#TheReset: Reducing the risk of ‘stag-deflation’ after COVID…

If the post COVID ‘reset’ works, then it will have to move beyond longstanding structural thorns that western society has so far failed to deal with. The great twentieth century historian Eric Hobsbawm wrote that the period from 1945 to the early 1970s were a ‘golden age’ in human achievement and it was only the breakdown of the mid to late 1970s of economic wellbeing and living standards that broke this unprecedented period of growth.

In the height of this progressive era, in 1967, JK Galbraith wrote:

No hungry man who is also sober can be persuaded to use his last dollar for anything but food. But a well-fed, well-clad, well sheltered and otherwise well-tended person can be persuaded as between an electric razor and an electric toothbrush. Along with process and costs, consumer demand becomes subject to management.

The era ended because of the period known as ‘stagflation’ where the previously thought impossible combination occurred. High unemployment in the 1970s meant that in theory consumer demand to buy products would decrease and therefore inflation would reduce, however prices continued to rise at uncontrollable rates. Even in the midst of the troubles, NI had fuel shortages (as did most western countries) as oil prices spiked.

What western economies have faced, or rather feared, since the 2008 crash is “deflation” which simply means a rapid decrease in the price of goods and services spurred by a reduction in the availability of credit (“credit crunch”). On the face of it this sounds marvellous for all concerned, cheaper prices mean more in your back pocket at the end of a working week. But in actual fact this is not the case, lower prices mean that suppliers have to squeeze tight margins to maintain profitability and wages stagnate.

Our sluggish manufacturing sector failed to do this and so the far eastern boom swept across western industry due to its superior ability to provide Galbraith’s myriad of consumer products. We were left with high quality professional services becoming our highest value export which has enriched and enlivened a professional class of people who have nearly completely been educated by the state (in most cases through comprehensive education).

In the face of ever decreasing prices governments have sought to increase the supply of credit through monetary policy. By printing money through quantitative easing and depressing interest rates the central banks hope to spur on growth through consumer and commercial borrowing. With this there is a risk of inflation whereby prices shoot up because of an over-supply of money.

However, this risk has completely failed to materialise and so we are on a 500 or so year decline in base central bank interest rates with little inflationary effects. The IMF credit this long-term decline in rates to an ageing population, with this comes a totally different set of social attitudes because of the proclivity for saving amongst the older population. This has its own effect on the deflationary risk as the elderly population have conservative spending habits, somebody needs to buy the eastern products being marketed by western professionals.

With inflation so low it begs the question of whether we are at a precipice moment. Keynes predicted (with it must be said liberal enthusiasm) that by our time the rate of automation would ensure leisure time peaking over work time. However, what the great economist forgot to mention in his assessment was money. Interest rates could go into negative and cash would still be out of the hands of a great many who not only need it but could do a great deal for the economy with it.

This is why I think that the great post war golden age should be kickstarted again post covid with a serious attempt at a universal basic income. Firms producing everything from coffee machines to coffee tables continued to operate through the worst throws of the pandemic and consumer demand was kept afloat thanks to the wonders of broadband communication. The furlough scheme was proof that injecting cash into a great proportion of the population to buy these products online wouldn’t lead to rampant inflation – the data for a “trial” is already there!

In 1969, near the end of Hobsbawm’s golden era, the unlikely figure of Richard Nixon proposed legislation which included a guaranteed minimum income for all families. It never made it into law but since then the UBI debate has raged. The reset we need doesn’t need to come in the form of great structural changes to welfare, health, education or economic regulation but it can come in the form of a systemic change to all of these things with an enlivened populace receiving a guaranteed minimum income to pursue their own happiness and fight deflation by ‘buying out, to help out.’

Photo by Skitterphoto is licensed under CC BY-NC-SA

This post is part of our #TheReset series in association with Ulster Bank