The Inevitable Costs of the Crisis: Who Pays?
Last night Mervyn King warned that the UK faces the worst decline in living standards since the 1920s.
He stated that:
unpleasant though it is, the Monetary Policy Committee neither can, nor should try to, prevent the squeeze in living standards, half of which is coming in the form of higher prices and half in earnings rising at a rate lower than normal.
one way or another, the squeeze in living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.
The “inevitable price” of the financial crisis, we are told, is falling living standards.
Certainly the financial crisis had extremely high costs – lost output, higher unemployment and hole blown in the Government’s finances. That may be inevitable, but the question of who pays that bill is a political choice.
I’ve argued before that this is the situation Ireland now faces:
I’m sure we’ve all been there – a long and rather good meal with a large group of people, some of them close friends and some of them vague acquaintances. The bill arrives and suddenly people are disputing exactly how much wine they drank, asking who had a starter and who ordered coffee.
The bill following the financial meltdown is collusal, the political question is – who pays it?
We have Osborne’s and King’s answers: the crisis may have started in the financial sector but the adjustment costs will be met by the general public. And they’ll pay twice, once through the decline in living standards noted above and again in terms of higher taxes and lower quality public services from the Government’s deficit reduction programme.
There is however another answer, one that looks to an increasing wage share of GDP, public investment and growth.
I know which option I prefer.