It takes a special kind of chutzpah to expect Australian households, already struggling to meet the increased costs of essential living, to take on the burden of higher interest rates as the “only” way to curb inflation. Yet this is the current strategy.
“It was difficult before prices started to rise to put food in the fridge, put gas in the car or find and pay for shelter,” said economist and senator-elect of the South Australian Greens, Barbara. pocock. “Suppressing wages to deal with inflation is like using a fire extinguisher to deal with a flood. It won’t work, and it could actually make things worse.”
While official inflation is at 5.1 percent at a 22-year high, increases in the cost of essential goods such as rent, food, utilities and fuel are significantly higher. Prices of non-discretionary products are rising the fastest in 15 years, up 6.6 percent, more than double the rate of discretionary products, which rose just 2.7 percent. Given this rather significant disparity, we can rule out frivolous “post-pandemic” splurges from unpublished JobKeeper as the main culprit.
Blaming inflation on wages is a “misdiagnosis of the problem,” Pocock says. We must avoid burdening companies with substantial wage increases, despite the fact that those companies have made nice pandemic profits.
Earnings are now the highest ever share of Australian GDP, while wage shares are at record lows. A recent analysis of Australia’s national accounts by Greg Jericho of the Australia Institute’s Center for Future Work found that corporate profits rose 25.3 percent in the past year, accounting for a record 31.1 percent share of the national economy. income.
Over the past two years, profit margins have increased by 40.3 percent, while wages have increased by just 7.4 percent.
“Corporate Australia sits high,” said Alison Pennington, senior economist at the Center for Future Work.
She says companies often calculate prices retrospectively based on an “acceptable” win rate. “If they’re providing something that people desperately need, like groceries and electricity, that profit-maximizing incentive just gets bigger.”
Yet the idea that wage growth is the main driver of inflation persists in the public consciousness. There was the infamous claim by journalist Phillip Coorey that linking wages to inflation would be “a one-way ticket to the Weimar Republic”. Similarly, Andrew McKellar, chief executive of the Australian Chamber of Commerce and Industry, said that “small businesses cannot afford a minimum wage increase of more than 5 percent”, and that such increases would “create cruel jobs, not create”. Meanwhile, the broadcaster Waleed Aly described wage stagnation as the “bitter drug” that “could keep inflation in check”.
Aisle Two Fact Check: Wages Won’t Raise Inflation Unless They Rise Faster Than Inflation and productivity combined. In reality, wages have been stable – or fallen in real terms – for more than a decade.
“Business commentators and business economists fall for the same tired orthodoxy, blaming wages for high inflation and even fantasizing about wage-price spirals,” Pennington says. “But unit labor costs have risen more slowly than inflation since 2013. Real wages have fallen by 2 percent in the past 12 months. It’s not a wage.”
The truth is that when we talk about inflation, we really ask ourselves how much poverty and unemployment we are willing to tolerate in order to keep prices at a certain level. That’s what inflation targeting is.
“In Australia, monetary policy has for decades used the pain of unemployment as a tool to manage inflation,” said Richard Denniss, chief economist at The Australia Institute.
“We use interest rate policies to keep at least half a million people out of work, but we still blame the unemployed for not working hard enough. We pay them low unemployment benefits so they don’t look hard enough. But the harder they search, the higher we raise interest rates. None of this is an accident.”
Economist Professor Rabee Tourky says the Reserve Bank appears determined to plunge Australia into recession by deliberately cutting wages and the bargaining power of workers rather than tackling the root cause of inflation.
“Inflation in itself is not that harmful,” he says. “Its healing is harmful. The ‘cure’ is more harmful than the disease.”
It is clear that an earnings price spiral is underway, especially in the gas sector, which is driving inflation.
Denniss says prices are effectively set by the most expensive producer on the market: “Everyone just gets a raise.”
The price of oil or gas must be high enough to induce expensive production companies to supply the market in times of unexpected crises, such as the invasion of Ukraine.
“Every company has different production costs,” Denniss says. “If parts of the oil supply are disrupted, new forms of energy have to come onto the market. You have to pump gas from further afield or transport it by sea rather than through a pipeline. That just means Santos kisses Australia like a bandit, because their production costs haven’t gone up at all.”
While it is easy to pin inflation to demand shocks such as the pandemic and ongoing supply chain disruptions, as well as supply shocks such as post-lockdown spending, climate change and the invasion of Ukraine, these factors are only part of the equation. story.
Alison Pennington says this crisis has been decades in the making and has more to do with how we organize production in an economy where large oligopolies have the power to demand what they want.
“Covid shocked international supply chains,” she says. “Workers in key sectors got sick. Vague, ‘just in time’ production techniques unraveled. Even the OECD recognizes the impact of widespread price inflation in generating inflationary pressures, as companies are strategically placed in manufacturing networks that exploit buyers and consumers to raise prices and increase profit rates. Those drivers of global structural inflation also apply to Australia domestically.”
Australia suffers from high market concentration. Our stock market is the most concentrated in the world, with the top 10 stocks in the ASX 200 now making up 47 percent of the index. A research report commissioned by the Department of Industry, Innovation and Science under the previous government found that at least nine Australian industries were “too concentrated or under-competitive” and that “the increasing concentration of markets should not be particularly celebrated” .
These sectors included the Big Four banks, which control about 80 percent of the mortgage market; air transport, “practically served by two carriers: Qantas and Virgin Australia”; as well as electricity, educational support services, iron and steelwork, printing and support services, telecommunications, supermarkets and retail fuel.
The report warns that “when companies grow beyond certain scales, whether productive or not, they will unequivocally use their size advantage to bend the rules and gain advantage by influencing the political process.”
Professor Flavio Menezes recently co-authored a paper with Professor John Quiggin showing that market power – the ability to raise prices – can amplify and exacerbate inflation in the short term, especially in highly concentrated or monopolized economies such as Australia’s.
“The less competition, the more concentrated the market, the greater the initial price change due to a demand shock,” he says.
Market power allows firms to pass additional costs on to customers, while in a more competitive, less concentrated economy, additional intermediate costs would have been shared and consumers’ inflation experiences would not have been so acute.
“Companies with market power can also hide anticompetitive behavior behind inflation,” says Rabee Tourky. “And regulators can’t figure out how to prove they’re naughty.”
According to a recent study, the first of its kind in Australia, two of the world’s largest institutional investors – BlackRock and Vanguard – were found to control at least 50 percent of the market in more than a fifth of Australia’s industries, accounting for more than than a third of the sector’s total turnover. These include commercial banking, explosives manufacturing, fuel retailing, general insurance and iron ore mining. Common ownership was found to increase effective market concentration by 21 percent. The government is certainly aware of this fact as their own MP – Andrew Leigh – co-authored the article.
At the heart of the inflation we are currently experiencing is the conflict between what both sides felt they had to say to get elected and what the government should do – or not do – now to get it under control.
The new government was elected on a platform of kindness and compassion, but nevertheless prioritizes tax cuts for the rich at the expense of wages to levels that would enable people to better cope with the rising cost of living. Meanwhile, Employment Secretary Tony Burke claims it is “too late” to change the coalition-initiated points-based JobSeeker system.
Pocock, Pennington and Denniss say that free childcare, abolishing executive pay and a superprofit tax on fossil fuel producers are far more effective strategies to fight inflation than rate hikes and wage suppression.
“We need significant policy changes to limit the concentration of firms’ price-setting power and to organize the economy on more equitable, sustainable grounds,” said Pennington.
“We need to rebalance the balance of power between large companies and workers through tougher corporate taxes, new wage-raising systems such as sectoral collective bargaining, expanded public services and reversing privatizations in critical services where the private sector has failed miserably.”
This article was first published in the print edition of The Saturday Paper on July 2, 2022 as “It ain’t wages.”
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