Austerity is to blame for the UK’s coming recession

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The year 2023 is set to drag most of the world into recession, and the UK is set to be particularly hard hit.

Globally, the biggest risk is a massive cost of living crisis, driven by the uneven recovery from the pandemic and a host of supply chain issues that remain unresolved.

First, the war in Ukraine combined with runaway fossil fuel corporate profits and our slow transition to clean energy has kept fuel prices high. Europe is the most affected because it is more dependent on Russian natural gas.

Second, the massive lockdowns in the global shipping system, which I reported on last year, have eased, but import prices are still affected. And the global value chains that link resource extraction and the production of goods in the Global South to consumer markets in the Global North have still not returned to pre-pandemic levels of efficiency.

But these factors primarily affect the cost of goods, and inflationary pressures have shifted from goods to services in 2023. Part of this comes down to fuel prices, which affect all areas of economic activity, but there are also other factors at work.

Policymakers were quick to blame workers for the rising prices, as they always do. In the United States, writer and historian Tim Barker recently had access to a statement written in 1996 by current Treasury Secretary Janet Yellen, in which she described unemployment as a “device of labor discipline”. The outlook hasn’t changed much since then: policymakers now believe that employment and workers’ bargaining power are too high, and that’s what’s causing inflation.

The absurdity of this argument is quite clearly revealed by the data. Prior to the pandemic, workers in the United States had experienced stagnant real wage growth for four decades. And the immense struggles that workers across the economy face as they try to unionize to resist the erosion of their wages are ending the idea that they have too much bargaining power.

So what’s really going on?

To understand what drives inflation in the United States, just look at the price of eggs. In the United States, the price of a dozen eggs has more than doubled in some places and tripled or even quadrupled in others.

Producers claim this is due to the pandemic and outbreak of bird flu last year. But the problem is actually corporate profit. As is the case in many other markets, the oligopolies collude to raise prices and use generalized inflation as an excuse.

In a competitive market, new entrants can be expected to undermine these practices of incumbent producers. But the markets in the United States are not competitive, they are highly monopolistic. This gives big companies enormous power to set market conditions rather than follow them.

Much like fossil fuel companies and shipping lines, many consumer goods producers collude to jolt consumers by raising prices far more than their rising costs.

Most UK markets are not as oligopolistic as those in the US, but we still have to deal with corporate greed from fossil fuel companies, big energy companies, banks and many more.

Thus, corporate greed is a factor driving up prices. But the cost of living crisis is not just about rising prices. It’s about the disparity between what things cost and what people earn.

As is now well documented, wages in the UK stagnated for the longest period in centuries in the decade following the financial crisis. And we’ve seen some of the biggest monthly declines in real wages on record this year.

The situation in the United Kingdom and the United States reveals the utter absurdity of the attempts of policy makers to induce unemployment in order to bring down inflation, under the pretext of preventing a recession.

The severity of the probable recession in the UK is due to the fact that people simply cannot afford to go out and spend the money. In an economy like ours, which is disproportionately driven by consumption, this has massive ripple effects.

Companies earn less, so they invest less, which reduces their suppliers’ income. Companies have to lay off and unemployment rises, compounding the problem.

The icing on the cake is the government’s decision to revert to the failed austerity economics of David Cameron and George Osborne. Just as families and businesses need more support to survive, the government has reined in spending, one of the economy’s biggest sources of demand.

It is very easy for policy makers to paint the cost of living crisis and the coming recession as a problem of rising prices, and to tell workers that their demands for wage increases in line with inflation will not only make the problem worse. But even if you ignore the fact that corporate greed is putting upward pressure on prices in many markets far more than wage pressures, prices are only one side of the equation.

The other side is incomes, and in the UK, thanks to decades of underinvestment, stagnant wages and faltering productivity growth, these were already pushed to breaking point before the inflation is starting to rise.

All over the world, workers are suffering from rising prices. But in the UK they are squeezed to the breaking point between rising prices and stagnating incomes. And the government’s only response has been to introduce policies that will further limit wage growth.

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