Ruth Lea on cutting public sector wages
Today's Guardian treats us to a précis of an exceptionally emetic[1] piece in Comment is Free (the giant Guardian blog) by Ruth Lea, formerly of the Institute of Directors and currently director and economic adviser at the Arbuthnot Banking Group (which "offers outstanding Private Banking and Wealth Management services") and a governor of the London School of Economics. Ms Lea explains 
that the current strike by public sector workers against the government's pay deal, which represents a cut in their standard of living in real terms, is unjustified: any pay award above the level of inflation just leads to even higher prices, you see, so any such pay increase is bad news for all the rest of us. Why single out public service workers for pay cuts as part of the government's attempts to contain inflation? Because there's more job security in the public sector than in the private sector (a woefully out-of-date assertion), and also because above-inflation awards in the public sector will incite private sector workers to demand similar inflationary awards (which presumably wouldn't have occurred to them without those wicked nurses and teachers and postmen setting a bad example):
And – surely the clincher – council staff workers must realise that they will be condemned as irresponsible and unfair if they push for high pay awards when their private sector friends may be losing their jobs.
Ms Lea's article (worth reading in full on CIF, if you have a sufficiently strong digestive system) prompts at least two questions:
First, is she really unaware of the intense resentment among public sector workers, many of them among the lowest paid in the land, over the Government's attempt to place the whole burden of reduced living standards at a time of mounting inflation on them, when there is not the slightest effort to spread the burden more fairly by using the tax system to curb monstrously inflated salary increases and astronomical bonuses, often quite unrelated to performance and way above the level of inflation, awarded to one another by her friends in the City and business? Or is she aware of this (wholly justified) resentment, but can't understand it? Or does she fail to acknowledge it simply because it would spoil her self-serving argument? Her failure even to mention it does leave rather a large hole in her treatment of the issue.
Secondly, what on earth does the Guardian think it's doing publishing this reactionary rubbish, not once but twice — in print, and in Comment is Free? There are plenty of far right-wing media outlets only too happy to host this kind of stuff in defence of Ms Lea's fellow-bankers and their living standards. God forbid that these people's inalienable right to an annual hike in the salaries and bonuses that they pay each other should be threatened by a pay award to rubbish collectors and librarians in line with, or even above, the level of inflation, to ensure that at least they don't continue to get a little poorer every year.
Old-fashioned Old Labour class envy? No: just an invitation to recognise the indefensible unfairness of government tax and inflation policy — the policy, so help me, of a Labour government (best read with a Kinnockian Welsh accent[2]).
[1] emetic: vomit-inducing
[2] 'Kinnock raged at Hatton and Militant, saying: "You end in the grotesque chaos of a Labour council — a Labour Council — hiring taxis to scuttle round a city handing out redundancy notices to its own workers." ' http://tinyurl.com/68y6l8 and http://www.psr.keele.ac.uk/area/uk/pebs/lab87.htm
Brian
What is Ms Lea's salary? I think we should be told.
Brian writes: I entirely agree, Barrie. I wonder how she would react to a proposal to reduce her income to the point where she would experience real day-to-day hardship, as many hard-working (and other) public servants do. Her advocacy of such a policy is especially offensive in the light of her own background as a former civil servant who has moved into the private sector, undoubtedly doing very nicely out of the transfer.
God forbid that these people’s inalienable right to an annual hike in the salaries and bonuses that they pay each other should be threatened by a pay award to rubbish collectors and librarians in line with, or even above, the level of inflation
Thanks, Brian – that’s the stuff to wake up to!
Good stuff. What is also unjust is that senior public sector workers, the very people responsible for hiring, firing and managing the lowest paid, are relatively cushioned with less risk of losing their jobs.
Surely it is wrong to criticise the Gruniad for publishing an article with which one disagrees, as somehow disloyal to the oppressed in this country? I thought it was the hallmark of a liberal to be tolerant and broad-minded? I hope I am not wrong!
Brian writes: Thanks, Jeremy. Of course the vast majority of the senior public sector people who, as you say, do the hiring and firing and managing of the lower-paid staff, have no responsibility for determining pay awards to the staff that they manage and can't be blamed for the government's attempts to exploit the public service by deliberately reducing its standard of living in order to contain inflation for the benefit of the rest of society. As to my criticism of the Gnuardia for publishing reactionary rubbish by Ruth Lea, I stand by my view that it's not the job of a quality left-of-centre, small-l liberal newspaper to disseminate opinions which run directly counter to the values that the paper purports to stand for, when there are so many alternative forums available for it. I recognise no obligation to be 'tolerant' of malignant far-right class-war propaganda: I wouldn't ban it, obviously, but I think there are plenty of places where it belongs and the Guardian isn't one of them.
I agree with near enough everything you have to say about Ms Lea, but Jeremy's right to defend the Guardian's decision to print her article.
Most of us only read one, or maybe two, papers regularly. Is it really healthy only to read the views of people you more or less agree with?
I'm not sure where "malignant far-right class-war propaganda" properly belongs, but if anyone's prepared to put his head above the parapet and actually try to argue the case for Iraq, Bin Laden, hunting with dogs, hanging (like John Stuart Mill), identity cards, the Olympics, Trident, Mrs Thatcher's funeral etc etc etc, then surely a newspaper does us all a service by printing it?
Isn't comment supposed to be free?
Brian writes: I have no problem with the free expression of obnoxious views. But there's an obvious distinction to be made between on the one hand views which are controversial, with which one may disagree but which one can accept as legitimate, matters of judgement on which sensible people may differ: and on the other hand views which are actually offensive to ordinary small-l liberal opinion. Both categories have every right to be heard and debated, but the second category should have no place in a newspaper like the Guardian. Of course the line between the two categories is blurred and there's room for disagreement over which side of it Ms Lea's polemic falls. I think it's on the wrong side. Would you be relaxed about the Guardian publishing an article (carefully phrased so as to be just on the right side of the law) denouncing immigration by non-Europeans? Or by non-whites? Or advocating the return of birching for anti-social teenagers? I repeat: I'm not against freedom of expression: it's a question of the appropriateness or otherwise of the channel through which illiberal and offensive views are routed, that's all.
I have an additional issue with her article – namely the assertion that "… if the pick-up in prices inflation leads to higher wages then there is a real risk that an inflationary "wage-price spiral" becomes embedded in the economy ". She does at least acknowledge that there is no direct link to inflation from public sector wages, but she is promoting the persistent myth that higher wages feed inflation. General inflation is a symptom of a rise in money supply compared to the supply of goods and services. In other words higher wages are only inflationary if the BoE creates more money in order to pay them. If the public sector wage bill rises, and this is paid for by taking it from the private sector, then there will be no inflationary effect because the increase in purchasing power of public sector workers will be balanced by a decrease in purchasing power of the private sector workers.
On a related point there is a general assumption at the moment that wages will increase faster than CPI, and will always do so. This seems likely to be proved false. Currently the main drivers of inflation appear to be a rise in the cost of raw materials and foreign labour – if these trends continue, and there is every reason to believe they will, CPI may one day reach a point where it is higher than wage inflation in the long term. In other words the value of UK labour is likely to decrease as we compete in a global economy against improving training and skills in the developing world. This may be balanced by an ongoing increase in global productivity, but could equally be exacerbated by raw materials shortages leading to a more rapid decline in our global purchasing power.
I don't think either of Aidan's comments above is quite right.
On the first, it is true that if a government raised taxes (on the private sector) to pay higher wages (for the public sector) then this would have little effect on aggregate demand, because it transfers demand from one group in the economy to another. (There are some second-round effects which we can ignore). But if higher wages are paid for by higher borrowing, that increases aggregate demand and so increases inflation. (Monetarists would say this borrowing increases inflation through the indirect effect of increasing the money supply; I would say that it works through effect of higher demand pushing up prices) So Aidan is partly right that it is not the wages per se, but the overall macroeconomic stance, that determines the impact on inflation, but he is in a dwindling minority in thinking it has much to do with the money supply.
Aidan's second paragraph is, I'm afraid, not right at all. The value of UK labour does not decrease as a result of increased "training and skills in the developing world". Why would it? The value of UK labour is determined by our productivity. If someone else's productivity goes up, that makes no difference to the value of our outputs, which is ultimately what we get to consume. (If anything, it might increase the value of our work, by enabling us to use their products more cheaply than we otherwise would.) Wages rise faster than inflation because our productivity rises over time (technical progress), which means the real value of our earnings rise over time. (Note that there was no mention of foreigners in that last sentence: the value of our work is determined by our productivity and nothing else.) Wages will rise less fast than inflation if, and only if, our productivity falls. This might happen if, for example, environmental considerations mean that we have to stop using a cheap technology (eg oil) – which has artificially flattered our productivity (we have been producing something apparently cheaply but actually expensively).
Owen
Owen,
Surely if higher wages can only feed through to inflation through higher borrowing, then the core point that they have no direct effect on inflation still holds. If one section of the population gets more, then the rest of the population must get less – unless of course the commodity that the first group is being paid with becomes more plentiful. I agree with your higher demand argument in so far as it can cause local or temporary effects. For example if people borrow money on the global money markets and use it to buy UK houses then we get dramatic inflation in that particular area. Ultimately that sort of effect will be self correcting because those who are borrowed from will eventually want it back. Higher demand can’t possibly push up prices by itself except by lowering them in others. If we spend our domestic savings to sustain consumption then we are reducing our capacity to spend in future.
I think the best argument that can be made for higher wages causing inflation is demand destruction. If, for example, policemen expect to be paid 1% more in real terms and the government agrees then there are a number of possibilities:
1) Money supply is increased – policeman thinks he is getting 1% more, but actually isn’t because the money has been devalued. (Inflation)
2) Taxes increased to take the 1% from non-policemen. (No inflation due to demand displacement)
3) Money is borrowed from domestic sources – they have less to spend which compensates for increased policeman spending. (No inflation). Ultimately taxpayers are still going to have to pay for this, and so ends up as 2) but delayed.
4) Money is borrowed from foreign sources. (No inflation as real terms increase for policeman can be imported). Ultimately is paid for by taxpayers, so is also just 2) delayed.
5) Less policeman are employed. Non-policemen still pay the same but for less policemen. Roughly 1% of policemen now unemployed when previously they could have been doing something useful. Across this economy this does result in inflation as money supply is the same, but production has fallen.
You seem to have me down as a monetarist, but I think 5) is a substantial argument against their policy conclusions. In reality people are not perfectly rational and imperfect knowledge introduces a lot of friction into the system. If a pessimist view prevails then increasing government spending can have a benefit in real productivity by in effect forcing people to be take bigger risks that are ultimately beneficial. On the other hand it could prove disastrous by overstretching an already beleaguered consumer. It all depends whether the government or individuals are better judges of the situation.
To clarify paragraph 2, over the next few decades I think that the global supply of some critical raw materials, in particular oil, food and metals, is unlikely to be much greater than it is at the moment, and is very unlikely to keep pace with population growth, let alone productivity growth in other areas. Imagine an isolated island where only one person has the skills and tools to make furniture. This person gets a very good price for their products, perhaps exchanging one hour of time for a quantity of fish that typically takes five hours to catch. Over time the overall levels of skills and productivity increase on the island, and although there are still the same number of people on the island, there are now ten people making furniture. The island as a whole has benefitted because they have more furniture and people have been diverted from low productivity activities to higher ones. However, this has not been good for our original craftsman – because an hour of his labour is not worth as much as it was compared to the others on the island. He still produces a chair in the same time (perhaps less as he gets more proficient), but other people are not prepared to give him as much in return for the chair. I believe the developed world is in this position – for a long time we have been the chair maker, and have exchanged the products of our capital and labour for a great deal of unskilled labour and raw materials from other parts of the world. We are already seeing demand rising in China and India for finished goods – their societies are becoming more like ours. That means the world as a whole is getting richer, but we are losing our monopoly.
I think you misunderstood what I meant by value when you said "the value of UK labour is determined by our productivity", but value compared to what? We may still be doing the same things, but we may find that others in the world no longer value the products as highly. As we are net importers of commodities such as oil, energy and food then this would hit our standard of living. This is a good thing from a global equality point of view, but bad from a selfish consumerism point of view. You are correct from a global viewpoint about improving productivity, but I suspect that what might stop us using a cheap technology will not be so much environmental considerations as reduced competitiveness. If someone else is prepared to outbid us for a barrel of oil, then we aren’t going to be able to put it in our car.
Forget about "denouncing," but yes, in the highly unlikely event of anyone trying to present a reasoned case for any of the unfashionable policies you mention I'd be very relaxed about anyone – including the Guardian and contributors to these columns – deciding to publish it.
I would read it with keen interest.
Let's take the birch.
Like most of my friends and relations I'm dead against the birch, for most of the usual reasons. Obviously I think I'm right to follow this line. Just as obviously, it's at least conceivable that I may be wrong to do so.
It's easy to forget that until very, very recently lots of men and women of apparent intelligence and goodwill – including I daresay many of our own parents and grandparents – went along with the birch, and even the cat o' nine tails; presumably this was because they thought that these were the best, or perhaps the only, ways to sort out obstreperous teenagers or the more violent type of criminal.
These are problems even we haven't yet been able to solve.
And don't let's forget that in the good old days of the British Empire one of the ways whereby we tried to civilise our colonies was by introducing the cat and the gallows; see George Orwell and Leonard Woolf.
All this raises a tantalising question, to which you and I will never know the answer: how many of the practices and values we small-l liberals uncritically embrace today will be condemned as unacceptable within the next generation or two?
Brian writes: John, thanks. I would only question your suggestion that we liberals "uncritically" embrace our values and views on the kind of issues you mention. Many of us have thought most of them through and given due weight to the counter-arguments. The other point I would make is that in 'introducing' the cat and the gallows in our once-upon-a-time colonies, we were very often replacing even more ferocious practices and penalties widely used locally before British rule; and we were inflicting punishments that were all widely used at home in Britain on British people. These were not reserved for the peoples of our colonial territories: and they were consistent with even enlightened opinion around the world at the time. It's unhistorical to apply new, changed contemporary values that have only relatively recently evolved in much — but even now not all — of the civilised world to a by-gone era which took a quite different view (often quoting scripture in defence of what we now regard as inhuman, cruel and counter-productive treatment of our fellow human beings). But I hasten to make it clear that I'm not suggesting that you have been guilty of that attempt to view history through unhistorical lenses.
I didn't mean to suggest small-l liberals were likely to change their minds about the issues we've mentioned; most of us, I agree, have already thought them through as carefully as we can and some kind of action has been taken.
I was thinking of questions we don't seem to have sorted out yet: eg the rich getting richer by making the poor poorer, streaming of schoolchildren according to their parents' religion, our treatment of non-human animals, criminalising people for helping loved ones out of their misery, pressure on mothers of young children to go out to work, failure to give ordinary people a decent pension, trying to cut crime by building more and more prisons, hamburgerisation of the rain forests, spending billions on weapons of mass destruction and maybe two or three more.
I was wondering what posterity is going to think about the way we've dealt, or failed to deal, with some of these?
Brian writes: I entirely agree that future generations (assuming that there will be any) will regard all these activities and failures as evidence that we were barbarians.