Mainstream economists claim that we can only cure inflation if workers and the poor have less to spend. Instead, we need to think outside the box — by turning to tax-funded wealth redistribution and limits on profiteering.
A store worker serves a customer in the fruit and vegetable section at Paddy’s Market on October 22, 2022 in Sydney, Australia. (Lisa Maree Williams / Getty Images)
After twelve increases to the interest rate since May 2022, Australia’s cost-of-living crisis is reaching a boiling point. According to the Reserve Bank of Australia (RBA), whose board sets the rate, these increases are to tackle inflation. However, thanks to landlords and banks who have passed on higher interest rates in the form of rent and mortgage repayment increases, renters and mortgage holders are feeling the impact most.
Much of the media — not to mention the RBA — justify this, by arguing that rising wages are a key driver of inflation. But this is contradicted by the RBA’s own research, which forecasts a considerable decline in real wages over the coming years. Indeed, while addressing the impact of the rate rises on living standards, RBA governor Philip Lowe may have conceded that their real rationale has less to do with wages or incomes than the bank would like us to believe. As he explained, “If people can cut back spending, or in some cases find additional hours of work, that would put them back into a positive cash flow position.” Ostensibly, the point of increased interest rates is to cut consumer spending. But if the Reserve Bank’s move encourages workers to work longer hours or find a second job, the implication is that the bank’s more genuine concern is to make workers foot the bill for bringing down inflation.
Either way, the situation poses an urgent question for the Left: How can we alleviate the cost-of-living crisis and deal with inflation, without forcing workers and the poor to shoulder the burden?
Greedflation
The current inflation crisis is in part the result of a series of very specific intersection between different world events. Global supply chains are still recovering from the impact of the pandemic on manufacturing, transport, and distribution networks. At the same time, severe weather events have wiped out crops, disrupting food production and driving up prices on some items. And the ongoing war in Ukraine — as well as and the economic sanctions imposed on Russia — have caused significant disruption in Russian gas exports and Ukrainian grain exports.
However, there’s another, more important factor underlying inflation: profiteering. A wide range of companies have chosen to raise the price of their goods substantially above any underlying rise in costs. This can be seen in the fact that these companies’ profits have grown substantially above their growth in turnover, which suggests they have used external factors to conceal price gouging.
Economist Isabella Weber has described this as “greedflation.” Indeed, the European Central Bank, the Organization of Economic Cooperation and Development, and International Monetary Fund have flagged excessive profits as a cause of inflation.
Despite this, central banks around the world have sought to curb inflation by raising interest rates. Ideally, these measures would put the brakes on some sectors, like the stock market and housing market, without necessarily disrupting the economy overall. However, for most working people, these rate rises are potentially catastrophic, as are their impacts on the economy. Many are being forced to skip meals, default on mortgages or face eviction.
Stagnant Wages
Prior to the current crisis, wages in advanced countries had already been stagnant for some time. This is the result of two key developments.
First, harsh, anti-union industrial relations regimes have weakened the power of workers and their unions, while removing restrictions on employers, considerably strengthening their bargaining power. Second, employers have taken the opportunity to pursue an increasingly aggressive approach to bargaining and wage-setting. This change in approach was also a response by employers to historically low profit growth.
In Australia, this problem is framed by the Fair Work Act, which governs enterprise bargaining. As both the Australian Council of Trade Unions and the Australian Labor Party (ALP) have pointed out, over the last decade, this industrial relations regime has seen record low-wage growth. Consequently, early in his term, Prime Minister Anthony Albanese introduced amendments to allow unions to engage in multiemployer bargaining and to make industrial action legal during such bargaining.
While multiemployer bargaining may improve the position of some workers who have previously been excluded from the enterprise bargaining system, more than two million workers in smaller workplaces are excluded. In addition, these amendments are not likely to boost wages in the short term because bargaining is a lengthy process, and it can take more than a year to finalize some agreements.
On top of that, the new Fair Work Act contains features that give employers enhanced abilities to stymie negotiations and limit workers’ right to take action. These will make it even harder for unions to overcome the impact of decades of declining membership and low levels of shop floor organization in most sectors.
At any rate, this is beside the point for many workers who are already covered by enterprise agreements that have yet to expire. Before they are up for renegotiation, these agreements will deliver a decline in real wages.
Rebuilding Living Standards
Consequently, while it’s important to push for a revitalization of unions — as well as pro-union laws — it’s necessary to also raise demands that can immediately boost incomes for workers and poor people.
The most obvious solution is a universal income supplement. Such a supplement has a number of advantages. For one, it could be adjusted more rapidly than wages. And by making it universal, it would ensure that people who don’t earn wages — like owner-operators or social security recipients — are not left behind.
While this may seem politically impossible, recent precedents would suggest otherwise. In the fifteen years since the 2008 global financial crisis, federal governments led by both the Labor and Liberal Parties have made one-off cash payments economy-wide. Although these were aimed at boosting consumer spending in the short term, there’s no reason why they couldn’t also supplement wages on a regular basis. There’s also no reason to think such an income subsidy would detract from the push to increase welfare payments to the poverty line.
Measures that maintain purchasing power, while important, are also likely to drive up prices in some sectors of the economy because businesses will likely take advantage of an increased capacity to pay to engage in price gouging.
To ensure that we aren’t just boosting profits, we can follow the advice of Weber and her colleagues, who advocate capping price rises on key commodities, which would both restrict profiteering and help to stabilize inflation. Obvious candidates for price controls would include utilities bills — particularly power and gas — as well as fuel, transport, and food.
In addition, governments should act to freeze both rents and mortgage payments. The Greens have made a rent freeze a key demand at both the state and federal level, building pressure on the ALP. However, a freeze on mortgage repayments is just as crucial. Skyrocketing repayments can lead to mass mortgage defaults. If this happens, house prices could drop to a point where they are much lower than the mortgages that are owed. The outcome for people who default would be both homelessness and a substantial debt. At the same time, a rapid price drop triggered by a glut of mortgage defaults would encourage vulture capitalists who can shoulder borrowing costs to buy up cheap housing while the market is depressed.
Who Will Pay?
Critics will echo former UK prime minister Theresa May’s comment that “there is no magic money tree” to argue that the federal budget — still recovering from the pandemic — cannot absorb additional social spending.
This is wrong. As economists John Christensen and Nicholas Shaxson put it “there is a magic money tree . . . one version of which would be tax havens, multinational enterprises, and the mega rich.”
Specifically, research by the Australian Institute indicates that over the past seven years, five of the six major gas exporters paid no tax on $138 billion in revenue. Indeed, this is part of an ongoing problem that has seen large corporations avoid tax obligations in country after country. In addition to tightening regulations, a potentially simple solution would be to introduce windfall taxes on profits that have expanded as a result of cost increases beyond real inflationary pressures.
Indeed, by limiting greedflation, windfall taxes could help bring down consumer prices, and limit the extent to which income subsidies are needed.
Beyond this, there’s an even more obvious magic money tree: the third stage of the tax cuts originally introduced by the former Scott Morrison Liberal government. These cuts primarily benefit high income earners and if Labor cancels them, the move would retain an estimated extra $238 billion in government revenue over the next ten years.
Of course, it’s increasingly apparent that like neoliberal governments elsewhere, the Albanese Labor government has no intention of prioritizing workers’ interests over corporate profits. But this isn’t the point of raising these demands. Over the last six months, the Greens have proven they can build popular support behind policies that identify real problems workers and poor people face, and pose real and immediate solutions to them.
If the union movement also campaigned around redistributive policies, it would not only increase pressure on the government — it could also help the unions rebuild their power by recruiting and mobilizing members.