The year 2023 looks set to bring most of the world into recession, and the UK is expected to be hit particularly hard.
At the global level, the biggest risk is a massive cost-of-living crisis, driven by the uneven recovery from the pandemic and a host of supply chain issues that still haven’t worked themselves out.
First, the war in Ukraine combined with the rampant profiteering of the fossil fuel companies — and our slowness to transition to clean energy — have kept fuel prices high. Europe is the worst affected as it is more dependent on Russian natural gas.
Second, the massive blockages in the global shipping system, which I wrote about last year, have eased, but import prices are still being affected. And the global value chains that link the extraction of resources and the production of goods in the Global South with consumer markets in the Global North still haven’t returned to pre-pandemic levels of efficiency.
But these factors primarily affect the cost of goods, and inflationary pressures have shifted from goods to services in 2023. This partly comes down to fuel prices, which affect every area of economic activity, but there are other factors at work too.
Policymakers have been quick to blame workers for rising prices, as they always do. In the United States, writer and historian Tim Barker recently gained access to a communiqué written in 1996 by now secretary of the Treasury Janet Yellen, in which she described unemployment as a “worker-discipline device.” Perspectives haven’t changed much since: policymakers now think employment, and worker bargaining power, are too high, and that this is what is driving inflation.
The absurdity of this argument is quite clearly revealed by the data. Before the pandemic, workers in the United States had experienced a four-decade-long stagnation in real wage growth. And the immense struggles that workers across the economy are facing while trying to unionize to resist the erosion of their wages puts paid to the idea that they have too much bargaining power.
So, what’s really going on?
To understand what’s driving inflation in the United States, just look at egg prices. Across the United States, the price of a dozen eggs has more than doubled in some places and tripled or even quadrupled in others.
Producers claim that this is down to the pandemic and last year’s outbreak of bird flu. But the problem is actually corporate profiteering. As is the case in many other markets, oligopolies are colluding to raise prices, and using widespread inflation as an excuse.
In a competitive market, you might expect new entrants to undercut these practices by incumbent producers. But markets in the United States aren’t competitive — they’re highly monopolistic. This gives big corporations a huge amount of power to set market conditions rather than follow them.
Just like the fossil fuel companies and the shipping companies, many producers of consumer goods are colluding to shake down consumers by raising prices far more than their rising costs.
Most UK markets aren’t quite as oligopolistic as those in the United States, but we still have to contend with the corporate greed of the fossil fuel companies, big energy companies, banks, and many more.
So, corporate greed is one factor driving up prices. But the cost-of-living crisis isn’t just about higher prices. It’s about the disparity between what things cost and what people are earning.
As is now well-documented, wages in the UK stagnated for the longest time in centuries in the decade after the financial crisis. And we have seen some of the largest single-month falls in real wages on record this year.
The situation in both the UK and the United States reveals the utter absurdity of policymakers’ attempts to incite unemployment in order to bring down inflation, under the guise of preventing a recession.
The severity of the likely recession in the UK is being driven by the fact that people simply cannot afford to go out and spend money. In an economy like ours, which is driven disproportionately by consumption, this has massive ripple effects.
Businesses earn less, so they invest less, reducing the incomes of their suppliers. Companies have to lay people off and unemployment increases, exacerbating the problem.
The icing on the cake is the government’s decision to return to the failed austerity economics of David Cameron and George Osborne. Just as families and businesses need more support to survive, the government has put the brakes on its spending — one of the single most significant sources of demand in the economy.
It’s very easy for policymakers to paint the cost-of-living crisis — and the upcoming recession — as a problem of rising prices, and tell workers that their demands for wage increases in line with inflation will only make the problem worse. But even if you ignore the fact that corporate greed is putting far more upward pressure on prices in many markets than wage pressures, prices are only one side of the equation.
The other side is incomes, and in the UK, thanks to decades of underinvestment, wage stagnation and faltering productivity growth, these were already stretched to breaking point before inflation began to rise.
All over the world, workers are being hurt by rising prices. But in the UK, they’re being squeezed to breaking point between rising prices and stagnant incomes. And the government’s only response has been to introduce policies that are going to constrain wage growth even more.