The Worst Ever Drop In Disposable Income?

The UK media, always glad of some new sensationalist story, have been talking about recession, as speculators, and their representatives have been doing for some time, as they seek to create an atmosphere of gloom and fear, designed to persuade workers not to risk striking or demanding higher wages, and to save rather than spend, just as all of the Covid hysteria was previously designed to do. Now, we are told, in the world of the media's need for superlatives, that UK households are to face the biggest ever fall in their disposable income. Is that possible? Anything is possible, Is it likely? Probably not.

For it to be true, a whole host of variables have to come together, along with the acceptance of a lot of other assumptions. For one thing, the definition of what constitutes disposable income could be questioned. Its generally accepted as meaning the surplus income after necessary spending has been accounted for, but that then begs the question of what is necessary spending. It meant something completely different in the 1830's to what it meant in the 1880's, which was again different to what it was in the 1930's, or again in the 1980's. For one thing, in the 1980's, virtually no one had a mobile phone, yet, many, today, would see it as necessary spending. So, in real terms, its not comparing like with like.

The predictions also make assumptions about inflation, recession, and wages. Take the difference between the forecast of the Bank of England and that of the OBR. The Bank of England has forecast that Britain will have a fairly shallow, but prolonged recession, lasting up to 18 months, whilst the OBR, also forecast a shallow recession, but lasting perhaps only 6 months, and with faster growth thereafter. The reason for the difference is their assumptions about saving and spending. The Bank of England assumes that households will not use the large amount of savings built up during lockdowns, and, faced with the fear of recession, will, instead, add to those savings, thereby reducing spending, and so aggregate demand in the economy. The OBR assumes that households will continue to draw down on those savings, to supplement their wages, and so spending will fall less, leading to a smaller drop in aggregate demand.

The Bank of England's forecast, of course, is based upon what it hopes will happen as a consequence of its attempts to bring about a recession by raising its policy rates of interest, so as to, then, lead to higher unemployment and pressure on wages, which will enable profits to rise, at the same time as reducing the demand for money-capital (and increasing its supply from additional savings), thereby, halting the current rise in market rates of interest, which is causing asset prices to crash. The Bank of England, like all central banks, is the centralised representative of the speculators that comprise the ruling class, and of their interests as owners of fictitious-capital. So, its no surprise that this is what it hopes for, and that it comprises their central forecast.

But, in fact, the OBR's assumption, and so forecast, is more likely. Firstly, despite the repeated rises in its policy rates, the Bank of England, like other central banks, has not raised them, yet, until they become positive in real terms, i.e. Bank Rate is currently 2.25%, but inflation is running at 11.1% and rising, so the real rate of interest is minus 8.85%. If you are looking to save money, then variable rates (and no one wants to get locked into a fixed savings rate, now) are still around 1.8%. So, there is every reason to use your money to buy a new car, a new TV, kitchen, phone and so on, using your lockdown savings, because all those things are likely to cost you at least 10% more in a year's time, as against the measly 1.8% you can get on your money stuck in the bank.

And, the same applies to businesses. Borrowing costs are higher than deposit rates, but even still, if the annual rate of profit is, say, 30%, then £10,000 borrowed, today, at a rate of interest of, say, 6%, will produce £3,000 of profit in a year's time, as against the £600 of interest paid to borrow the capital to produce it. However, as a result of 10% inflation, when the firm comes to sell the output from that capital, it will sell at money prices 10% higher than today, and so producing money profits also 10% higher. Rather than £3,000 of profit, it will be £3,300, meaning that inflation would have reduced the amount of interest by half, leaving the firm with £2,700 of profit, as against £2,400. In other words, interest rates would have to rise significantly more to bring about the effect that the Bank of England, and other central banks seek to achieve, of slowing economic activity, and so leading to a fall in wages, and rise in profits, so as to boost asset prices.

That rate known as R* is much higher than the rate, known as R**, at which financial markets and asset prices suffer a crisis. The small absolute rises in global interest rates have already caused asset prices to fall by around 30%, and more like 40%, in real terms after inflation. The speculators are desperate for those rises to end, not be extended much further, and latch on to any sign of recession, or potential for central banks to “pivot”, and begin, reducing those rates, as justification to begin their gambling on stock and bond markets all over again.

But, what both the Bank of England and the OBR forecasts fail to take into consideration in their assumptions is what workers themselves might do, not as passive consumers and savers, but actually as workers. The social democrats who parrot these claims about falling real wages, and disposable incomes, because they seek to opportunistically attack the government, also make this assumption about workers being merely passive participants, having things done to, or for, them by government.

The reason for that is, also, because they really don't want wages to rise sharply squeezing profits, and threatening asset prices, because they have built their own agenda on a continuation of those speculative capital gains too. Moreover, it reflects the fact that most of these pundits and politicians are middle class in nature, largely outside the labour movement, and indeed dependent upon their own individual skills, or otherwise passive participants in events. The concept that workers might collectively, via their trades unions, respond to rising prices, by themselves demanding, and in conditions of labour shortages, obtaining, above inflation pay rises, is beyond their comprehension.

But, that is what workers have always done in conditions like those we have now. In that case, rather than household disposable income falling by the most on record, it would, in fact, rise, and, as in previous periods, such as the 1840's, 1890's, as well as in the 1960's, would result in significant real terms increases in workers' living standards. A look at the sharp growth in unionisation, across the globe, and of strikes of workers demanding and quickly obtaining large pay rises, shows that is the situation, now, and not one of the biggest ever fall in household disposable income.

Is that inevitable? Of course, not. Wages began to rise after 2000, as labour shortages began to emerge. Central banks, then, too, tried to halt it, with increases in their policy rates – actually to higher levels than currently exist, though with lower inflation, and so much, much higher real rates of interest – and the result was the crash in asset prices that occurred in 2008. But, states responded to that crash by introducing fiscal austerity to slow economic growth, as well as printing money tokens to inflate asset prices, a process, which has, now, also led to the high rates of commodity price inflation seen across the globe.

The purpose of all the talk about recession, the worst fall in disposable income and other such narratives, is, again, to try to frighten workers, and to, thereby, slow economic activity. Larry Summers has made clear what the ambition of the ruling class is, which is to increase the number of unemployed by around 50%, so as to discipline workers, reduce wages, and boost profits.

Yet, even that was not enough, after 2008, because the underlying dynamic of the long wave cycle continued to push its way through all these attempts to hold back the economy. To an extent, they worked. UK GDP growth was, on average, only 2% p.a., in the period after 2010, as against around 2.7%, in the period between 1997 and 2008. And, other means have been used to that effect.

In his Budget Speech last week, Jeremy Hunt tried to claim that the shoddy performance of the UK economy was nothing to do with him and the Brexitory Government, but that is clearly nonsense. When Labour left office in 2010, GDP was growing at 1% quarter on quarter, or about 4% p.a. It was halted overnight, by the incoming Tory-Liberal government talking about a debt crisis, and need for drastic austerity. It was the austerity introduced by that Liberal-Tory government that created an artificial recession, in the period up to 2014, despite historically low levels of interest rates, to finance government debt, and which also led to a renewed destruction of UK infrastructure and public services, inherited, today.

Another major factor damaging the UK economy is Brexit, again the policy introduced by the Tories, and now being implemented by a Brexitory government, aided and abetted by a Brexitory Blue Labour PLP. Brexit has drastically reduced UK trade with its major trading partner the EU. It has fallen by around 15%, with a consequent hit to the UK economy. But, it has also imposed much higher costs as a result of the red tape, and frictions on the remaining trade. One of those frictions is also in relation to a labour market that is already tight, resulting in firms being unable to recruit the required workers, even as they are forced to offer much higher wages. So, the Brexitories cannot complain about that hit to the economy that they have brought about themselves, and the Brexitories of the Blue Labour PLP are also in a bind on that, because they are as much to blame, as they continue to support a continuation of Brexit, as they search in vain after the votes of reactionaries.

Indeed, Starerm and Blue Labour's position on that looks increasingly insane even in electoral terms, because 66% of Labour voters support rejoining the EU. Why would you piss off two-thirds of your voters, simply to try to satisfy the other one-third? What is more, 57% of all voters, now support rejoining the EU. That is a 14% lead for rejoining, as against the 2% margin for leaving in the 2016 referendum. Clearly, if the Brexitories of Blue Labour do not respond to that by changing position, the field will be wide open for the Liberals, Greens, Plaid and SNP to steal huge numbers of Labour votes, by campaigning for re-joining, ahead of the next election. 

Hunt, also referred to the effects of lockdowns, but, again, lockdowns were not something that occurred outside the government's control. They were a deliberate and, again, insane decision by the Brexitory government, again backed by the Brexitories of the Blue Labour PLP. Lockdowns seriously damaged the economy, by physically preventing both prouction and consumption, and were compounded by the fact that the government borrowed money to pay out in income replacement schemes, causing its finances to be cratered, and borrowing costs to rise, as well as by having the Bank of England print even more money tokens to finance that spending, which has now created the high levels of inflation seen in the economy. The economy is also suffering from shortages of skilled workers, and also has a problem with kids leaving school with inadequate education, but that again was compounded by ridiculous lockdowns of schools for two years, which denied kids of two years of education, unnecessarily, given that kids are not at risk from COVID.

The decision to lockdown the economy was the government's decision, and it, along with the Brexitories of Blue Labour that also backed it, and wanted more, is responsible for it! In fact, Sweden, which did not lock down has had per capita death rates, and rates for hospitalisation and serious illness much lower than Britain and other countries that did.

Hunt also complained about the high cost of energy hitting the UK economy. High energy prices are indeed affecting the UK economy, as well as the EU and US economy, because energy forms a part of constant capital, and the sharp rise in price has led to a tie-up of capital, which otherwise would have gone to either additional revenues and consumption or investment. But, again, those high energy prices are not an accident, nor the fault of Putin. It is NATO that imposed sanctions on Russian exports, reducing the global supplies not only of energy, but also of grain, and fertiliser that has pushed up global food prices. It is the EU, and UK, which, in support of those sanctions, has boycotted Russian oil and gas, pushing the price of those commodities much higher, and it is NATO that blew up the Nordstream pipelines to try to prevent a change of heart on that score by EU governments!

So, yes, all of those things act to depress economic activity, and may yet lead to a recession, which would lead to wages falling, as prices continue to rise, but it is not at all as though those things are outside the control or responsibility of the government. The cause of inflation is a devaluation of the currency/standard of prices, caused by excessive liquidity, and the government could end that, now, by removing the independence of the Bank of England, and introducing QT, rather than raising official interest rates.

It won't do that, because the effect would be to prevent price rises, which in conditions of rising wages, would squeeze profits. The government could respond to the wishes of the large majority of the electorate by scrapping its insane Brexit, and applying for a rapid re-entry into the EU. The government, and those of other EU countries, could end the high energy prices by ending their sanctions against Russian oil and gas supplies, paying for those supplies in Roubles, and so on. They could also reduce global food prices by removing the sanctions on Russian grain and fertiliser exports, and allowing Russia to receive payments via the SWIFT international payments system.

The concern from Brexitories, including the Brexitories of Blue Labour, is phoney, because, if they were really worried about there being the worst ever fall in household disposable income they would change their stance on all of the above, which are causing living costs to rise sharply. But, of course, they won't because they all want to cow workers, so as to reduce their wage demands, boost profits, reduce interest rates, and so enable asset prices to rise once more. They have no other solution than that, which has been their policy for the last thirty years. Workers cannot be taken in by it, and instead must continue to rely on their own strength and ability to win higher wages, as they are already doing.

The reality is that many workers are able to simply shift from their existing jobs to better, higher paid, jobs. On average that brings a 15% increase in pay, which is not reflected in the average pay increase figures. Nor is the fact that a worker who goes from working part-time to full-time, gets a much bigger increase in their income than the average hourly pay rise data indicates. Similarly, a household which goes from having one income earner to two, or more, has a much bigger increase in income than the data indicates, and so also an increase, rather than a decrease in its disposable income. Of course, if you are a single person household, and unable to take advantage of all the above, you will suffer in current conditions, especially as, if you are on Minimum Wage, the proposed increase does not actually match inflation. If you are a single-parent household, then, even more is that the case.

The media, of course, focus their vox pops and personal stories on these latter groups, rather than on the majority, and, as for the majority, they simply present the narrative of helpless, individuals, unable to affect their condition by collective action to raise wages. The last thing they want to suggest is that workers are active agents in history able to influence events themselves, by collective industrial and political action. But, the reality is that, just as in Marx's time the paupers represented a small minority, which, whilst growing in absolute numbers, at specific times, represented a smaller proportion of a generally more affluent and wealthier society, so that is true of their modern equivalents.

Its true that, compared to the 1970's, the number of single person households has risen significantly. Then, it was around 21%, as against 41% today, but, the majority of households are still comprised of married or cohabiting couples, and families, 52%, as against 70% in the 1970's. The increase in single person households, is itself a consequence of asset price inflation, as people sought to buy a property to avoid future price rises, and often to try to obtain, for themselves, a capital gain from such rises. As such, it is equally susceptible to being reversed, as property prices crash along with the prices of other assets. That, in itself, would create conditions of lower living costs, and a consequent rise in household disposable income.

The majority of households, single or multi-occupancy, are able to increase their wages, either by taking advantage of labour shortages to move to higher paid jobs, or else by joining with other workers in trades unions to demand higher wages in their existing job. That is what happened in all such previous periods, such as in the 1950's and 60's, and into the early 1970's. In 1973, I doubled my wages, simply by moving from my existing job to another paying much higher wages, and a few months after that, I moved jobs again, to one paying higher wages, and with shorter hours. I remember my dad doing similar things in the early 1960's, around the same time that many workers began to reject the idea of having to work overtime so as to boost their pay, and, instead, demanded higher hourly rates, as labour shortages became apparent. That activity is already apparent, in the US, as indicated by the continued rise in its Quit Rate.

The main problem with workers obtaining higher wages, without moving jobs, is in the state sector. There, the capitalist state is using its power, and fact it does not have to worry about shareholders complaining about loss of profits and reduced dividends and capital gains, to try to strong arm workers into taking real terms pay cuts. All of the sanctimonious talk about NHS workers is shown for what it was as the government demands they accept such cuts in living standards. So, its no wonder that, whilst, in the non-state sector, many workers have obtained large pay rises without the need for industrial action, or with just short strikes, its in the state and near state sectors, like the railways, post office and so on, still significantly tied to the state, although with the profits going largely in dividends to shareholders, that workers are being forced into strikes to avoid their pay being cut.

But, ultimately, the state itself will have to concede. Even Tories have recently admitted what I wrote recently, which is that the consequence of ten years of austerity is that there is nothing left of public services left to cut, other than by shutting them down altogether, and so, the burden of austerity, then falls on its workers. But, in conditions of labour shortages, and rapidly rising wages in the non-state sector compared to the state sector, workers can again simply move into those higher paid, non-state jobs, meaning that the existing huge vacancies in the state sector get even bigger, meaning that it, again, effectively collapses. Either, to avoid that, government is forced to pay the higher wages, or else, the state sector does collapse in many sectors, and new non-state providers emerge to take its place, paying the higher wages that the state would not pay.

The continued rise in employment, and falls in unemployment indicate that the economy is not in recession or even close to recession, despite what GDP might imply. Capitalists do not employ additional workers to sit on their hands producing no additional value and surplus value. Even less do they employ them to reduce the amount of value and surplus value being created, so the continued rise in employment, and of hours worked, means that new value and surplus value creation continues to rise. That is reflected, across the globe in continued rises in sales. UK Retail sales rose by 0.6% in October, which if carried forward, means a rise of 7.5% in the year ahead.

So despite all of the doom mongering by the media, as well as by opportunists and catastrophists, it is not at all a foregone conclusion that there will either be a recession or the greatest ever fall in household disposable income. If the former arises it will be because governments and central banks have deliberately caused it, and workers failed to prevent them imposing it on them, via austerity, and if the latter occurs, it will only be because workers failed to take advantage of another historic opportunity, in conditions of large and widespread labour shortages to mobilise to raise their wages. One factor that would affect that would be if they allowed themselves to be distracted by calls for a general election, during which Labour politicians and trades union bureaucrats would no doubt call on them to call off strikes – as they did during the Queen's funeral – which would lead to demobilisation and demoralisation, with the incoming reactionary Labour government pressing home its advantage to make workers, again, pay, so as to raise profits.

But, absent that, as many workers get large pay rises even without the need for strikes, and as millions of state employed workers strike for those higher wages, and eventually get them, that will not only mean that rather than household disposable income falling, it will rise, and as household spending, fuelled by those higher wages, and supplemented by existing savings, rises, so that rise in aggregate demand will cause firms to have to accumulate additional capital, employing even more workers, especially in service industry, so that all talk of recession will again prove to be wrong.