The cost of living crisis isn’t recent and has deep roots in the economy
If you’re anything like me then you will have seen your electricity, gas and food bills skyrocket over the last year or so, along with your rent or mortgage. There are many easy explanations offered for the economic mess we are in: it was caused by gas and grain shortages due to the war in Ukraine is the most commonly given; at least in my brief survey of people trying to explain the economic goings on. However, we were warned about inflation and the rising cost of living before 2022. Hell, Ed Miliband was talking about it in 2014.
The cost of living is high because inflation is high, it is also said. This is so obvious that it is practically a tautology. High inflation raises the cost of living and cost of living rises are inflationary. However, staples like food are increasing in price faster than other goods and faster than inflation. This is especially true for cheaper food items and is part of the well documented problem that it costs more to be poor than to be rich.
There is also a strong argument that high inflation has been driven by all the money that was created through furlough schemes during the pandemic. We are now living with the consequences of that decision. Not that there were any alternatives at the time. We needed to lockdown to stop the NHS collapsing and people needed money to do that. This does imply that the inflationary wave will pass, which if it will, it’s not passing quickly.
High energy costs
Another explanation that is offered is that the cost of living is high because energy prices are high. Almost everything requires petrol or electricity to be made or delivered to consumers, so if the cost of energy rises then this is passed on to the consumer via higher prices for food or other essential goods. High energy costs are also directly driving up electricity bills.
One cause of high energy prices is the huge profits of energy companies. This is known as, greedflation, i.e. when the greed of companies leads to them putting up prices. Albert Edwards, an analyst at Société Générale, one of Europe’s oldest and biggest banks, has put forward evidence that this is a leading cause of inflation.
No simple explanation
The truth is that there are no simple explanations for what’s happening. The cost of living crisis has been caused by long term problems with our economic system, yes, exacerbated by recent events such as the pandemic and the war in the Ukraine, but the problems are deep and structural.
The Western world hasn’t seen real wage growth since the 2008 financial crash, which is a long term cause of current economic problems. Wages have not kept pace with prices for more than a decade and a half. Many people are poorer now in real terms than they were in 2007.
The 2008 crash is crucial. This was the point that capitalism stopped benefiting most people in the West and almost everyone got poorer as a few rich people got richer. Certainly, life wasn’t great for everyone before that. Lots of people had low wages, insecure housing or no prospects in a small, post-industrial town. However, since 2008 wages have not grown for the majority of people and the benefits of most economic activity has increasingly gone to a few wealthy people.
Bigger than problems in the past?
This prolonged lack of wage growth is behind many problems, from the cost of living crisis to the rise of Donald Trump and Brexit. People feel much poorer regardless of whether the economy is growing or not.
The problem is big, structural and long term, but it’s no bigger - although it is different - from the problems faced by the post-war Labour government or Franklin Roosevelt’s Democratic government after the Great Depression. So, what solutions are today’s politicians offering to fix this mess?
Labour wants growth
Labour’s offer is economic growth, like we had in the 90s and 00s. Yes, in the past we had economic growth AND wages rose, making people better off. Most people, that is. Again, there was still a lot of poverty, mainly in specific regions of the country and in communities that used to be based around employment in heavy industry.
Bringing back economic growth, even strong economic growth, without real wage growth won’t help. We had growth for periods under David Cameron and George Osborne’s administration, but wages didn’t rise and people felt worse off. Hence the Brexit vote, in part. Most of the benefit from the Cameron era growth went to a few wealthy people, because of how unequal this country is. Economic growth isn’t a panacea to deal with the problems of poverty and low wages.
Labour are also vague about how they will achieve this economic growth. How will the investment the economy needs be paid for without increases in taxes or borrowing (both ruled out by Labour)? How do they plan to address the low productivity of the British economy? How will we bring in people with the skills there’s a shortage of in the UK, whilst reducing immigration? These are questions Labour is keen to not answer.
The Tories offer no more details
The Tories also want to grow the economy, but offer even less insight than Labour into how they plan to do this and how this will lead to wage growth. They would prefer we talked about small boats instead.
No one is addressing the complex root problems of the cost of living crisis or offering anything that even smells like a real solution. Every political party claims to have a solution that will make everyone better off and no-one will lose out (apart from migrants) but no clue on how this will actually work.
The same old orthodoxies
An end to the war in Ukraine, no more pandemics and lower energy prices would certainly help with the cost of living crisis. Having less greedflation would definitely help, although that is a systemic issue, and I wouldn’t hold my breath for Labour or the Tories to tackle private companies’ greed.
Fixing the problem of high cost of living requires addressing the deep structural problems in our economy, which the 2008 crash laid bare and have plagued us ever since. We have been a low wage growth economy for too long and (nearly) everyone is feeling the pinch.
Bringing back economic growth won’t help if there isn’t wage growth and a redistribution of wealth. Systemic change is needed to create an economy that works for everyone, not just a wealthy few. Unfortunately, neither Labour or the Tories will tackle the underlying issues in the economy or make the bold reforms that are needed. They just offer the same panacea of economic growth and the same old orthodoxies that got us into this mess.
GBP image created by Joegoauk Goa and is used under creative commons.
