Over at Liberal Conspiracy the General Secretary of the TUC, Brendan Barber has penned an article which asks British Firms to pay higher wages in order to grow the economy. This is typical of a socialist, in that it puts the cart before the horse. Employers will only pay what someone is worth. If someone is paid more than they make the firm in productive work, the company will lose money. If this is true accross a firm (for example if the state demanded that people are paid more) then the firm will either fire people, or go bust. In order to increase wages, you must increase the value of work someone can do.
Barber starts by explaining how the fiscal multiplier works -all that guff about state spending circulating through the economy and increasing overall demand. However despite spending four paragraphs laying out a fairy story, by ignoring the negative effects of Government spending -those taxes needed to pay for it (eventually) shrink demand - he can be dissmissed by the observation of the National Bureau of Economic Research who concluded that...
(i) the output effect of an increase in government consumption is larger in industrial than in developing countries, (ii) the fiscal multiplier is relatively large in economies operating under predetermined exchange rate but zero in economies operating under flexible exchange rates; (iii) fiscal multipliers in open economies are lower than in closed economies and (iv) fiscal multipliers in high-debt countries are also zero.In the UK, a high debt, open developed economy with a floating exchange rate, the fiscal multiplier is probably less than 1. Deficit financed state spending probably depresses aggregate demand. This is not controversial economics - except amongst the British left. Does Brendan Barber know this? If so he's lying to us, and if not, he's ignorant. Which is it? The suspicion is that high state spending leads to more state jobs. As most of these are unionised, it's clear why he ignores any evidence to suggest that state spending is too high and should be cut. He's not interested in the economy, but in the economics of the TUC, which is thnakfully still haemoraging members.
The rest of the article is left-wing boilerplate about how Britain's banking industry should be taxed to Zurich, and Business should pay more tax.
He says Over the past three decades, the share of GDP going to workers’ wages has fallen from 65% to 53%, with those in the middle and at the bottom hit hardest.He neglects to mention that for those at the bottom, wages are irrelevant. Over the last 14 years, half of that time frame, we've enjoyed a minimum wage - and as I've argued before, those at the bottom of the heap have indeed been hit hardest. There's no jobs at all for them thanks to Government demanding business pay more than people were worth. For young men without an education (another failure of British society which 13 years of Labour did NOTHING about) the only option is welfare for life.
The share of GDP going to tax has gone UP over the last 30 years - is that not a bigger reason than corporate profits for the fall in the share going to wages? Does it necessarily follow that the share of GDP going to wages falling is a bad thing? Even the lowliest pension investor, which is eventually most of us is a capitalist benefitting from that share going to profits. Am I suggesting Brendan Barber picks his statistics to get the answer he wants - more state spending? Never!
Next, he rails against debt. Household debt, naturally. Not the lovely state stuff, which is ambrosia and nectar for the economy.
In Britain, household debt more than trebled between 1980 and 2005. As incomes are squeezed further, household debt in this country is predicted to reach over £2 trillion by 2015 – an albatross around the neck of our economic future. Unless workers see their pay packets growing, we won’t be able to build sustainable consumer demandThe main reason debt has gone up is that the cost of money, the interest rate has gone down, and the UK has a sophisticated, developed banking system which allows people to get credit. It's nothing to do with low wages - the very poor are excluded from the credit industry. If anything, this is another argument for people to pay less tax.
Demanding business pay more - making labour more expensive - means companies will hire less of it, and it is the least productive, the least able who will bear the brunt. You want youth unemployment? Then raise the Minimum wage to £8 or whatever you think is required. Whilst it is true that compaines increasing wages WILL in time boost aggregate demand, this can only happen in the context of full employment. Government demanding higher wages will depress the level of employment and have no net increase in demamd (if lucky. It's actually more likely to depress demand).
Only productivity growth will lead to higher wages, and that requires investment, which requires returns on capital. The best way to ensure return on capital is to tax less. Growth requires a tax cut (but only in the context of a balanced budget - there is no fiscal multiplier in the UK, remember?). That requires that spending be cut further faster and deeper than the coalition are planning. Which brings me to the first paragraph in Mr. Barber's post.
I was at the O2 in Greenwich yesterday, speaking to the Insitute of Directors (IoD) annual convention. I always admire the way the IoD doesn’t pussy-foot around. They’re very clear that they don’t just back the spending cuts, but want more of them – and want them more quickly.The IoD are right, and he is wrong.