It is now clear that the Bank of England thinks it can cure one problem of the rising costs of living by putting up one of the most important of those costs: the rate of interest. As a consequence, anyone paying a mortgage faces a nasty hike in their payments and anyone running a business that borrowed money faces an equally unpleasant problem.
A crude and painful way to tackle inflation
Inflation cannot be cured by raising the price of money. Or to be more accurate, doing it that way comes at such an immense cost that no responsible person should contemplate such an eccentric strategy. Essentially what economists who accept this theory believe is that the best way of dealing with inflation is to batter enough people into accepting a cut in their standard of living by putting their jobs at risk.
That is a very crude and painful way of tackling inflation. Faced with rising bills for mortgages, rent, fuel, and food the only reasonable action any employee can take is to seek a pay rise. Whilst there is a shortage of workers, they are likely to get it. So supposedly responsible economists are deliberately trying to create unemployment in the hope that it will slow the economy sufficiently to stop inflation in its tracks.
Their theory is incredibly dangerous. It will take a hefty dose of hard times to begin to have the required impact on shortage professions. It isn’t wise to try and cure a problem of lorry drivers shortages by slowing the economy down so badly that business doesn’t need as many. The best way of solving a problem of rising fuel costs and rising food costs isn’t to make a lot more people too poor to buy food or heat their homes.
High inflation leads to high unemployment
When inflation reached 27 percent in Britain in the 1970s two things happened that stopped the problem. The first and the most important of those things was that globalisation reduced the price of a lot of imports so that a lot of things became cheaper and inflation went down. That was a relatively painless change. The other thing that happened was that unemployment went up to over three million people. I am old enough to have lived through the experience. It wasn’t pleasant. It meant lost jobs, bankrupt businesses and household budgets slashed to the bone.
That is not a set of experiences that anyone ought to contemplate repeating lightly. Especially as the impact of globalisation has now started to reverse. The rest of the world has changed enormously since the 1980s. It is no longer the case that people in China will work flat out in a factory for a bowl of rice a day, or that businesses can move their production to poverty stricken third world countries to cut costs and provide cheap products.
Western standards of living are unsustainable
Across the globe standards of living have risen and the new middle classes of India, China, and Nigeria have started to adopt styles of living that put real pressure on the price of food and the price of fuel and to demand wages that rival those available in Britain. When Western-style consumer lifestyles start to be adopted by billions more people it starts to become increasingly obvious that those lifestyles are simply not sustainable.
The pressures we Western consumers place on the environment are enormous and billions of people trying to consume lots of meat, lots of oil and lots of plastics pushes up prices. Globalisation has now ceased to drive down inflation and has begun to have the opposite effect. That means that any attempt by British policy makers to drive down prices by deliberately slowing the domestic economy is going to be very much harder and more painful than many conventional economists realise. It is simply not realistic to expect UK inflation to be knocked out by a quick and relatively painless minor economic slowdown.
What it will take is a whole series of clearly thought through plans by central government and central bankers that are aimed at helping people to reduce their consumption of goods and services that are rising in price, without hugely painful impacts on their lifestyles.
That means a plan for reducing fuel consumption, a plan for reducing housing costs, a plan for reducing food bills and a plan for addressing shortages of workers. Such planning is simply beyond the capability of the people currently running this country because they are locked into a set of ideological beliefs that prevent them from undertaking the necessary actions.
For example, the only realistic way to reduce housing bills is to start building good-quality affordable social housing and then let local councils and housing associations rent them out. This government is trying to do the exact opposite and wants to seize the private property of housing association charities and sell them off.
The best ways to reduce fuel consumption is to reduce the number of journeys people take and switch as many of them as possible to public transport. This government is trying to bully people to go back to the office five days a week and its enthusiasm for privatised train companies is resulting in reduced services.
The way to cut heating bills is to insulate homes. This government has let millions of new homes be constructed without solar panels or heat exchange units and has no serious programme for retrofitting leaky inner-city homes.
The best way to increase the supply of labour is to re-join the EU single market and have freedom of movement of labour. This government is busily increasing the barriers with the EU.
Nasty party, nasty economics
Put bluntly this is a government that has no idea how to tackle a cost-of-living crisis because it was raised on narrow minded Thatcherite economics. It has no experience of the realities of ordinary people’s lives because it consists of deeply privileged people who have never moved outside the circles of multimillionaires, expensive public schools and investment bankers’ annual bonuses.
It used to be argued by some that the Conservatives might be the ‘nasty party’, but at least they were efficient at running the economy. These days things have changed. They have become a lot nastier and a lot worse at responsible economic management. It isn’t just their ethics which need calling into question. It is their entire world view.