Who benefits from the cost of living crisis? Right now, it’s big business owners | Christine Berry
Jhe UK cost of living crisis seems to be getting worse almost every day. Experts say we are facing the biggest drop in living standards since the 1970s. Announcing a phase-out of Russian oil imports, Boris Johnson spoke of “dark days ahead” – as if the days in which we live were not already dark enough.
This crisis cannot be blamed solely on Russia’s brutal invasion of Ukraine. The return of high inflation may be attributable to short-term supply shocks. But the things that make it a crisis took decades to prepare.
In the 1970s, “stagflation” – low growth coupled with high inflation – ended three decades of rising living standards. Now that adds up to a lost decade. Actual wages are no higher than 2008, when the financial crisis erupted. Millions of households were already struggling to make ends meet. It doesn’t take much to turn them into the red.
It’s not just that wages have been squeezed: just to exist in the UK has become prohibitively expensive. That’s partly because we’ve gone further than almost anywhere else in turning essential goods and services into financial assets. Because people literally can’t live without them, owning these assets is a reliable way to extract huge rents while doing very little. By putting the means of a decent life in the hands of private gatekeepers whose sole concern is to maximize their rents, we have built an economy that systematically inflates costs to consumers while driving down wages.
The most obvious and blatant example is that of housing. When soaring housing prices taken into account, living standards have fallen for most working-age households since 2002. House prices have risen 20% since the start of the pandemic and are at an all-time high, both in absolute terms and relative to earnings. This leaves a growing number of people trapped in the private rental sector, where around one third of their income is swallowed up by rent alone. Average rents have risen by 8.6% over the past year and now stand at over £1,000 a month. This comes on top of a decade where rents have already risen much faster than wages. Of course, the losses of the tenants are the gains of the owners. Attracted by these disproportionate returns, rental investors have engulfed a significant portion of the housing available in recent years.
We see the same patterns elsewhere, from care to water, from energy to transport. Britain’s childcare system is the third most expensive in the world: bad news for parents but good news for the child private equity investors buy cribs. During this time, approximately £1 per £10 social care spending is squeezed out of the system by highly financialized corporations that own and control assets within it – contributing to a 30% cost increase for self-funded care since 2012. Rail fares increased by 20% in real terms since privatization, and water bills by 40% – with excess profits inflating the latter by about £2.3 billion a year. Meanwhile, as the Common Wealth think tank pointed outnetwork monopoly owners make profit margins of 40% and pay more than £1 billion per year to shareholders.
Bank of England Governor Andrew Bailey recently warned of the threat of inflation caused by rising wages. The bogeyman behind the governor’s intervention was the “wage-price spiral” – in which rising wages drive up prices further, leaving no one better off. This ties in with the idea, dear to traditional economists, that the interests of workers and consumers are essentially a seesaw: for one to win, the other must lose. But that conveniently ignores the third player in the equation: the owners. In the UK today, landlords are the only group that really has the power to set both wages and prices. Indeed, this power has been systematically given to them by decades of deregulation and the decline of unions.
So why did Bailey ignore them? Why, the FT commentator Martin Sandbu reflected, didn’t he call on powerful companies to “moderate” their profits, rather than ask less powerful workers to “moderate” their wage demands. Perhaps, as Sandbu observes, because mainstream economics has a “blind spot” for the power of capital, and correcting that would be asking uncomfortable questions about “who bears the cost” of rising inflation and who benefits from it.
High energy costs may have millions of people wondering how they will heat their homes, but BP’s chief executive has shamelessly bragged about turning his company into a ‘slot machine’. Profits for BP and Shell soared to $32 billion last year as BP shareholders were set to benefit from a $1.5 billion share buyback. Windfall tax claims have proven popular because people intuitively understand that these huge rewards are undeserved and unfair.
But even companies on the wrong side of rising input costs have significant power to decide who takes the hit: do they pass it on to customers by raising prices, or to shareholders by squeezing margins? In the case of supermarkets, as campaigner Jack Monroe made clear, this effectively means the power to decide whether poorer families can afford to eat. The problem is that the companies making these life-and-death decisions have no obligation but to maximize returns for investors. In France, the state-owned EDF has shielded citizens from the pain of rising energy costs. In the UK, where public ownership has been systematically dismantled, we lack both the democratic levers and the political will to do the same.
In the US, where corporate power is even more concentrated than in the UK, commentators warn that the real danger is not a price-wage spiral but a “price-profit spiral”. US corporate profit margins are at an all time high. 70 years high, and have increased by 37% in the past year alone. In investigationmore than half of retailers admitted to raising their prices by Continued as their costs increase – large companies being the most likely to do so. The inflation talk provides a handy smokescreen for inflating margins, as investors brazenly admit. In the words from an asset manager“What we really want to find are companies with pricing power. In an inflationary environment, it’s the gift that keeps on giving.
In the face of such shameless profiteering, calls for a slowdown in wage growth are as economically misguided as they are inhumane. Yes, there is a group that has skimmed excessive rewards for decades and now has to tighten its belt in the face of supply shocks. But these are not ordinary workers. Like those incendiary socialists in Morgan Stanley recently argued, it is profits that must decline to absorb the pain of inflation – making up for decades in which capital has increased its share at the expense of workers and consumers. More fundamentally, we need to ask whether the UK’s global privatization experiment has run its course. The incredible sums given to investors could have gone unnoticed in better times. Today, this largesse is something we literally cannot afford.
Christine Berry is a Manchester-based writer and researcher
Guardian Newsroom: The cost of living crisis Join Hugh Muir, Richard Partington and Anneliese Dodds MP for a livestreamed event on the cost of living crisis on Thursday 14 April 2022 at 8pm BST | 9pm CEST | 12pm PDT | 3 p.m. EDT. Book tickets here