As the world economy falters, the ruling class prepares to make workers suffer
As the world economy falters, the ruling class prepares to make workers suffer
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The world is in the midst of the biggest inflationary episode since the 1970s. The costs of goods and services have gone up across the board, with increases concentrated in the most essential sectors of food, energy and housing.

This price shock has forced down the real purchasing power of working-class people. In Australia, workers have lost a decade’s worth of wage rises in the space of a few months. Meanwhile, politicians, economists and business owners are preparing to punish workers even more. Indifferent to the collapse in living standards that millions are facing, the media are instead focused on the hypothetical danger of real wage rises that are facing ... well, nobody.

The pandemic days when essential workers were feted have been relegated to the history books, along with concern for public health and decent welfare payments. We now face escalating assaults on living standards that, if not resisted, could set us back decades.

To understand this situation, we have to look at recent shifts in the global economy.

When the pandemic first swept the world, most economists predicted that it would result in economic catastrophe as lockdowns destroyed industries and impoverished millions of workers. Although economies did collapse in the first half of 2020, governments quickly stepped in with huge spending designed to prop up the system. Stimulus measures were far more substantial than those deployed in the Global Financial Crisis of 2007-09. For instance, the US government alone had spent more than $5 trillion by November 2021, not including the varied and vast stimulatory actions taken by the Federal Reserve. Broadly speaking, these emergency measures staved off the predicted catastrophe.

Corporations found new ways to make money as governments provided relatively generous support to both consumers and businesses. Economic fortunes revived almost as quickly as they had cratered. The blood of millions of unnecessary pandemic casualties was sacrificed to accelerate this recovery, as governments prematurely abandoned attempts to contain COVID-19.

But the rapid rebound created new problems. There was a huge rise in household savings as workers banked cash usually spent on restaurants and holidays, and, in countries like Australia, as payments increased to the unemployed and to small business owners. As the immediate fear of collapse receded, workers used their increased funds to improve their household amenities, driving a boom in furniture, whitegoods and home renovations.

But lockdowns and labour shortages restricted supply and disrupted supply chains that make world trade possible. Big manufacturers had also scaled down their capacities in the early days of the pandemic, preparing for a long recession. They were unprepared when the economy snapped back, and took months to catch up.

In a classic example of how the free market fails in every crisis, these shortages led to eye-watering price rises. For instance, the cost of international shipping increased dramatically through 2020 and early 2021, by up to 1,250 percent on some lines. Trucks and drivers were in short supply, and waiting times at ports blew out. The boom in the manufacturing and home renovation sectors led to dramatic increases in the cost of necessary inputs such as timber, coal, iron ore and steel as companies desperately tried to fill orders and restock their inventories. Being good capitalists, suppliers paying these higher prices passed on the cost to retailers, who in turn passed them on to us.

That’s the origin of the recent inflation story. It has nothing to do with workers being greedy or wages being too high. In research conducted for the American Economic Policy Institute, Josh Bivens found that more than 50 percent of US inflation has been driven by corporations seeking to maintain or expand their profit margins, with wages accounting for just 8 percent.

Notably, this all preceded the war in Ukraine, which is often used by governments to explain away inflation. Putin’s war and Western sanctions undeniably have placed additional strain on energy and food supplies, especially damaging for states in Europe and the Middle East that rely on Ukrainian and Russian exports. But far from being an outlier, political shocks such as this are an inevitable feature of a world market that is simultaneously unified by trade and fragmented by geopolitical rivalries. In other words, inflation and supply shortages reflect the insanity of a world economy organised around markets and profits rather than human need.

In response to inflation, the central banks are moving away from the “easy money” policies more or less in place since the Global Financial Crisis, back towards old-school monetarism. They hope to rein in inflation by tightening access to credit through raising interest rates and withdrawing support for the bond market, the main source of funds for governments and big corporations.

The immediate impact of this new policy has been to pop a number of asset bubbles. Years of cheap credit led to rampant speculation in crypto currencies, unprofitable tech start-ups, stocks more broadly, real estate and other speculative “assets”. A recent newsletter by economist Adam Tooze noted that the sell-off in equities and bonds has resulted in $15.5 trillion in losses. Meanwhile, cryptocurrencies have plummeted by 70 percent.

But it’s not just the financial sector that faces a disruptive correction. A report by Bloomberg found that roughly one-fifth of America’s top 3,000 firms don’t earn enough profit to cover the interest payments on their debts. Forcing some of these companies to the wall could be the basis for a new round of growth and accumulation, if it doesn’t send the whole economy spiralling downwards.

There is also a global element to this process of cannibalisation. Many low- and medium-income countries have enormous debts, mostly denominated in US dollars. US economist Michael Spence has described the combination of rising interest rates, higher energy and food prices, and a strengthening US dollar as a “nightmare scenario” that threatens to destabilise these countries. The crisis in Sri Lanka could be just a taste of what is to come.

There is more than a little echo of the early 1980s in the policies of the US Federal Reserve today, even if under different conditions. Then, as now, forcing interest rates up was partly motivated by a desire to cull inefficient corporations and strengthen US capital for an imperial power play. This is one element of the competition that is perpetually taking place between capitalists, supported by the institutions of their state.

Having said that, smashing workers’ living standards was a key goal of the ruling class in the 1980s. Neoclassical economic theory says that inflation is largely a product of a vicious circle of wage rises leading to generalised price rises—what it terms a “wage-price spiral”. This supposed problem can be “fixed” by driving up unemployment, reducing working-class purchasing and bargaining power.

US Federal Reserve chief Jay Powell made this point explicitly in a press conference on 4 May, explaining that, by slowing economic growth, the US could “get wages down and then get inflation down”. Australian Reserve Bank head Phillip Lowe has insisted that wages must be cut substantially: “Three-and-a-half [percent annual wage rise] is the anchoring point that I want people to keep in mind. I know it’s difficult when inflation is higher than that”.

What we are currently seeing, however, is not a wage-price spiral, but a profits-profits spiral, as businesses raise prices on their products to protect or increase their profits, those price increases being passed on by other businesses purchasing the products. Workers are collateral damage in this process, rather than the factor driving it.

Yet the capitalist media are campaigning hard to provide ideological cover for this ruling-class offensive. When the Fair Work Commission handed down a measly one dollar an hour increase in the minimum wage, journalists fretted about whether this trivial increase would be passed on to the rest of the working class. The tiny handful of op-ed columnists who pointed out that wages have little to do with current economic turmoil were largely ignored.

So workers are being set up to pay for this crisis through serious attacks on our living standards. Real wages are falling fast. That will lead to a big fall in working-class living standards. At the same time, rising interest rates and higher unemployment will lead to more pain, as servicing outstanding debts on mortgages and credit cards gets harder and harder. If that weren’t bad enough, governments are now looking to reduce spending on social services and welfare to balance budgets and “reduce demand”.

For now, most economies are still in the tail-end of a boom following the self-imposed recession of 2020. But the bosses are already preparing for a possible downturn, and their resolve to make workers pay will only intensify as the turmoil continues.

Politics is moving fast to accommodate the new reality. Despite campaigning on wages growth, the ALP is now arguing that pay cuts will be necessary. Prime Minister Anthony Albanese and Treasurer Jim Chalmers are also signalling that government spending will be reduced in the October budget update. In the US, President Biden has abandoned his signature progressive policies and is now flapping helplessly in the political wind, while newly elected centre-left governments in Latin America are promising relatively little in the way of economic reform.

In this context, the working class needs to gets its shit together. Repeated strike action by teachers, nurses and train drivers in New South Wales shows that workers will jump at the chance to fight if given a lead. A major rail strike in the UK has won widespread support, especially from younger workers who have moved to the left in recent years. A successful mobilisation by the Trades Union Congress, the union federation in England and Wales, drew tens of thousands of unionists onto the streets to demonstrate against the cost-of-living crisis.

As economic conditions worsen, there will be growing pressure on union leaders and their members to be “reasonable” and to “tighten our belts” for the good of the economy. Already, the ACTU has suggested that it will seek wage agreements that do not go beyond inflation, so that real pay already lost will not be regained.

In our workplaces, we should not accept the sacrifice of a single dollar on the altar of corporate profits. We should also campaign hard for the ALP to undo tax cuts for the rich and to slash the massive military budget to pay for an improved health and welfare system for those who are struggling. We will also need price controls and public investment in a range of areas to protect workers from inflation, if that proves to be lasting. None of this will be possible unless we build a socialist movement that can stand up to the rich and their representatives in government.

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