What are the solutions to the cost-of-living crisis and stagflation facing Scots?

STAGFLATION. Of all the portmanteaus in the English language (Brexit being one of the newest), stagflation is the only one that strikes fear into the heart of economists, especially those working at central banks.

Why? Because stagflation is the coming together of two economic risks – stagnation, or even recession, as the economy stops growing or contracts, combined with a sharp increase in prices, or in other words, inflation. This puts central banks in a bind because they typically try to dampen down inflation by increasing interest rates, so that the cost of incurring debt is higher.

However, in a situation of economic stagnation, rising interest rates can have the effect of choking economic activity and making the trends towards recession worse.

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But lowering interest rates runs the risk of prices rising even further, which will make people even less likely to spend. Can you see why stagflation is a central bank’s worst nightmare? It looks increasingly likely that some form of stagflation is where the UK economy is heading, with a 0.1% contraction in March expected to be just the start. The inflation rate is more than 6% and, according to the Bank of England, could be above 10% by the end of the year. If the conventional tools of central banks cannot solve both the stagnation and inflation parts of this problem, what solutions are there to a crisis which is threatening to engulf Scottish households?

Solutions, for whom?

First , it’s important to establish something important that is too often missed in debates about solutions to this crisis. The economy is made up of different, often conflicting, interests and usually what is presented as the general interest masks the interests of a particular group of elites. So when we talk about solutions, we have to be clear about who those solutions are for.

The last time the British economy experienced stagflation was in the late 1970s. Many things were different about that time to today. Unemployment was much higher and large sections of workers had strong trade unions which could win wage rises significantly above inflation.

Nonetheless, that time provides us with a very useful case study in how a solution can be presented as for the good of everyone, but in practice comes at the expense of workers’ jobs and livelihoods. That case study is called “the Volcker Shock”, named after Paul Volcker, chairman of the Federal Reserve, the US Central Bank, from 1979-87.

To tackle stagflation, Volcker’s solution was to double interest rates to around 20%, a move which is credited with at least partly being responsible for inflation reducing from 14.8% in March 1980 to 3% in 1983. However, Volcker’s Shock sparked the US recession of 1980-82 as the increased cost of credit for businesses and households led to a huge economic slowdown.

The damage was profound. Unemployment rose from 6% at the start of the Volcker Shock to almost 11% at its end, with many communities which relied on heavy industry in particular never recovering, even as the US economy in general began to grow again.

For Volcker (below), millions of workers out of jobs was a sad but necessary by-product of his plan to tame inflation and destroy the collective bargaining power of workers.

If putting millions of workers on the scrapheap and destroying trade unions is not what we are looking for by way of solutions today, then what will help the vast majority of Scots in a stagflation crisis?

Public, green, people’s QE

Yanis Varoufakis, economist and former Greek finance minister, says that what is different today is that not only would a Volcker Shock devastate the working class, it would also “smother the green transition”. Why? Because the high cost of debt means investments in wind farms, home insulation, electric buses – all the things which are needed to decarbonise – would collapse. Considering this decade is our final chance to prevent runaway climate catastrophe, that would be a crime that future generations would not forgive.

Instead, Varoufakis proposes two monetary policies which, if implemented together, could tackle stagflation, reduce inequality and give a boost to the green transition. First, interest rates are increased “substantially” with the specific aim of reducing asset prices, which have risen much faster than wages for more than two decades, creating a society divided by those who own property and those who don’t.

At the same time, this should be combined with “a massive central bank-supported green public investment drive”. This may seem counter-intuitive since I have just explained how rising interest rates choke investment, but the central bank has an additional lever for supporting public investment: quantitative easing (QE).

THIS monetary policy has been used to support private banks and major corporations since the 2008 financial crisis, with £895 billion of new money created by the Bank of England for this purpose. But what if QE was used for a different purpose, the creation of a public investment green bond to finance the home insulation and electric buses we need, while creating jobs and supporting economic activity?

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“The central bank should announce a new type of quantitative easing. It should stop financing the financiers and instead promise to stand behind (by buying, if needs be) public green bonds that raise funds to the tune of 5% of national income annually,” Varoufakis argues.

The Greek politician is by no means the only economist to have proposed an unconventional QE policy to tackle the twin economic and climate crisis. Richard Murphy, economist and professor of accounting at the University of Sheffield, was one of the first to develop the idea of a “people’s QE”, and he has also advocated such a policy in response to this crisis, although he differs with Varoufakis on the question of interest rates, believing rates should be reduced, not raised.

In an article with Danny Blanchflower, a former member of the Bank of England’s monetary policy committee, Murphy also argues that tax cuts on things like National Insurance are necessary, in what would be a reversal of the UK Government’s policy, to encourage people to spend, as well as raising welfare benefits for the same reason.

All of this, they propose, can be paid for through wealth taxes, QE and redirecting savings by changing tax reliefs on pensions and ISAs to encourage green investment.

What Murphy and Varoufakis’s strategies have in common is that their aim is to protect the livelihoods of those who live off their wages, boost investment in the green transition, which will also create high-quality jobs, and tackle wealth inequality through monetary and fiscal policy levers.

Of course, there are very good reasons to believe the Tory government will not do any of this, precisely because these solutions are not for the people the Tories care about – the super-rich and their big-business financial backers. Given that, with the limited powers of the Scottish Parliament, what could be done north of the Border?

What can the Scottish Government do?

Scotland does not have a central bank, so all discussion of a Scottish people’s QE is hypothetical (although it is very relevant to debates about an independent Scotland’s currency policy).

However, throughout this series of articles we have spoken to experts in energy, food, transport, housing and industrial relations who have all had ideas for how the Scottish Government could effectively tackle the cost of living crisis.

We can differentiate these ideas between sticking plasters and structural reforms. Sticking plasters help people in the immediate term but do nothing to change the structural factors which induce an unaffordable cost of living.

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Structural reforms take more time and are about changing power relations within the economy, so that in the future sticking plasters are not needed because the system itself produces more equitable outcomes.

What is required to tackle this crisis is sticking plasters and structural reforms working in tandem. That means Scots being helped in the present, while the root causes of the problem are also tackled. The aim should be to have an affordable cost of living that is sustainable over the long term.

In energy, the sticking plaster which is available now is to increase government subsidies to households to pay for heating costs. Structural reforms are restricted by the fact that the energy market is a reserved power but a Scottish public energy company could offer an alternative to the high prices of the “Big Six” energy firms. In food, the sticking plaster for consumers is bolstering the Scottish Welfare Fund so that crisis grants are more easily accessible, while for small farmers it is to increase subsidies, which the Scottish Government has been doing to some extent.

The structural reform is to establish a major renewable energy programme to make all farms net energy producers, thus reducing their energy costs massively, and enforcing longer contracts between animal feed producers and farmers to reduce price volatility. While supermarkets are a reserved power, the Scottish Government could financially support the establishment of independent and non-profit food retailers as an alternative.

In transport, the sticking plaster for taxis and private hire drivers is a fuel discount card to reduce their sky-high petrol costs, and to significantly reduce the costs to buy an electric cab. The structural reform is to make public transport, especially buses, a service that is cheaper than the car, and with routes that are accessible for everyone. That will require publicly-owned buses and an integrated system of public travel across trains, buses and bikes.

Housing is the area where the Scottish Government has the most powers to intervene. A one-year private rent cap so that the price does not increase for at least 12 months across Scotland would be a strong sticking plaster for tens of thousands struggling with the cost of rent. Structural reforms include establishing a fully-functioning system for pegging rent prices to the quality of house or flat, like in the Netherlands. Also, replacing Council Tax with a Land Value Tax would reduce property inequality, increasing housing affordability while raising much-needed funds for local government.

In industrial relations, the sticking plaster would be to bolster government funding for trade union initiatives to organise workers in precarious sectors of the economy such as retail and hospitality.

Since employment law is a reserved power, there are few structural reforms that are directly available but one obvious change would be to ensure no public-sector workers are in in-work poverty by substantially raising pay and ending zero-hours and temporary contracts, a particularly pressing problem in the overwhelmingly female care sector.

There is no doubt that not having the powers of an independent nation state limits the Scottish Government’s ability to tackle the cost of living crisis, but there’s plenty that can be done which isn’t being done at the moment. And when households across Scotland are choosing between heating and eating, what can be done must be done.