#squeezed middle

One of the current Tory arguments about wages is that if they increase public sector wages, inflation will go up. Even by their own logic, this is clear nonsense, and there’s a reasonably strong argument that increasing public sector wages could actually stimulate the economy too.

So, where does this idea come from? Well, it comes from business, where the idea is that if you increase wages, some or all of that price rise gets passed on to the consumer, and prices go up. Of course, even this is false, because in many cases the consumer will say “fuck that” and not buy the product, or choose a cheaper alternative. Thus, the company must instead reduce profits to retain consumers (and let’s not be fooled, a lot of companies are still making huge, untaxed profits right now). Or they cut hours and provide a less good service.

But this doesn’t apply in the public sector. Increasing wages of people in education, or in healthcare or in the civil service etc has no direct impact on the price of anything, because the public don’t directly buy our services.

However, it may actually stimulate the economy more widely.

In general, when you give rich people more money, they save it, or possibly “invest it”- meaning it basically goes out of circulation and doesn’t further benefit anyone.

If you give people right at the bottom more money, then they almost inevitably spend it right away, usually on essentials- which benefits the economy because more money is being spent, so companies have more money to pay wages, etc etc. But this doesn’t work soooo well, because people always need essentials, and will find some way of getting them, generally, if they possibly can. Of course, we want a world where everyone has access to these essentials easily, but we’re trying to think like an economist right now.

Most public sector workers are somewhere between these two extremes although some are definitely in the second category.

Right now, however a lot of people like teachers, nurses, junior doctors, junior civil servants etc etc are “feeling the squeeze”- caught between high housing prices, rising bills and stagnating wages, there’s less and less money to spend on “luxuries”. People might cut back on eating out, on take aways, on buying new clothes, on buying presents, on “treats”, on non-essential travel, on buying things like books and nice stationery, on make up and toiletries, on haircuts and getting their nails done- the list goes on.

These things aren’t essential to survival, you can do without them. So if you can’t afford to buy them, you don’t. But of course, if a lot of people stop buying these things at once, it hurts the economy. Companies that make or sell these things see profits go down, perhaps reduce hours or lay off staff, which in turn gives them less money to spend, and it all becomes a vicious cycle which shrinks your economy- i.e. the worst possible thing if you’re a Tory, supposedly.

(Investing in education and health also has long term pay off, but anyway).

If the people at the bottom and the people a bit above the bottom had a bit more spare cash, there would be more spending, and more businesses would see a proportion of that spending. And so they can offer staff more hours, pay higher wages, employ more staff. There’s more money going around and it’s a virtuous circle. The economy grows.

Would some companies then put their prices up? Maybe. Companies will often raise prices whenever they can. But the pressure to increase prices tends to come from increased costs, not increased custom. And it would matter less because everyone or nearly everyone would be earning more.

Cutting and cutting just leaves everyone poorer. We know this.

The Tories, ideologically, are against government borrowing, and don’t want to increase it. Hunt effectively made up fiscal rules for the autumn statement, so he could say he met them and appease the markets (or try to). In order to meet these fiscal rules, he effectively needs to propose more cuts, and limit public sector pay and other spending.

But there’s a problem. He’s done nothing to bring down inflation, and nothing to bring down interest rates. For most UK household, their biggest cost is housing- high interest rates mean high housing costs. High inflation means the costs of energy, food and other necessities will continue to rise. The average household is expected to have increased costs of £4000 over the next 12 months, according to some estimates.

The Tories will protect pensioners, because that’s their voter base, and the very rich, ideologically.

They’ve also announced increases to national living wage and to benefits, which are in line with, or just below inflation. I genuinely think they’ve done this because the alternative would be mass scale theft, homelessness, starvation or food riots. It’s probably not going to be enough to keep people comfortable, but it’s just enough to put off national unrest.

But, here’s the issue- very roughly working people/households with incomes between 30%-70% aren’t going to get any sort of help/protection. They will have to absorb rising costs, and these are the households facing the £4000 (and remember, that’s just an average) in increased costs. The treasury hopes that people will dig into their savings in order to do this- but not all households in this income bracket have savings of any kind. Many, many people towards the bottom of this income bracket have no savings at all and live pay cheque to pay cheque. And savings are all well and good, but they don’t last forever.

So, what happens when savings run out? Well, people have to borrow. People will extend their mortgage terms, or use credit cards, or take out loans, or use finance to buy a new car when theirs packs up, and so on. And that’s shit- to ask ordinary working people to take on debt, so the government doesn’t have to.

But it gets worse- because some of these people won’t have access to the credit they need. If they rent, their housing costs will likely go up, and their wages won’t, and that will impact their ability to get credit. And at some point, for some of these people, their income will exceed their outgoings.

What the Tories hope is that this will happen slowly. They are, in effect, kicking the can down the road. Hoping they can hold out until the next election, before the shit really hits the fan. That things will somehow get better.

They also hope that they can push the blame onto individuals, if their lives go tits up. They shouldn’t have taken on a mortgage they couldn’t afford. They should have managed their spending better. They shouldn’t have gotten into debt. They should have known the cheap credit would run out... (you know the lines, you remember then from 2008).

It is very easy for governments to borrow money, to spend it, to improve the economy. (This is what Labour should be advocating, by the way). But the Tories won’t do it, because they are against it ideologically. So instead, they will ask ordinary working people to pick up the slack.

Over the next year or so, it’s very likely a lot of traditionally “middle class” professions will strike or take some form of industrial action. The media will say that these people are well paid, that they don’t need pay rises, that they’re just being greedy. But, among other issues, these people are now, effectively, being asked to take on debt so the government doesn’t have to.

The squeezed “middle”

I spend a disproportionate amount of time thinking about what I would do if I won millions of pounds playing the lottery.

High up on the list is: buy some property; offer my parents and grandparents some money to make up for how much I’ve cost them – maybe get my Dad to help me sell my books or something. I would even try to offer my sister some money, although I’m not sure she’d take it (she’s…

Ragan, November 29, 2011 Economic pressures and the widening gap between rich and poor are being felt everywhere this year--from the streets of America's cities to the dictionary.

That's right, the dictionary.

The dictionaries team at Oxford University Press chose the phrase "squeezed middle" as its Word of the Year for 2011. The term refers to the financial pinch of the middle class.

"The speed with which squeezed middle has taken root, and the likelihood of its endurance while anxieties deepen, made it a good global candidate for Word of the Year," Oxford Dictionaries spokeswoman Susie Dent said in a blog post.

This year marks the first time the same word (or phrase in this case) has won the honor in both the U.S. and U.K.

"While squeezed middle is British Labour Party leader Ed Miliband's term for those seen as bearing the brunt of government tax burdens while having the least with which to relieve it, the Word of the Year committee in the U.S. felt it had good resonance in the US, as well," Oxford University Press explained in a press release.