We’ve built an economy where life-or-death decisions on prices and wages are driven by investors’ interests
The UK’s cost of living crisis seems to escalate almost by the day. According to experts, we are facing the biggest fall in living standards since the 1970s. Announcing a phase-out of Russian oil imports, Boris Johnson spoke of “dark days ahead” – as if the days we live in were not already dark enough.
This crisis cannot be blamed solely on Russia’s brutal invasion of Ukraine. The return of high inflation may be traceable to short-term supply shocks. But the things that turn it into a crisis have been decades in the making.
In the 70s, “stagflation” – low growth coupled with high inflation – put an end to three decades of rising living standards. Now, it comes on top of a lost decade. Real wages are no higher than in 2008, when the financial crisis hit. Millions of households were already struggling to make ends meet. It does not take much to tip them into the red.
It is not just that wages have been squeezed: simply existing in the UK has become inordinately expensive. This is partly because we have gone further than almost anywhere else in turning essential goods and services into financial assets. Because people literally cannot do without them, owning these assets is a reliable way to extract huge rents while doing very little. By putting the means of a decent life in the hands of private gatekeepers whose only concern is to maximise their rents, we have built an economy that systematically inflates costs for consumers while also driving down wages.
Bank of England raises interest rates to 0.75% as inflation soars
The most obvious and egregious example is housing. When soaring housing costs are taken into account, living standards have been falling for most working-age households since 2002. House prices have risen 20% since the start of the pandemic and are at a record high, both in absolute terms and relative to earnings. This leaves growing numbers of people trapped in the private rented sector, where about a third of their income is gobbled up by rent alone. Average rents have risen 8.6% in the past year and now stand at over £1,000 a month. This comes on top of a decade where rents already rose far faster than wages. Of course, renters’ losses are landlords’ gains. Attracted by these outsize returns, buy-to-let investors have swallowed up a substantial chunk of available homes in recent years.
We see the same patterns elsewhere, from care to water, energy to transport. Britain’s childcare system is the third most expensive in the world: bad news for parents but good news for the private equity investors buying up nurseries. Meanwhile, about £1 in every £10 spent on social care is extracted from the system by highly financialised companies that own and control assets within it – contributing to an eye-watering 30% increase in costs for self-funded care since 2012. Rail fares have risen 20% in real terms since privatisation, and water bills 40% – with excess profits inflating the latter by an estimated £2.3bn a year. Meanwhile, as the thinktank Common Wealth points out, the monopoly owners of the grid are achieving 40% profit margins, and pay out over £1bn a year to shareholders.
The Bank of England governor, Andrew Bailey, recently warned against the threat of inflation caused by increasing wages. The bogeyman lurking behind the governor’s intervention was the “wage-price spiral” – whereby rising wages drive prices up further, leaving nobody better off. This plays into the idea, beloved by mainstream economists, that the interests of workers and consumers are essentially a seesaw: for one to gain, the other must lose. But this conveniently ignores the third actor in the equation: the owners. In the UK today, owners are the one group who actually have the power to set both wages and prices. Indeed, they have been systematically handed that power by decades of deregulation and trade union decline.
So why did Bailey ignore them? Why, the FT commentator Martin Sandbu pondered, did he not call on powerful businesses to “moderate” their profits, rather than asking less powerful workers to “moderate” their wage demands. Perhaps, as Sandbu observes, because mainstream economics has a “blind spot” for the power of capital, and correcting this would mean asking uncomfortable questions about “who bears the cost” of rising inflation and who benefits.
High energy costs may have millions wondering how they will heat their homes, but BP’s chief executive boasted unashamedly that they turn his company into a “cash machine”. BP’s and Shell’s profits soared to a combined $32bn last year, with BP shareholders standing to benefit from a $1.5bn share buyback. Demands for a windfall tax have proved popular because people intuitively understand that these enormous rewards are unearned and unfair.
The UK facing double-digit inflation, John Lewis head predicts
But even companies on the wrong end of rising input costs have significant power to decide who takes the hit: do they pass it on to customers by hiking prices, or to shareholders by squeezing margins? In the case of supermarkets, as the campaigner Jack Monroe has made clear, this effectively means power to decide whether the poorest families can afford to eat. The problem is that the companies making these life-or-death decisions recognise no duty other than to maximise investors’ returns. In France, state-owned EDF has shielded citizens from the pain of rising energy costs. In the UK, where public ownership has been systematically dismantled, we lack both the democratic levers and the political will to do the same.
In the US, where corporate power is even more concentrated than in the UK, commentators warn that the real danger is not a wage-price spiral but a “profit-price spiral”. US corporate profit margins are at a 70-year high, and have risen 37% in the past year alone. In one survey, more than half of retailers admitted to raising prices by more than their increase in costs – with larger firms most likely to be doing so. The narrative about inflation offers a convenient smokescreen for fattening margins, as investors brazenly admit. In the words of one asset manager: “What we really want to find are companies with pricing power. In an inflationary environment, that’s the gift that keeps on giving.”
In the face of such shameless profiteering, calls for slower wage growth are as economically wrongheaded as they are inhumane. Yes, there is a group who have been creaming off excessive rewards for decades, and who now need to tighten their belts in the face of supply shocks. But it’s not ordinary workers. As those firebrand socialists at Morgan Stanley recently argued, it’s profits that must shrink to absorb the pain of inflation – making up for decades in which capital has increased its share at the expense of workers and consumers alike. More fundamentally, we have to ask whether the UK’s world-beating experiment with privatisation has run its course. The astounding sums handed to investors might have passed unnoticed in better times. Today, this largesse is something we quite literally cannot afford.
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