No, Inflation Does Not Justify Wage Cuts or Austerity Measures

In the US and Canada, the policy measures taken to battle inflation will set the tone for post-pandemic politics. It is of utmost importance that combating inflation does not become an excuse for wage cuts and fiscal austerity.

Lowering wages and fiscal austerity are the two standard responses to the problem posed by inflation. For workers, both cures are as bad as the disease. (Jonathan Cutrer / Flickr)

The global pandemic, now in its third year, has not halted the emergence of crises both domestic and international. The coronavirus itself continues to circulate and mutate; the far right is organizing “anti-mandate” convoys and occupations; and Russia has invaded Ukraine. Not unrelated to these difficulties, we are also facing rising inflation and, with it, two policy “solutions” that must be avoided at all costs.

The lowering of wages and fiscal austerity are the two standard responses to the problem posed by inflation. For workers, both cures are as bad as the disease. It is crucial to the shaping of the post-pandemic order to avoid falling into these traps.

Inflation is widely debated, deeply contentious, mobilized for political ends, and often misunderstood. By raising the costs of goods and services, inflation weakens the purchasing power of people trying to make it through the day. Typically, business-class analysts tend to explain inflation as a result of higher wages — the cost of paying workers more forces firms to pass these expenses onto customers.

A question often ignored by proponents of wage cuts is who, exactly, should be shouldered with the cost of inflation. Should workers have their wages cut to ensure the profitability of businesses?

It is true that, over the course of the last year, average wages in the United States have grown, but in some sectors that growth has been heavily offset by aggressive price increases. Many people have, in spite of wage gains, taken a de facto pay cut. If wage growth slows or stalls, which it might, and inflation continues to rise, workers will feel even more of a pinch.

The debate over the causes of recent sustained inflation has the usual talking heads pointing to a variety of causes: snarled supply chains, wage growth, corporate greed, state spending, and commodity price surges along with higher input costs. Establishing the driving factors behind inflation is essential — and inflation is surely a result of “causes,” not simply one “cause” — because policy options depend on the sources of the phenomenon, and not all causes are equally causal.

Writing in the Nation, James K. Galbraith argues that higher oil prices and supply chain challenges are “the big items” driving inflation, the effects of which he expects to abate over time. Noting that wages have increased, Galbraith warns against moves to suppress that growth in order to ease prices, including raising interest rates.

Here we meet the first inflation policy trap: the temptation to suppress wage increases in an effort to staunch rising prices. Galbraith argues, instead, that “some price increases should be accepted, and some should be managed, as best we can, with policies that keep things under control and share the burdens.” Seeing inflation as temporary, Galbraith notes both a challenge and an opportunity. The challenge is sharing the burden of inflationary effects; the opportunity is a chance to transform the country. He cites several policy examples, including “large investments in infrastructure, mass transit, housing, and rebuilding cities; action on climate change; and legislation for higher minimum wages and guaranteed jobs.”

The structural changes Galbraith suggests for the United States could be applied, in part, to Canada, too. Those measures include demilitarizing, definancializing, controlling the cost of health care and rents, as well as price controls in sectors with runaway corporate gouging.

Galbraith’s program runs counter to the dangers of the second inflation policy trap: austerity. Deep cuts to public spending may indeed curb inflation, much like driving a stake through the skull of a patient will kill the cancer inside of them. A recession would do the trick, too. Neither is a good idea.

Writing in Passage, Adam King sees “inflation mania” as “a much deeper class struggle over the distribution of society’s resources.” The lens of class struggle is useful here, since competing views of and responses to inflation reflect different class interests. King supports the supply shortage theory of inflation, which understands the problem to be caused by shortfalls in the supply of goods, not the result of wage increases. King warns against making state spending and wage increases the bogeyman for higher prices.

In Canada, Conservative leadership hopeful Pierre Poilievre, railing against government spending and the central bank, has made inflation his campaign’s rallying call by showing a reckless disregard for the facts. Poilievre’s campaign is, at best, cynical fearmongering. Should he win the race, he may prove to be a threat to an aging Liberal government that would have been in power for the better part of a decade by the time the next election rolls around. If he does win, the threat of deep cuts would be very real.

The orthodoxy of cuts is compelling to both the Right and the center. Prime Minister Justin Trudeau is under some pressure to cut spending. As the pandemic slows or becomes normalized, and as Canada reopens and pursues a strategy of living with COVID, the mainstream policy discourse is likely to shift toward spending less and cutting more. These appeals will be couched in familiar frames: the threat of saddling future generations with the burden of debt, the need to be investment friendly, and, of course, the importance of getting inflation under control.

The Left must respond to the mainstream orthodoxy on inflation with an aggressive counternarrative that guards against falling into the twin inflation policy traps of dampening wage increases and fiscal austerity. As many observers argue, the inflationary pressures we are seeing may abate and move toward the pre-pandemic baseline as the extraordinary events of the past few years level out. If they don’t, it will be equally important to guard against wage cuts and austerity — after decades of wage stagnation, the idea that mild gains for workers are responsible for galloping inflation is preposterous.

Moving toward the post-pandemic world, the focus of the state ought to be on public spending and investments that develop capacity and enable people to live their lives free from the pressures of meeting the necessities of bare existence. Policy and political muscle memory in the United States and Canada will make fighting for these reforms difficult. But the importance of the moment makes the struggle necessary — it is critically important to build the foundation of a post-pandemic order that normalizes high-wages and robust state capacity.