The Triple Block – What they don’t want you to know about income

By TruePublica Editor: I have been asked on a number of occasions to explain why it is that people in full-time work, who get annual pay rises still find it consistently harder and harder to make ends meet. There are a number of reasons and theories but to explain this – first up, some basic economics and then onto the reasons why the standard of living in Britain is going in reverse.

Productivity is simply a measurement of output per worker over a given time – per hour, day, quarter or per typically per year. It is a measure of the efficiency of a person, machine, factory, system, etc., in converting inputs into useful outputs. Productivity is computed by dividing the average output per period by the total costs incurred or resources (capital, energy, material, personnel) consumed in that period. Productivity is a critical determinant of cost efficiency. The more productive a country is, the wealthier it is and supposedly, the wealthier its people are. The real test of the latter part of that statement is confirmation that standards of living have risen over time.

Productivity in the UK fell at its fastest annual pace in five years in the April-to-June quarter, according to the Office for National Statistics. The figure – measured by output per hour – fell by 0.5%, after two previous quarters of zero growth. The following quarter rose by only 0.1 per cent. The reality is that productivity has flatlined. It’s serious for the country and it’s serious for workers. In fact, labour productivity was lower over the past decade than at any time in the 20th Century.

But there’s another story about productivity and the other elements that make up our standard of living that the press and broadcast media rarely report.

Just for a start, there is a relationship between productivity, inflation and collective bargaining. Collective bargaining is the negotiation of wages and other conditions of employment by an organized body of employees. In Britain, the power of the unions has been under assault for four decades. Secondly, corporations and their management have seen huge pay increase when workers have not and thirdly, there is a belief that everything should be measured by inflation – itself a con. For the vast majority of working people, this should be regarded as a ‘triple block’ to rising standards of living

If income had increased at exactly the same rate as productivity by no more and no less over the last five decades, the vast majority of workers could be working just 12 hours a week & making the same income as they are making now full-time. Or they would be earning over 300 per cent more if they worked a normal 40-hour working week.

This is because productivity in the last five decades has increased through ingenuity, technology, efficiency through more advanced machinery, speed and so on – and all those things have allowed things to be manufactured or produced and delivered at a competitive enough price to be sold in a market where price discovery allows for profit-taking.

If the minimum wage (currently £8.21 – increasing to £8.72 for over 25s this April) were simply adjusted for productivity gains over the last five decades it would be something like £24 per hour. Median weekly earnings for full-time employees reached £499 in June 2019, 0.8 per cent lower than it was the same month in 2008. If was also adjusted on the same basis average annual salaries would be about £75,000.

This sum sounds outrageously high and no-one would think this is right. Except, there is more one indicator that should dispel this idea and it is the ‘triple block.’ The examples below use the timescale 2000 to 2013 as this is where the best data is and includes pre and post-financial crash data. Like all numbers, they can be read in different ways and depending on who is producing them – be manipulated. So here goes.

 

Executive pay

In 2016 median average pay for an FTSE CEO rose 11 per cent to £3.9m. Just two years later it rose another 23 per cent to about £4.8m (stats High Pay CentreUK). From the year 2000, CEO pay rose 80 per cent by 2013, their annual bonuses increased 313 per cent and average overall packages including pensions etc went up 232 per cent. The companies they managed saw pre-tax profits rise by 96 per cent.

The average pay for the average full-time permanent employee in the same time period increased 43 per cent (stats OECD).

 

House prices

The average house in the year 2000 sold at £77,698 – in 2013 it was £189,002 (today it is £215,925). The problem is that if house prices rise 145 per cent in thirteen years and executive pay outstrips it by another 50 or so per cent, and average worker pay falls behind by minus 200 per cent (against rising house prices) – executives buy houses to rent to workers who can’t afford to buy them. The wealthy also put property into pension funds. That makes one part of society much wealthier and the other much poorer. Two-thirds of all the wealth in the UK lies in property (land) and pension funds (stats – ONS)

At the height of the housing market in 2007, something like 45 per cent of all new homes being constructed were bought by buy-to-let landlords. Today, the number of landlords totals 2,594,720 – with the most (2,266,770) living in England. Scotland has 158,505 landlords, Wales 104,450 and Northern Ireland 64,995 (stats – Financial Secretary to the Treasury)

There is a myth in the mainstream media that the low number of property built is the cause of the housing crisis. The crisis is caused by a combination of low interest rates and higher multiples of income that qualifies for a mortgage (as well as some unit shortages). Low-interest rates make buying property more affordable, while higher multiples push the amount people can borrow and both push house prices up. Around 38 per cent of 25 to 34-year-olds are homeowners, down from 55 per cent a decade earlier and 61 per cent a decade before that (sats – English Housing Survey). In 1980, legislation ensured income multiples could not exceed three times the main income earner of the property to be mortgaged. That multiplier put a brake on house-prices as it was linked directly to wages. That piece of legislation was deregulated and today, it is not uncommon to read about income multipliers of nine times.

House prices, in particular, has done more damage to average wealth distribution in the UK than anything.

 

Inflation

The Consumer Price Index (CPI) and Retail Price Index (RPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. The trick here is that CPI does not include average accommodation costs – RPI does.

The government likes to pay out liabilities (like pensions) via CPI because it is generally about 1 per cent lower than RPI per year. On the other hand, the treasury likes to charge taxes based on RPI because it generates more money – and people believe this to be right -somehow.

If for you, wage inflation is not keeping up with real inflation then your income continues to be eroded against the cost of living. Losing just one per cent per year has a highly detrimental effect over ten years and is catastrophic over twenty years. In 1970, the average man on average wages could afford a house, a wife (who probably did not work) and two children without being in debt. Today, about 40 per cent of households are now struggling to pay the bills. In fact, average unsecured household debt in Britain went up by an eye-watering £46.2 billion last year alone. The average adult (individual) has 112 per cent of debt (including mortgage) against earnings, who between them are paying £140million per day to their lenders.

So bad has the effect between pay, asset wealth and inflation got – the ‘triple block’ – that according to the Office for Budget Responsibility’s (March 2019 forecast), household debt is forecast to reach £2.425 trillion in 2023-24 – an increase of 45 per cent, currently sitting at £1.669 trillion. Yes – I had to read that several times as well. (stats – money charity/ONS/OBR).

 

What needs to change

The reality of all this is that while capitalism is the only really effective way of organising society successfully (although almost all forms of the extremes on both the left and right have failed), it has to be reformed and regulated to reflect that. The end result of the system today is that the UK is now experiencing the longest fall in living standards since records began in the 1950s. It is also experiencing a drop in life expectancy where other Western countries it continues to increase and inequality continues to worsen.

There is no economic reason why we can’t have (almost) full employment, wage-led growth and rising standards of living and health.

We need to change a system that has in reality been a four to five decade long one-sided class war against labour and we need the right story to sell a newly invigorated version of capitalism. Margeret Thatcher sold Britain a share owning dream, where privatisation and the free-markets would trickle down and raise all boats. It would have worked if politicians did not keep deregulating it as they did. It has now failed so many, the country is in dire trouble. The evidence of that failure is that today 38 per cent of all households now take more in benefits than they pay into the system. This means they can’t afford to live even though they are working. The housing crisis and subsequent disgrace of homelessness are the inherent signs of political failure. After all, what is the point of government if they can’t even house their own people.

Capitalism is NOT inherently inequitable, undemocratic, alienating, inefficient and destructive – the people who manage it are. The triple-block is a multi-tool, designed to transfer wealth, concentrating it at one end.

 

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