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The politics of high inflation – can governments do anything?

Written By: - Date published: 10:46 am, May 19th, 2022 - 13 comments
Categories: economy, Europe, Financial markets, Free Trade, Globalisation, inequality, International, Media, Politics, uk politics, Ukraine, us politics - Tags: , , , , , , ,

Britons woke up to the news today that inflation in the UK has hit a 40 year high of 9%. Recent increases to power bills, fuel and groceries have in no small part driven this inflationary pressure and indications are that prices could increase further. The bank of England governor has called for wage restraint fearing that this could drive inflation even higher, though with the cost of living rising so quickly this call will likely fall on deaf ears.The recent losses in local body elections and lacklustre polling for Boris Johnson’s Conservatives is in part due to the rising cost of living. But is this all just a case of bad economic management by the Conservatives?

My usual reference point is comparing and contrasting the UK and New Zealand situations, having lived in both countries. New Zealand’s inflation rate is at a 30-year high hitting 6.9%. A friend in NZ recently asked if I could send petrol over from the UK as the cost had gone up too much over there, the joke soon fell flat when I told them how much a tank of petrol cost here in the UK. In New Zealand, the opposition has been quick to blame the Labour Government in New Zealand for this, at a time when support for the government is falling fast. Having won a record majority in 2020 for their handling of the pandemic, Jacinda’s government now faces a backlash over coronavirus restrictions and is taking the blame for current economic challenges. Commentary in the New Zealand media also tends to focus on inflation as a domestic issue, as such much of the commentary is often wide of the mark.

The above Bloomberg graph shows the global inflation rates spiking upwards in 2022

In Australia, the country goes to the polls for their first federal election since the pandemic. Whilst polling numbers are still fairly close there is a real possibility the right of centre Liberal Coalition Government led by Scott Morrison may lose, in no small part due to inflation and the rising cost of living. Whilst there are plenty of good reasons to vote out the Coalition government, not the least their inaction on climate change, like in Britain and New Zealand, is the cost of living increase in Australia really down to the federal government?

In the US, President Biden and the Democrat-controlled House and Senate are facing an uphill battle in the November midterms against a Republican Party now very much aligned to Trumpian politics. For the Biden administration there appear to be few options to control inflation in the short term. I have previously blogged about the limitations of the US political system and it is no surprise that many Americans yet again feel frustrated. However, it is clear that this is not a crisis limited to any single nation-state, what we are dealing with is a global inflation problem.

At the start of the pandemic, I wrote a blog post outlining how there would be long lasting economic ramifications of this crisis. This, along with the Russian invasion of Ukraine is driving inflation and causing economic uncertainty. This is particularly challenging for much of Europe where there is a high level of reliance on Russian Oil and Gas and moves to end this reliance will see short term price hikes and energy shortages.

Previously, I have written about the importance of global governance and how our current global governance institutions are not up to the challenges we face in the 21st century. The current crisis illustrates this more than ever. At the current time, we turn to the nation-state and in democratic countries we as voters can hold our leaders to account for what happens, including economic management. In reality, how much can Jacinda Ardern, Boris Johnson, Scott Morrison, Ursula von der Leyen or Joe Biden or any other world leader do? When finance Ministers do the national budget each year, many of the key economic factors are determined by external factors, not by their government’s decisions. Likewise, we can beat up the Bank of England, the Reserve Bank in New Zealand or other central banks for not controlling inflation within the targets they have been set, but they did not cause a global pandemic, invade Ukraine or control many of the key drivers of international inflation at that time.

This is not to let governments off the hook, as they still have the power to mitigate the effect of high inflation. Governments have the power to reduce or remove sales taxes, regulate pricing or support people on low incomes through benefits or policies that help lift wages. On the global stage, finance ministers when they attend the yearly Davos meeting, or leaders who attend the G20 meetings, need to be doing more to develop a global economic strategy that can protect against these sorts of shocks. Further, they need to create global governance institutions that can ensure a stable global economy that delivers for everyone, not just now but into the future. This is what we should be demanding of our governments.

Back in the late 1990s and early 2000s the big push was for globalisation, which in reality was a push for removing tariffs and international market liberalisation. The anti-globalisation movement of the time often took the position that this agenda weakened the nation-state and undermined democracy. The problem, which neither side really understood, is that in a world where we for a long time have depended on international trade but also on the movement of people, relying on national governments to resolve this will inevitably fail. Margaret Thatcher, in the introduction to her memoir The Downing Street Years, claimed the following:

An internationalism which seeks to supersede the nation-state, however, will founder quickly upon the reality that very few people are prepared to make genuine sacrifices for it
Margaret Thatcher, The Downing Street years, page 11

Yes, in terms of consciousness people still hold nationalism and their own country in high regard. But where we increasingly see countries with governments of all different colours struggling to control the cost of living, at some point we must face the fact that an international response is required. People may not believe in current global governance institutions or be “prepared to make genuine sacrifices” for them. But they may do if these institutions were in fact giving people a better quality of life by controlling inflation and the cost of living. At the time of writing, this all seems somewhat academic, with there being little likelihood of an international response, other than some short term cooperation to control the immediate crisis without looking at the underlying long term problems. Yet it is clear that we will continue to face these economic challenges with tools that are ill-equipped to face the problems. Only a truly international response can create an economy that delivers for all.

13 comments on “The politics of high inflation – can governments do anything? ”

  1. barry 1

    Many economists were surprised that QE didn't lead to runaway inflation. The decoupling led to modern monetary theory https://www.investopedia.com/modern-monetary-theory-mmt-4588060

    Of course the money had to go somewhere, and there has been severe asset inflation. If the price of art goes up nobody (who matters) really cares, but the price of land and housing has real effects (and is mostly excluded from CPI). Asset inflation didn't lead to higher grocery prices, but still devalued money and discouraged saving.

    The real reason that CPI stayed low is because of outsourcing manufacturing to low wage economies. Even though that led to wage increases in the manufacturing countries, the cost of labour is still so low as to make it irrelevant. Immigration from low wage countries also kept the wages in NZ and other countries lower.

    The pandemic lockdowns, travel restrictions and logistics problems broke that. Import costs have gone up (partly due to shortages). Lack of immigrants have driven local labour costs higher. Financing costs have increased as well. This would have happened anyway, but the pandemic accelerated it.

    So the government is not responsible for the current inflation, but government policies over the last decades (here and overseas) have led to it.

    We won't fix it by doubling down on the policies that caused it. Outsourcing and relying on high paid service jobs, while allowing high immigration to keep wages low is not sustainable. We need a proper balance to stop this sort of periodic, economic disaster.

    • pat 1.1

      Indeed….however we have even more pressing reasons for change.

      Limits to growth.

    • gypsy 1.2

      Many economists were surprised that QE didn't lead to runaway inflation.

      It's long been accepted that QE doesn't necessarily cause inflation.

      We need a proper balance to stop this sort of periodic, economic disaster.

      You haven't defined what this 'economic disaster' is, but the 'proper balance' is carefully targeted government spending, and policies that strategically promote growth in the private sector.

      • barry 1.2.1

        From your cite "If the economy is close to full capacity, increasing the money supply will invariably cause inflation."

        For most of the last 10 years we have been close to capacity.

        The disaster is cost of living outstripping the earnings of a large portion of the population. QE created wealth for a few, while the labour policies have kept wages low. Balance would have higher wages for the workers, and less wealth going to capital.

        Government spending is not the problem. If low government spending was the answer we would be one of the richest economies in the world. Growth and productivity improvements are important, but why restrict it to the private sector? Workers should get the reward for such growth and productivity. By keeping wages low, we have created an environment that discouraged investment.

        The point about inflation is that we have had high inflation which was not represented in the CPI. The inflation has rewarded the rich and the property owners and punished those who found themselves renting or looking to buy their first house. Now the shit is hitting the fan and we are seeing it reflected in the CPI.

        Ideological – public bad, private good – doesn't answer the question. It is more about how do we reward people properly for their work, and how do we look after the least well off.

        • gypsy

          Thanks – good responses.

          "For most of the last 10 years we have been close to capacity."

          If we're smart, there are solutions to that. For example, I've just been listening to Paul Goulter, CEO of the NZ nurses association talking about the budget. We are 4,000 nurses short, and yet he claimed there was little or nothing in the budget to attract people to nursing. Now in this case capacity shouldn't be an issue – there are nurses ready and waiting to come to NZ, but they can't get in!

          "Government spending is not the problem. "

          Totally agree, The problem is the quality of government spending, and I would also say the proportion of government spending to GDP.

          "Growth and productivity improvements are important, but why restrict it to the private sector?"

          Productivity improvements, absolutely, but growth? That depends. If the public sector is delivering services to the economy efficiently then sure. The problem is that governments have a tendency to exhibited an unfortunate largesse without corresponding results. Mental health is one obvious example. And then there's the number of civil servants earning over $400k almost doubling in one year.

          "Now the shit is hitting the fan and we are seeing it reflected in the CPI."

          Indeed, but the government can't escape responsibility. Successive governments have failed to correctly manage the housing market, and the current government has increased landlords costs at a time when those costs are able to be passed straight on to tenants.

          "It is more about how do we reward people properly for their work, and how do we look after the least well off."

          Yes. We may not agree on the journey, but we can certainly agree on the destination.

  2. Incognito 2

    Nice paragraphs, Nick cheeky

    • lprent 2.1

      I fixed them for him by reading his post on his own site. Does need a better paste. He should try with the block editor.

    • Nick Kelly 2.2

      Yes, sorry the para’s were there in the draft but when a published not so much.
      I will try another method next time 🤦‍♂️

      • Incognito 2.2.1

        No worries. I only saw the tidy version, which looked heaps better than your previous Post qua formatting – it was funny when I found out that I was giving Lynn a pat on the back instead surprise

  3. Blazer 3

    The cornerstone of western Capitalism,is interest bearing debt.

    Along with Q.E =the perfect recipe for ramping…inflation.

  4. Just Saying 4

    Who is not prepared to make sacrifices?

    Maybe with the global clusterfuck reaching endgame the international mega-rich elite want to ensure it is everyone else who pay the price. Our democratic rights, including our abilities to freely communicate, to form political parties, and to vote within nation-states might be seen as a danger to their continuing power and control, including to their extravagant lifestyles and to their legal impunity. Maybe it is they who are becoming most antsy as things get worse and worse.

    Maybe as the crunch hits, everyday people might be expected to become less and less tolerant of the very wealthy and their enablers being the exception to making sacrifices. Because their virtue signalling as opposed to actual sacrifice might not cut it any more.

    As an aside it is the Ardern government. Ardern is the Prime Minister of a nation, a position that is not referred to by Christian name, as is the case with, say children and close kin. Something to do with the dignity of the office, from memory.

    • mac1 4.1

      "As an aside it is the Ardern government."

      Absolutely, Just Saying. Margaret Thatcher got a proper reference. So should Prime Minister Jacinda Ardern.

      More that just saying…worth saying.

    • roy cartland 4.2

      +1 re sacrifices: we've made plenty. And watched on as the beyond-absurd antics of the unconscionably rich waste resources on rockets, yachts bunkers. With never a single wtf from our media.

      I'd happy sacrifice their wealth, as well as continue to make sacrifices of my own.

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