QE, labour market restructuring and the ‘regressive recovery’

Cameron’s continuing ‘two nations’ governing strategy prepares the way for a further economic crisis

Jeremy Green and Scott LaveryWhen David Cameron emerged from 10 Downing Street on the morning of the 8 May, he proclaimed that he would lead a ‘one nation’ government – one whose guiding aim would be to ensure that ‘the recovery reaches all parts of our country’.

There was nothing particularly new in this rhetorical positioning.  Indeed, in the early years of the Coalition government, one of Cameron’s most popular refrains was to insist that ‘we are all in this together’, whilst the Chancellor, George Osborne, emphasised the need to ‘rebalance’ the UK economy both sectorally and geographically.

In reality, over the past five years Cameron has pursued a distinctive ‘two nations’ governing strategy – one which privileges certain segments of society whilst imposing discipline and retrenchment on others.

In an article published recently in New Political Economy, we outline some of the distributional implications of this process and argue that the transition from crisis to ‘recovery’ has in fact been underpinned by a distinctive dynamic of ‘regressive redistribution’: a process of state-led economic restructuring that has worked through two axes at the centre of the recovery.

The first axis focused on Quantitative Easing (QE). The Bank of England opted to begin undertaking QE from March 2009, injecting new money into the financial system by purchasing Treasury bonds from banks and institutional investors.  Crucially, the policy was encoded with distributional prejudices right from its inception.  It was targeted at increasing the wealth of asset holders in order to boost demand.  While wage-earners experienced an unprecedented period of decline in real earnings, asset-holders received a huge wealth boost from the Bank’s monetary policy committee.  Stock and bond prices rallied on the back of QE 1 and 2, with the Bank itself calculating that the gains in value amounted to around £600 billion.  ‘Picking winners’ in this way has been central to establishing a two-track recovery where asset-holders prosper while wage-earners suffer.

The second axis of the regressive recovery was premised upon wage deflation.  Workers’ real average earnings had declined by 7.9 per cent four years after the onset of the recession, a trend which compares unfavourably against the recessions of the early 1980s and 1990s. While the Conservative party boasted of an ‘employment rich’ recovery, in reality 77 per cent of net job creation between 2010-13 was focused in ‘low pay’ sectors, where pay falls below £8 per hour.  On top of this, there occurred a regressive re-composition of the British labour market, with growing numbers of precariously employed individuals finding themselves involuntarily in temporary jobs.  Wages might now be rising marginally once again, but this is taking place after a slump in real earnings that has not been seen since the 19th Century! Indeed, wages are not set to rise to their pre-recession levels until at least 2020, suggesting that this really has been a ‘lost decade’ for Britain’s low and middle income earners.

This combination of loose monetary policy and sustained wage deflation underpinned the economic recovery proclaimed by the Conservatives in the last parliament.  The problem is that these processes consolidate, rather than overcome, weaknesses at the heart of Britain’s growth model.  First, they are likely to contribute further to a declining ‘wage share’ – the proportion of overall economic output which goes to wage-earners.  This is potentially destabilising as it can lead to shortfalls of aggregate demand which in turn encourage high levels of private indebtedness throughout society.  Second, the further concentration of wealth at the top end of society – in part sustained by low interest rates but also ratcheted up through QE – creates a further glut of income and wealth at the upper end of the income scale. This can again create demand problems as wealthy asset-holders have a lower propensity to consume than low and middle income earners.

In effect, longstanding distributional disparities which weaken economic potential and entrench social inequities have been consolidated over the past five years.

The new government’s programme for the next parliament needs to be understood in this context.  Possessing now an outright majority, and thus unencumbered by the politics of coalition, the Conservatives look set to consolidate the regressive recovery further.  As the IFS has shown, 1.1 million public sector jobs are likely to be cut between 2010-11and 2019 on current spending plans.  Partly in preparation for this, the government is already pushing through legislation which will further curtail trade union power by imposing minimum thresholds on turnout for industrial action.  This will further curtail the capacity of workers to secure wage increases and protect their conditions in the years ahead.  In addition, the £12 billion of welfare cuts will primarily hit the poorest hardest; a process which is likely to further entrench inequality and increase levels of poverty throughout society.

Continuing to drive growth through these policies will ultimately entrench a more deeply divided and unequal society than post-war Britain has ever had to live with.  A recovery built upon such foundations is not only extremely regressive, it is also hugely unstable.  The political crisis facing the Labour Party has dominated the aftermath of the election, but it may well prove that a further economic crisis will be the longer-term result of extending Cameron’s regressive recovery.