism, a socialist political party is needed.