EUROPE

Death of a myth: Wage hike does not lead to inflation

Published

06.12.2022 11:58

When Germany’s largest labour union, IG Metall, agreed to a 5.2 per cent wage rise last November, monetary policymakers breathed a great sigh of relief. As reported in Financial Times, this deal finally eased central banks’ inconvenient wage-price spiral fears.

The fear that wage increases will lead to price increases (and hence inflation) is quite widespread. We see that not only the Germans but also the British live with the same concern. Bank of England President Andrew Bailey says the wage bargain needs to be “restrained” or things will get out of hand. Jason Furman, who was the Director of the National Economic Council under Barack Obama, is also clear: Increasing wages also increases prices. According to Furman, this is “basic micro and common sense.”

European Central Bank President Christine Lagarde said they would look at the increase in wages to see if they would continue to raise interest rates in Europe. Last May, Lagarde rejected bank employees’ desire to link wage increases to consumer price increases and wrote that this was “not acceptable and desirable”.

Klaas Knot, president of the Bank of the Netherlands, who has been skeptical about wage increases at the level of inflation, said they should be on high alert for any “feedback loop” to wage and price increases, but added that current wage developments do not provide clear evidence that they are entering a wage-price spiral in the eurozone.

Federal Reserve Chair Jerome Powell has made the most explicit statement. In explaining why they’re raising interest rates; Powell makes it clear that they want to reduce demand and lower wages. Powell thinks they can do all this without slowing the economy and putting it in recession. However, clearly, interest rate hike aims to reduce the bargaining power of the working class and suppress wages by increasing unemployment.

What is the wage-price spiral?

The technical wage-price spiral recipe: at least three out of four consecutive quarters have a wage-price spiral if both consumer prices and nominal wages increase. To give a more concise definition, price increase triggers the wage increase, and wage increase causes the capital owner to increase the prices, and so on.

The debt between Thomas Weston, a leader of the carpenter’s union, and Karl Marx at the International Working Men’s Association in 1865 is the historical example of this issue. Just like the central banks argue today, Weston said that capitalists reflected the increase in wages to increase in prices to protect their profits; increasing prices would reduce the purchasing power of workers and thus keep real wages in place. That is, Watson concluded that a struggle or bargain for wage increases was useless.

Marx’s answer to this is summarized in the manuscript we know as Value, Price, Profit. Marx presents three arguments against Weston: First, wage increases come to the fore not out of the blue, but usually as a reaction to rising prices. Second, wages don’t cause inflation, but multiple factors influence it: The size of production, the productive forces of labor, the value of money, fluctuations in market prices, and the different phases of industrial cycles. So, for example, under the condition that wages remain the same, a change in the amount of money in the market (or the value of money) can trigger inflation. Or, again, a change in labor efficiency (i.e., productivity) has a direct impact on commodity prices, provided wages remain the same.

Moreover, according to Marx, it is true that a general rise in wage levels reduces overall profit rates, but this does not directly affect the prices of commodities. Capitalists and their ideologists object to the increase in wages, not because prices will increase, but because profits will decrease. The physical limit here is to provide the means of livelihood required for the employee working today to work tomorrow. However, Marx says that in some examples, the wage received by the workers can be pushed below the minimum subsistence. Such a reduce in labor costs is compensated by charity on national scope or laws on supporting the poor. Hence, the question of how to detect wages and profits is answered dynamically, not statically, and the answer is determined by the opposing classes’ struggles and balances of power.

It will happen again: The claim that workers’ “excessive” demands for wages will lead to inflation is an assumption raised by the capitalist and his ideologists, who know that their profits will decrease. Now, it is time talk about the cracks on this front.

IMF’s confession

IMF economists are finding it very difficult to find the evidence they have been looking for from history for a wage-price spiral. A recently published article examines wage-price spirals in the last 60 years of advanced economies.

The conclusion reached by IMF economists is that wage-price spirals are difficult to find in recent historical records, at least when they are defined as a continuous increase in prices and wages. Moreover, the IMF has even more difficulty in finding the wage-price spiral in other historical periods when real wages has fallen like today. What happens is the nominal wage increases that only partially replace the real wage loss.

The examples found by the economists showing fall in real wages and tight labour market as experienced today, often prioritize a period of falling inflation and rising nominal wages. Thus, as economists describe it as a “surprise,” sustained wage and price increases in only a small part of the example are being rolled over to the next period. As a result, the IMF finds that the rise in nominal wages cannot necessarily be taken as a sign that a wage-price spiral period has begun.

The International Labour Organisation (ILO) also confirms this situation. In the first half of 2022, global monthly wages declined by 0.9 per cent in real terms. When wages in developed countries are separated from wages in developing countries, the ILO report shows that real wages in developed G20 countries decreased by 2.2 per cent, while in developing countries they increased by only 0.8 per cent. Looking at the United States and Canada, it is understood that real wages decreased by 3.2 per cent in the first half of this year.

The OECD report complements this statement. The report, which includes third-quarter data, suggests real wages decline in 31 of 32 major countries in the third quarter of 2022 compared to the same period the previous year.

President and CEO of the Federal Reserve Bank of San Francisco, Mary C. Daly also has had to admit that one of the most fundamental elements of the wage-price spiral is that the rising wage phenomenon has not emerged with inflation.

The ILO says that inflation is not caused by wage increases, but by the Ukrainian war and the global energy crisis.

Sources of inflation

Paul Donovan, the chief economist of UBS, one of the world’s largest asset managers, reminds that real wages are falling globally, pointing out that the Fed’s wage-price spiral thesis is not correct.

According to Donovan, the main source of today’s inflation is the excessive increase in profits. If inflation comes from profit rather than labor, says Donovan, central banks should look for other ways alternative to shrinking demand based on increasing unemployment.

A graphic published by the Economy Policy Institute last April provides the picture. Unit labour cost constituted 61.8 per cent of the increase in unit prices in non-financial companies between 1979-2019. Between the fourth quarter of 2021 and the second quarter of 2022, this rate decreased to 7.9 per cent. The main factor driving the increase in unit prices is profit with 53.9 percent. It is composed of non-work input prices with 38.3 percent.

So, what else is among the sources of inflation? The decrease in supply chains and labor productivity during the COVID period and the inadequate supply afterwards is a reason. Zero COVID policies in China and the subsequent Russia-Ukraine war also has caused disruptions in global supply chains and cost increases. Sanctions against Russia have also led to an exorbitant rise in global energy prices.

Moreover, in Britain, for example, service providers that distribute to retail energy companies and are often owned by large hedge funds and private equity companies can make profits of up to 40 per cent. These companies, known as the “Big Six,” have almost completely monopolized energy supplies. 99 per cent of domestic and small business customers depend on the Big Six. When the huge profits of international energy monopolies such as BP, Shell, Exxon, Chevron, Total is added, the picture is completed. The UK energy distribution companies, which have been privatized since the 1980s, work for profit and households suffer for it. The figure says it all: The Big Six distributed a £23 billion dividend to shareholders. That’s almost six times the tax the Six have been paying over the last decade.

On the other hand, excessive profit rates in 2021 are expected to decrease with the rise in interest rates. It is certain that there will be a slowdown in the profits and therefore investments driven by the increases in energy and raw material prices last year. The downward trend in large tech companies that made huge profits during the pandemic period, layoffs, and the difficulty in accessing finance also indicate that recession is likely in advanced economies next year.

Moreover, since the source of inflation is not “excessive demand” but weak supply, central banks have nothing to do with it. In addition to the disruption of supply chains, the Ukrainian war, and anti-Russian sanctions, decrease in profitability, declining labour productivity and investment appetite do not seem to match supply with demand. While recruitment in the United States is still in full swing, the lack of pace in GDP growth suggests that the problem of labour productivity in developed countries remains. The emergence of a sustained and downward demand shock in the world system therefore seems preordained.

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EUROPE

German economists warn of long-term recession

Published

13 hours ago

16/05/2024

Harici.com.tr

Germany’s top economic advisory body, the Council of Economic Experts, on Wednesday slashed its growth forecast for 2024, with the country once again expected to be among the worst performing economies in the EU.

Germany, whose annual GDP shrank by 0.3%, was the worst performing major economy in 2023. Germany is the world’s fourth largest economy.

The Council of Economic Experts, the German government’s top economic advisory body, said Germany’s recovery would be slower than expected, in line with other recent forecasts.

“The German Council of Economic Experts forecasts that gross domestic product will grow by 0.2 per cent this year and 0.9 per cent next year,” Martin Werding, one of the council’s five members, told reporters. These are bad numbers,” he said.

The group had previously forecast growth of 0.7 percent in 2024.

In the short term, experts point to weak consumption as the main problem after a year of economic difficulties, while rising inflation and energy costs are also hitting Germany’s manufacturing sector.

In addition, the Council has previously said that Germany is also suffering from long-term structural problems such as a lack of investment and an ageing population.

EUROPE

Latest news from New Caledonia: French government bans TikTok

Published

14 hours ago

16/05/2024

Harici.com.tr

In New Caledonia, the French colonial territory, Paris’ new electoral law has provoked a reaction from the indigenous population. Accusing the French government of trying to weaken the representation of the region’s indigenous population, French law enforcement officials have launched an intensive crackdown on the locals.

Three people lost their lives in the last night of violent protests. Media reports put the death toll at four.

New Caledonia, located between Australia and Fiji, is one of the few French territories stretching from the Caribbean and Indian Ocean to the Pacific that remains part of post-colonial France.

In a statement on the actions of the people of New Caledonia, the French Presidency said: “The President of the Republic deeply regrets the death of three people and the serious injury of a gendarme. All acts of violence are unacceptable and will be combated relentlessly to ensure the return of republican order,” it said.

State of emergency declared

President Emmanuel Macron has called an emergency meeting of the French National Defence Committee to discuss the situation and propose the declaration of a state of emergency in New Caledonia.

Macron has asked the French prime minister and interior minister to invite representatives from New Caledonia to Paris to reach an agreement.

France also declared a state of emergency today after sending troops to New Caledonia’s ports and international airport.

The emergency measures give the authorities more powers to tackle the rebellion that has gripped New Caledonia.

Additional powers under the state of emergency include house arrest, searches, confiscation of weapons and restrictions on the movement of people deemed to pose a threat to public order.

The last time France used such measures in one of its overseas territories was in 1985, also in New Caledonia, according to the Interior Ministry.

Prime Minister Attal: Violence will not be tolerated

“Violence of any kind will not be tolerated,” said Prime Minister Gabriel Attal, adding that the state of emergency “will allow us to use great means to restore order”.

Attal told a crisis meeting that troops had been deployed to secure ports and the international airport, and that the government’s representative in New Caledonia had “banned TikTok”.

The airport, where the troops were deployed, was closed to international flights.

“Dozens of rebels have been arrested and will be tried,” the French High Commission in New Caledonia said in a statement early on Wednesday.

The High Commission said ‘serious social unrest’ continued and condemned the widespread looting and burning of businesses and public property, including schools.

The cause of the riots: Reducing local representation

The French parliament passed a bill on Tuesday that would allow all citizens who have lived on the island for more than 10 years to vote in local elections, arguing that New Caledonia’s pro-independence movements would weaken the representation of the region’s indigenous population, the Kanaks.

The change, which requires a constitutional amendment, must be approved by parliamentarians in the Senate and National Assembly in a joint vote.

Since 2007, only those who were eligible to vote in 1998 (when the French government signed an agreement recognising ‘the legitimacy of the Kanaks as the indigenous people of New Caledonia’ and granting the territory greater autonomy) or their descendants have been able to elect the local executive.

As tensions escalated in Nouméa, the capital of New Caledonia, airports were closed and a curfew was imposed last night to prevent riots. Louis Le Franc, France’s representative in the region, described the low death toll as a ‘miracle’.

Local media reported looting, arson and the use of firearms.

Interior Minister Gérald Darmanin said in a radio interview that ‘around 100’ security forces had been injured and that the curfew would remain in place.

In a statement, the Kanak and Socialist National Liberation Front, the region’s main pro-independence force and the largest party in the local congress, “condemned” Tuesday night’s violence and called for “calm and appeasement”. “The unstable social climate … clearly shows the desire of a section of the population to make their voice heard about their future and the future of their country,” the party said, reiterating its call for the electoral reform to be scrapped in parliament.

Sonia Backès, a local official and former minister in Macron’s government who opposes the region’s independence, called for France to declare a “state of emergency” and accused some separatists of promoting “anti-white racism”.

Three referendums on New Caledonia’s independence will be held between 2018 and 2021. In the first two, a narrow majority of voters supported remaining part of France, but the third was held with a low turnout, with separatists calling on their supporters to boycott the vote after the state refused to postpone it due to the Covid-19 pandemic.

Social media ban

Meanwhile, the French government has announced a ban on TikTok in a bid to tackle the insurgency in the region.

French Prime Minister Gabriel Attal said the popular video-sharing app would be shut down as part of a state of emergency that includes the deployment of the army and a curfew on the island of around 270,000 people.

In July 2023, French President Emmanuel Macron floated the idea of shutting down platforms such as Snapchat and TikTok in a bid to contain riots in France’s major cities after a teenager was killed by a police officer.

EUROPE

Robert Fico shooting: What do we know?

Published

14 hours ago

16/05/2024

Harici.com.tr

Slovak Prime Minister Robert Fico was shot dead yesterday as he greeted citizens outside the House of Culture in Handlová, in the west of the country.

Denník N reporter Daniel Vražda, who was in the area, said he did not see the incident but was nearby and heard several shots. Vražda then saw the prime minister being lifted from the ground by security guards, put into a car and driven away.

According to witnesses at the scene, Fico walked towards the people who were there to greet him and several shots were fired. Available information suggests that a total of four to five shots were fired, after which Fico fell to the ground.

The Prime Minister remains in a critical condition

The alleged shooter was immediately arrested at the scene.

“The perpetrator fired five shots and the prime minister is still in a critical condition,” said Interior Minister Matúš Šutaj Eštok. The first information we have shows that the attacker had a clear political motivation and that the decision (to attack the prime minister) was taken shortly after the presidential elections,” Matúš Šutaj Eštok said.

The minister added that “the protection of constitutional representatives and some media organisations, as well as political representatives of both the coalition and the opposition, will be increased in the coming days”.Fico underwent a major operation that lasted about 3.5 hours.Defence Minister Robert Kaliňák said the prime minister’s condition was “very complicated”.

“We believe he will be strong enough to overcome this trauma,” Kaliňák said, according to Dennik N.

For his part, Deputy Prime Minister Tomas Taraba told the BBC on Thursday morning that “I think he will survive in the end”, adding that the prime minister’s condition was “not life-threatening at the moment”.

Conflicting claims about the shooterInitial reports on Slovak TV channel JOJ 24 identified the attacker as Juraj Cintula, 71, one of the founders of the DÚHA (Rainbow) literary club.

Cintula was president of the literary club until 2016 and author of three books of poetry.

Until 2016, Cintula worked as a security guard at a shopping centre in Levice, but resigned after being attacked on duty.The assailant, who was also a member of the Slovak Writers’ Union, allegedly wanted to found a political party called the Movement Against Violence eight years ago.

According to the portal of a Hungarian-language newspaper in Bratislava, Juraj Cintula was a sampatizan of the “pro-Russian paramilitary group” Slovenskí Branci (SB).Photos of Cintula regularly attending meetings of the organisation were published in 2016. The Hungarian website claims that the killer was listed as an “author and publisher” on the paramilitary group’s Facebook page and that some of his writings had been published.

But this is where things get complicated. According to the article, Cintula’s writings appear to criticise refugees and the Slovak state. It is a serious contradiction that the group organises uniformed commemorations at the grave of Jozef Tiso, the head of the fascist puppet state called the First Slovak Republic between 1938 and 1945, since the SB positions itself as an organisation against Nazism and fascism.

The Új Szó news portal, citing the Markíza television channel, reported that Cintula said shortly after his arrest that he had been “planning the assassination for a month because he disagreed with the government’s policies”.

In the video broadcast by Markíza, the suspect said: “I do not agree with the government’s policies. Why are the media being targeted? Why is RTVS [Slovak National Television] being attacked? Why was [Supreme Court President Ján] Mazák fired?”

Was Fico expecting an assassination attempt?A month ago, Fico posted a video on social media in which he talked about how the “progressive media” would shoot him and his government. The video was leaked by the Austrian newspaper Der Standard.

In the video, which was part of the political struggle at the time, the prime minister criticised the texts of the “progressive media”, which he said could lead to violence against government officials.”

“I expect that this frustration, which has been intensified by Denník N. Smečko or Aktualita, will escalate to the murder of one of the ” Fico said.

It is also significant that Interior Minister Eštok referred to the presidential elections.Last March and April, Slovakia’s pro-Western former foreign minister Ivan Korčok and Peter Pellegrini, leader of the ruling Hlas party, ran for the presidency.

Pellegrini won the race in the final round. Pellegrini had attracted attention by saying that if another NATO member was attacked by Russia, he would oppose sending Slovak forces to help that country under Article 5 of the North Atlantic Treaty. leading politicians of the government, and I am not exaggerating by a millimetre,” Fico said.

Some commentators have pointed out that the political atmosphere in Slovakia has been particularly harsh in recent years. In 2018, the murder of investigative journalist Ján Kuciak and his fiancée, Martina Kušnírová, sparked one of the largest protests in Slovakia’s modern history and forced then-Prime Minister Fico to resign.

Kuciak was investigating tax fraud by some businessmen with links to senior Slovak politicians.

Lubos Blaha, deputy speaker of the Slovak parliament and vice-president of Fico’s Smer party, blamed the “liberal media” and said: “On behalf of Smer, I strongly condemn what happened today in Handlová and at the same time express my great disgust at what you have done here in recent years. You, the liberal media and the political opposition.How much hatred you have spread against Robert Fico,” he said.

Fico’s stance on the war in Ukraine made the West unhappy

Pellegrini’s comments are closely aligned with those of Prime Minister Fico and his party.

Pellegrini claims that it is important for Slovakia to remain committed to the EU and NATO, but like Fico he refuses to send military aid to Ukraine.

Last January, Fico said neighbouring Ukraine was not a ‘sovereign nation’ but under the ‘absolute control’ of the United States.

The leader, who opposes military aid to Ukraine and sanctions against Russia, reiterated that he does not want Ukraine to join NATO.

Fico also accused Ukraine of being ‘one of the most corrupt countries in the world’, adding: ‘Only God knows how much of the aid sent to you has disappeared somewhere.

He argued that there was no military solution to the current conflict and that Ukraine would have to give up some of its territory.

He called for some kind of compromise that would be “very painful” for both sides: “And what do they expect? That the Russians will leave? That is unrealistic,” the Slovak leader said.

Fico cut military aid to Kiev immediately after his election victory, but at the EU summit he did not put obstacles in the way of Brussels’ aid to Kiev and a compromise was reached.

In the end, Fico announced that Slovakia would only provide humanitarian aid to Kiev and was also considering the possibility of supplying demining equipment.

The prime minister also announced that his country would help Ukraine train Ukrainian soldiers.

Together with Hungarian leader Viktor Orban, Fico was seen as a ‘bulwark’ against pro-EU and pro-US policies in Central Europe.

Europe ‘shocked’ by assassination

Fico, who took office as Slovakia’s prime minister for a fourth term in September 2023, had been criticised by Western countries, particularly the European Commission, for his “pro-Russian stance”, as well as his regulation of the media and NGOs, and the laws his government was trying to pass.

European Commission President Ursula von der Leyen condemned the attack after the assassination, saying: “Such acts of violence have no place in our society and undermine democracy, our most precious common asset.”

Charles Michel, President of the Council of Europe, said in a statement in X that he was “shocked by the news” and added: “Nothing can justify violence or attacks of this kind. My thoughts are with the prime minister and his family,” he said.

The pro-Western prime minister of neighbouring Czech Republic, Petr Fiala, issued a statement on the X website shortly after the incident, describing the news as ‘shocking’.

Other European leaders, including Fico’s Hungarian counterpart Viktor Orban, also expressed their “shock” at the shooting, condemned political violence and wished Fico a speedy recovery, while Romanian President Klaus Iohannis condemned the “extremist act” that “threatens our fundamental EU values”.

German Chancellor Olaf Scholz condemned the “cowardly” attack and stressed that violence has no place in European politics.

Italian Prime Minister Giorgia Meloni said she was “shocked” to learn of the “cowardly” attack and condemned all forms of violence as attacks on the fundamental principles of democracy and freedom.

Spanish Prime Minister and Social Democrat Pedro Sánchez also expressed outrage, saying that ‘nothing can justify violence’.

In Bulgaria, President Rumen Radev and Boyko Borisov, former prime minister and leader of the country’s largest party GERB, strongly condemned the violence, while Kostadin Kostadinov, leader of the ‘pro-Russian’ Vazrajdane party, questioned who would want to kill Fico: “In this situation, every normal European should ask two questions: Who has an interest in the death of the Slovak politician? Who will be next?” he asked.

Kostadinov also recalled that Fico had repeatedly expressed his opposition to the provision of military aid to Ukraine, Ukraine’s accession to NATO and the escalation of the military conflict in Ukraine.

Ukrainian President Volodymyr Zelenyuk condemned the attack and called for efforts to ensure that “violence does not become the norm in any country, in any form, in any sphere”.

“I was outraged to learn of the attempt on the life of the Prime Minister of the Slovak Republic, Robert Fico. There can be no justification for this heinous crime,” said Russian President Vladimir Putin, expressing his sincere support and wishing Fico a speedy recovery.