Class war at the Old Lady
Bank of England governor Andrew Bailey recently called for wage restraint in order to prevent inflation. In response, I asked on Twitter why he was calling for wage restraint from workers and not profit restraint from businesses, and the tweet went viral, says Martin Sandbu. In reply, some suggested that it was obvious that a banker on £500,000 a year would want to “put workers in their place”.
But that is “too facile”. The Bank is “duty-bound” to fight inflation and Bailey’s view of how inflation could take off is standard among economists. When the price of imported energy and goods goes up – a “terms-of-trade shock” in the jargon – that will reduce living standards. If workers then try to make up for that by seeking a pay increase, and businesses pass on the resulting higher costs in price rises, inflation can become entrenched in a “wageprice spiral” even after the shock wanes. Calling for wage moderation is then obviously one way to stop the spiral in its tracks. But stopping businesses raising prices and accepting squeezed profit margins would do the same job. So why do Bailey, and many like him, focus only on the wage side?
Time for profit restraint
There is certainly no reason in the theory, nor is it likely that a central bank’s words will have more influence over wage-setting than price-setting, particularly in the UK, which has little co-ordinated wage bargaining. It might be that trying to “browbeat” workers is deemed less harmful if it were to succeed than managers lowering profit margins, which could discourage investment. But that is “hard to credit”. Over the past four decades, the labour share of national income has gone down in most rich economies and the capital share has gone up, but investment rates have largely fallen rather than risen. In any case, a central bank worried about squeezed profit margins could always lower borrowing costs – the opposite of what the Bank now aims to do.
My guess is that the explanation is rather that there is “a blind spot in most economic policymakers’ mental model of the economy”. They’re so used to asking how wage demands affect inflation that they miss the question about protecting profits. This is ideological: it “unwittingly frames the problem so that the plausible answer favours the interests of one economic class”. The concept of class has been “largely exiled from mainstream economic debate”. But as the reaction to Bailey’s comment and my tweet showed, that’s changing. “Economic policymakers can no longer ignore once-outmoded questions of class conflict.”