The governor of the Bank of England gave a speech in Newcastle today. In it he said:
“Further rises in world commodity and energy prices cannot be ruled out,”
“Attempts to resist their implications for real take-home pay by pushing up wages would require a response [from the Bank's monetary policy committee].”
This is deliberately technical language used to disguise the fact that Mervyn King is literally saying “workers’ wages must go down in order to benefit the accumulation of capital”.
What? Well, I’ll explain step by step. King is saying there will be inflation, which means that if workers’ wages don’t increase proportional to whatever that inflation is, then they will be taking a pay cut while still working the same hours.
You also have to remember, to put this into context, that both the British and American governments are deliberately increasing the money supply with quantitative easing – effectively printing money. This causes inflation. The two governments’ stated reason for QE (and we have no reason to disbelieve them) is that it is being done to encourage investment, and therefore economic growth. More on that in a second.
King then explicitly warned that if workers’ wages nominally increased to cancel out inflation (aka if they didn’t fall in real terms) then the bank would take action and discipline the market using monetary policy, specifically interest rates. (‘require a response’ – very ominous).
Now, the Fed and the BoE are increasing the money supply with quantitative easing in order to restore growth to the economy. But of course, since wages will be falling, the product of that economic growth won’t be going to workers – in fact, workers will be getting less and less of it as their wages fall in real terms. If growth does occur, then it’ll all be going to the investor class, and the ‘rate of exploitation‘ will have increased. (In modern economic terms the statistic to watch is workers’ wages as a share of GDP, which would fall as the rate increases.)
It’s also worth considering that the Bank of England ‘disciplining the market’ with monetary policy in order to force this decrease in wages is state intervention on the part of capital, to the detriment of workers – not some kind of unavoidable natural occurrence.
Comments
it’s not as obvious as you think that QE increases the money supply. You can look at data and see that it hasn’t (obviously it increases high powered money, but not the broader money supply), Bernanke has said it’s not about printing money (counter intuitive as that sounds). And it’s not obvious that inflation is coming from the domestic economy at all – a lot is to do with deteriorating terms of trade (imported input prices rising) and tax rises – such things reduce the real worth of the labour share and the profit share in tandem (you can now buy less with your profits). Of course there could also be a further decline in the share of income going to labour – I’m just pointing out that’s not necessarily what Mervyn is talking about.
have a read of this too:
http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/12/rich.html
labour and profit income share data might not mean what it’s assumed to.
Interesting blogpost on the income distribution for investors, luis. I think the author makes a few wrong turns, though.
Really, the main thing is the inclusion of pensions as part of investment income is a bit sneaky.
It’s not clear that it makes sense to include pensions in a mean of all incomes – they only actually pay out at the end of life, and so yes, for 20 years at the end of your life your income will be supposedly 100% made up of investment, but for the rest of it you’re getting none of that. If you don’t have any of the other categories of investment (stocks, bonds, etc) then your investment income is effectively 0% for the majority of your life.
Because of the huge contrast and effective ‘mode change’, taking pensions and including them in a mean average like that really obscures what’s going on for the majority of someone’s life, which is that their ‘share of the capital pie’ is far lower.
It significantly affects the statistics when you use means, because what sort of income do pensioners usually have? Yep, pretty low incomes compared to when they were working. So you’ve got a huge block of people on low incomes (whether or not they were on low incomes for most of their life) getting 100% of their income from ‘investment’ (according to the graph) it hugely skews the result for everyone else who isn’t a pensioner and paints a different picture.
Since pensions and other retirement savings plans absolutely dwarf the other revenue classified as investment in the graph (because nearly everybody has a pension, but far fewer people have more conventional forms of capital) once you removed the pensions you’d get a very different shaped graph indeed.
Also, another point against including pensions as investments is the contributions are taken straight out of salary and not paid to the employee, you’re never actually counting that money that they earned as a salary as ‘employment income’ – a significant difference to how it would be counted with a normal investment. But then 40 years later it re-emerges as a pension payout, having being effectively ‘laundered’ by the author as ‘investment income’.
Of course, you could argue that this underscores the dangers of using the wages as a proportion of GDP statistic, (which I’m well aware of – it’s clearly not a perfect measure and you need to look at what’s increasing to offset it) and that pensions increasing as a share of the economy is responsible for the fall in wages as a proportion of GDP, but pension spending has been practically flat since the 1970s (in the US – only stats I can find sorry) http://upload.wikimedia.org/wikipedia/en/0/05/Us_gov_spending_histry_by_function_1902_2010.png so other forms of capital have been responsible for the fall of wages. This alone is really a good enough reason to discount pensions in an analysis of why wages are falling as a proportion of GDP.
Also, it should be noted that the top end of the scale is where off-shoring and tax avoidance takes place – which would inevitably skew the reported investment income downwards. But that is not as relevant we’re mainly looking a bit lower than that on the income scale.