The one ray of hope lately has been the low level of inflation. But the BoE extinguished that one this week with news that prices are heading up at a faster rate and are outstripping wage growth again. Inflation in October was an annual 2.7%, some way above the Bank’s 2% target.
The reasons are unclear but remember this is a western slump, hence commodity prices are still high due to demand from the rest of the world. Plus we’ve had a depreceation in sterling. Mentioned less often is the tendency of big companies to raise prices rather than increase output, given the lack of genuine competition in so many parts of the economy – energy is an obvious example.
Separately the unemployment conundrum looks to be getting settled – though in an equally gloomy way as recent resilience in the labour market sags. Although headline unemployment is still only 2.5 million, the numbers claiming jobskeers allowance and the numbers out of work for a year are edging higher.
The Bank’s latest explanation for the failure of recovery is that ‘zombie’ companies and households are loaded down with debt but kept alive by banks that can’t let them fail because of what further bad debts will do to their own solvency. Three out of 10 companies are now reported to be making a loss. This survival of companies on a drip-feed of bank credit must indeed be part of the mysterious recent unemployment figures. No ‘creative destruction’ means no rise in ‘structural’ unemployment as in past recessions.
According to Samuel Brittan the explanation for the productivity puzzle – output down but jobs much the same – is that people have priced themselves into work with lower wage demands since 2008. This is partly due to a fall in trades union membership over the last 20 years but also – perhaps more – because of extreme nervousness and fear of unemployment, returning us to the neo-classical model of a labour market where wages ‘adjust’ to economic conditions. Which has helped profitability at the 7 in 10 not in the red.
It is an important point as it takes us into one of the more popular explanations of what caused the crisis. This version runs that the capitalist system has only been able to maintain demand in the last twenty years by increasing consumer debt. As profits were inevitably squeezed by the process of capital accumulation and competition, labour power was weakened to bring costs down. Financial liberalisation then had to be introduced to maintain demand.
The alternative – though perhaps not contradictory – version of this theory is that demand had to be maintained in a structural shifting economy. In this version – more to my preference – we are going though a huge shift to a service economy. That shift is driven by a combination of long-term trends in consumer demand, as people get wealthier and more highly educated, and the off-shoring of manufacturing to cheaper labour centres.
It was this latter factor that created the trade imbalances and the surpluses that were fed into the financial system, grossed up by credit creation and then ploughed into housing and consumer credit markets to provide the demand for new products which were now being imported. This is a basic productivity gain / unemployment spiral writ on a huge scale.
And a bit of Keynsian pump priming will not sort it out.