The modern state is all about the transfer of wealth. Flick through this week’s magazine and you will see what I mean.
There is the council house right-to-buy scheme, under which the current tenants are allowed to buy their homes at a 50% discount to the market price, then flog them at the full market price after three years.
This is a slightly bemusing transfer of wealth from the long-suffering taxpayer – who will have to pay for more social housing to be built at some point – to a few chosen tenants. And the actual capital transfer is, of course, only the half of it: the houses will be bought with mortgages made artificially cheap by quantitative easing (QE).
Then there is ‘Help to Buy’ (a transfer from the taxpayer to home buyers). Then we mention quantitative easing and the ongoing low interest-rate environment. This transfers money from savers to borrowers. It keeps people in houses they can’t really afford. And it pushes up asset prices along the way.
But if you look at a good number of the transfers across the economy, it is clear that most of them are trying to compensate for the same thing – low wages.
We look at how the creation of bad incentives in the corporate world has pushed up profits at the expense of investment and wages. Governments have intervened with minimum wages to try and prevent living standards from falling below certain levels. But it hasn’t been enough.
An article in The Independent this week noted that the minimum wage in Britain has – thanks to inflation – now fallen well below the level that allows for a reasonable standard of living. That means vast expense for taxpayers here, as the welfare state is forced to effectively step in (via welfare to workers) to pay the wages that companies won’t (and often say they can’t).
We can’t afford to keep doing this – we can’t afford it in cash terms (particularly given the low tax take from big corporations these days). We also can’t afford to keep going with the endless economic distortions that our compensatory transfer policies create. You could argue, for example, that the financial crisis was in part a result of the low waged over-borrowing to maintain their lifestyles.
However, as Bill Bonner notes, it isn’t just about us: low wages are a problem across the world. And that isn’t sustainable (see here for more on this from John Stepek). We can’t say how or when the share of GDP going to workers will rise, and the share going to capital in the form of profits will fall. But the huge fast-food strike in America should surely give you a hint that it might be sooner than you think.
One more reason to prepare for the return of inflation.