From profit squeeze to wage squeeze.
| Author | Irvin, George |
| Position | Features - UK economy |
Britain's low-wage, high-debt economy is in worse shape than any other major EU economy. According to projections by the IMF, GDP will contract by nearly 3 per cent this year, and it will continue to contract in 2010. OECD projections soon to be released are said to be even gloomier. Ostensibly, this bleak picture results from economic recession on a global scale, an event triggered by the contagion of financial collapse. But there are deeper historical reasons for the crisis.
In both Britain and the Unites States, the Reagan-Thatcher era aimed to reverse the gains secured by the labour movement in the post-war years. By means of de-industrialisation, financial deregulation, the growth of a 'parallel' banking sector and the establishment of a 'flexible' labour market--which entailed greatly weakening the trade unions--the 1970s 'profit squeeze' was transformed into a wage-squeeze, and the profit share in GDP rose accordingly. The 1990s dotcom boom, followed by the housing boom, saw the wages of the poorest 40 per cent stagnate in the US and lag behind GDP growth in the UK. In turn, low wages and cheap credit meant that household debt exploded.
The high-debt economy was fuelled by the growth of the financial service sector. The enormous bonuses earned on Wall Street and in the City were not about 'wealth creation' but about income redistribution. The gains from higher labour productivity, which should have accrued in the form of increased wages to workers, were increasingly siphoned off by the super-rich. By 2008 Britain had the most regressive tax structure and income distribution of any of the large EU economies (Byrne and Ruane, 2008). Nevertheless, debt-fuelled consumption continued to rise, driving investment and economic growth.
Viewed in an historical context, it should be clear that redressing the economic and political balance in labour's favour must be central to any strategy of economic recovery. Redistribution, in part by means of radical fiscal reform, is not an 'optional extra'. Redistribution lies at the heart of creating a high-wage, low-debt economy; creating a 'sustainable' growth path requires not merely a greener Britain but a more egalitarian Britain.
Until the end of the property boom in 2007-08, growth in Britain had been steady for nearly a generation, and inflation and unemployment had remained relatively low. What was true for Britain was also true for the USA and some (though by no means all) of the OECD countries. After the initial dotcom bubble burst in 2001, recession was forestalled by looser monetary policy in the USA, the country which had served as the engine of the OECD economy throughout the post-war period. Indeed, one had to look back at the early 1990s for mild recession and the early 1980s for the last serious recession in the USA and Britain.
As late as 2004, Gordon Brown was able to say to the British Chambers of Commerce:
we can see a Britain that has a new found and hard won stability with: the lowest inflation for thirty years; and the lowest interest rates for forty years; the lowest unemployment for a generation; and a Britain that is seen today as the most stable of all the major economies. (Summers, 2008) Brown's 'prudent' spending policy may have helped balance the government's books, but as one commentator has noted, what drove the British economy was 'privatised Keynesianism', the apparently unlimited buoyancy of consumer demand animating the spirits of investors (Crouch, 2008). But is the story solely about a credit boom (and crunch) and too much private borrowing and leveraging?
The profit squeeze of the 1970s
In the three decades following 1945, Western Europe and the USA experienced solid economic growth, buoyant private and public investment and steady productivity and wage growth against a background of low unemployment, low inflation and stable exchange rates governed by the Bretton Woods arrangements. But post-war prosperity--driven by the twin motors of European reconstruction and an apparently permanent US capital outflow with which to finance the growth in international trade--contained within it the seeds of its own downfall.
In retrospect, three factors stand out in explaining the end of the post-war boom. First, as the share of wages in OECD national income rose, the share of profits fell, and investment--particularly in manufacturing--slowed, in turn slowing productivity growth (1). A sharp decline in labour productivity is apparent after 1973 throughout the OECD. As productivity slowed, the struggle over distributional shares intensified between the economic elite and ordinary working people. Rising inflation, ostensibly triggered by the oil price rises in the 1970s, was in good part a reflection of this struggle (2).
A second factor was the growing cost of the Cold War. America, the self-appointed guardian of the 'free world', was particularly affected by the difficulties of financing high defence expenditure at home and war overseas. As inflation began to bite in the early 1970s, the external current deficit swelled, US gold reserves dwindled and, in 1971, dollar parity with gold was abandoned, precipitating the collapse of the Bretton Woods system of fixed exchange rates and the emergence in 1973 of a regime of flexible exchange rates (3). The shaky nature of world financial institutions was amply demonstrated by the secondary banking crisis of 1973-75 (Reid, 2003).
The third factor was the internationalisation of competition. The late Andrew Glynn (4) summarised admirably the combined effects of wage pressure, slowing productivity, trade uncertainty and globalisation on the rate of profit:
the net rate of profit on capital employed in manufacturing [in the OECD] had fallen by nearly one half by the end of the 1970s [relative to 1970]. It was apparent that the profit squeeze was reflecting a combination of militant wage pressure pushing up ... [costs] and international competition restraining price increases. The rise in imported material costs and the weakening of productivity growth ... further exacerbated the distributional struggle. (Glyn, 2006, 7) Many economists have come to accept this interpretation of the root causes of the 1970s crisis. For example, Roberto Torrini of the Bank of Italy and the London School of Economics writes:
A widely accepted explanation for the fall in...
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