A Labour government promises inflation and depreciation

9 Dec 2019

“Inflation is taxation without legislation.”- Milton Friedman 

 

Reformist. Radical. Revolutionary. Apt words for the November 2019 Labour manifesto. Corbyn truly has once again lived up to his modus operandi. Corbyn’s troupe has assured to transform the economy while snubbing economics. Inflation and depreciation: Labour’s secret promises if one digs under the surface. 

 

Corbyn has disregarded that these have already been materialised by Brexit since 2016. Of course, Mr. Corbyn will not tell you this. Rather, he claims that he wants to narrow Britain’s wealth gap. How? Through raising the minimum wage by over 20% and nationalisation of six major British corporations. The manifesto distracts us from the complexities of a post-Brexit economy.

 

Instead, it excites us by superficial satisfaction. Labour’s proposal tarnishes Britain’s economy in the era of Brexit. It pleases the uninformed layman while distressing the economist. Fool’s gold; an apt phrase for the November 2019 Labour manifesto. 

Why fool’s gold? Minimum wage hiking will lead to cost-push inflation. This, in theory, looks perfect. It takes Britain’s wealth from the ‘wealthy and greedy’ and redistributes income into the hands of the poor. Unfortunately, Labour’s reforms will not exist in theory but rather in reality. The reform would escalate the costs of production (COPs) borne by British firms. COPs are already rising due to Brexit and will continue in a Europe without Britain. This has numerous causes such as economic uncertainty and imported inflation.

 

For example, Brexit can could the British automotive industry up to £4 billion a year. Raising wage floors only aggravates this figure. Countless corporations will see only one way to solve this adversity, raising prices. Thus, creating cost-push inflation. Inflation invariably diminishes your purchasing power. Would you prefer a £8 wage that keeps you warm at night? Or a £10 wage that can’t even feed you? 

 

Depreciation

How do higher wages stimulate depreciation? Higher costs of production encourages companies to transfer assets out of the UK; dubbed as capital flight. For example, in anticipation of Brexit, Barclays has moved £166 billion British assets to Ireland. 

This process required the wholesale of the British pound in exchange for Euros. If there is a higher supply of currency for sale, it’s value diminishes against other currencies. Labour has overlooked the rudimentary economics of supply and demand.

 

The minute blunder initiates a vicious cycle. Weaker currency will lead to further raises in costs of production. This in return, weakens the Pound further. Why fool’s gold? Labour’s policies won’t stop until a pound is worth less than the paper it is printed on. 

Why fool’s gold? Nationalisation results in Inflation. Britain’s public debt amounts to 85.2% of GDP as of March 2019. Nationalisation adds a whopping 5 percentage points this figure, costing £196 billion. How does this provoke inflation? A greater public debt equates to higher interest rates; called crowding out. This reduces levels of private investment in an economy. In 2011, private investment fell in the EU due to higher government bond yields. Labour aims to make the same mistake. If investments fall, firms are able to supply fewer goods and services. If there is a lower supply within an economy, average prices consequently rise.

 

In 2019, Britain experienced the most prolonged investment slump in 17 years fuelled by Brexit uncertainty. Once again, Labour has overlooked the rudimentary economics of supply and demand. Once again, Labour’s proposal aggravates a trend rather than reversing it. 

 

Furthermore, higher costs of borrowing equates to higher COPs. As stated previously, higher COPs consequently create cost-pull inflation. A central argument advocating nationalisation is lower prices. Prices are expected to fall as governments narrow or eliminate profit margins. How does Labour plan to lower costs in a period of rampant inflation? With economic common sense, one can decisively state that Labour’s plan is simply not feasible. 

 

Depreciation. One of the ways Labour promises to fund this deleterious expenditure is to raise tax rates for large corporations. This is another method of triggering capital flight. Why would a firm keep assets in Britain if other nations offer a greater return? Brexit has already rendered corporations skeptical from doing business in Britain. In 2018, Britain fell in WEF’s Global Competitiveness Index. 

 

This leads to more firms leaving Britain while fewer enter Britain. Along with Barclays, Brexit also prompted UBS to transfer £27 billion out of Britain. Increasing tax rates definitely work in the favour of Barclays or UBS. Nationalisation should come at a time when corporations are lining up to enter Britain, not quit Britain. Labour promises to provide lower prices by creating an economy with increasing prices. 

 

Summary of secrets

With inflation and depreciation on the rise, Her Majesty’s Government needs to vanquish these trends, not advance them. Between 2016-2017, inflation stole a week’s worth of wages from the average worker. The pound has already fallen by 15% to the dollar since the 2016 referendum. This is simply in anticipation of Brexit without Labour’s detrimental reforms.

 

The manifesto wishes to set the stage for “taxation without legislation.” Inflation and depreciation always hit the poor the hardest; a group the Labour has, ironically, championed to protect. The Labour prospects serve the sole purpose of gratifying the poor leading up to the elections. For Mr. Corbyn, they are worth 9 million votes. Why fool’s gold? Labour’s election rhetoric has revolved around achieving income equality. The Soviet Union attempted to reach total equality through nationalisation. How did they perish? With inflation and depreciation.

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