On January 11 round 25,000 British ambulance employees went on strike, their second since December, in an ongoing pay dispute with the federal government. ‘Mature’ Brits are reminded of the (in)well-known ‘Winter of Discontent’ of 1978/79 when the nation suffered a wave of strikes as unions resisted the Labour authorities’s try to restrict pay will increase to five% to combat inflation. In January 1979 Invoice Dunn of the Confederation of Well being Service Staff appeared on tv from a picket line outdoors a hospital saying “if it means lives misplaced, that’s the way it have to be…we’re fed up of being Cinderellas. This time we’re going to the ball.” In Might Margaret Thatcher’s Conservatives have been elected with a mandate to get each inflation and the unions beneath management.
Unions or authorities?
Britain was stricken by excessive inflation within the Nineteen Seventies. The Retail Worth Index rose from 2.5% in 1967 to 24.2% in 1975. The unions have been usually blamed. The ‘cost-push’ principle of inflation stated that, because the unions struck for and gained wage will increase, costs have been pushed up. Performing on this principle, the principle instrument utilized by British governments to fight inflation have been incomes insurance policies, like 1976’s ‘social contract’, offers struck with unions to restrict pay will increase.
The unions discovered an unlikely defender within the economist Milton Friedman. In 1970 he had written:
Inflation is at all times and in all places a financial phenomenon within the sense that it’s and will be produced solely by a extra speedy enhance within the amount of cash than in output.
In his 1980 ebook Free to Select Friedman produced quite a lot of charts supporting this, exhibiting the connection between modifications within the cash provide (as measured by the M2 amount of cash per unit of output) and modifications within the Shopper Worth Index (CPI) for quite a lot of nations. These charts, Friedman argued, disproved quite a lot of widespread explanations of inflation, together with unions:
Unions are a favourite whipping boy. They’re accused of utilizing their monopoly energy to pressure up wages, which drive up prices, which drive up costs. However then how is it that the charts for Japan, the place unions are of trivial significance, and for Brazil, the place they exist solely on the sufferance and beneath the shut management of the federal government, present the identical relation because the charts for the UK, the place unions are stronger than in any of the opposite nations, and for Germany and the US, the place unions have appreciable power? Unions might present helpful companies for his or her members. They might additionally do an excessive amount of hurt by limiting employment alternatives for others, however they don’t produce inflation. Wage will increase in extra of will increase in productiveness are a results of inflation, reasonably than a trigger.
In 1976, noting the connection between “the rise in cash provide every year in extra of the rise in output with the rise in costs two years later,” an early British convert to Friedman’s ‘monetarism’, Occasions editor William Rees-Mogg, wrote:
If the Extra Cash Provide determines the speed of inflation equally carefully in years topic to incomes coverage and in years with out, there appears to be no proof left that incomes coverage has any important affect on inflation.
Friedman commented that:
…the social contract, along with low financial progress, will curb inflation. With speedy financial progress, it is going to be one other unsuccessful experiment.
Now could be the winter…
That was the story of the ‘Winter of Discontent’.
In 1976 Prime Minister James Callaghan instructed the Labour celebration’s convention:
We used to assume that you would spend your means out of a recession, and enhance employment by slicing taxes and boosting Authorities spending. I inform you in all candour that that possibility not exists, and that in as far as it ever did exist, it solely labored on every event because the struggle by injecting a much bigger dose of inflation into the financial system, adopted by the next stage of unemployment as the subsequent step. Increased inflation adopted by larger unemployment.
This financial and monetary restraint introduced inflation down to eight.3% in 1978.
Then, with an election looming, Callaghan’s Chancellor, Denis Healey, introduced tax cuts of £2 billion and over £500 million of additional spending financed by financial enlargement. Inflation started accelerating (it might peak at 18.0% in 1980). Unions, not unreasonably, resisted pay agreements which the federal government would, in impact, unilaterally repudiate with inflationary insurance policies.
That is the story of the present ‘winter of discontent’. The British authorities has, as soon as once more, brought on inflation by printing cash to maintain down the prices of huge borrowing. If it offers the unions what they need that gained’t be inflationary supplied they don’t fund it by printing cash. As we as soon as realized, it isn’t the pay will increase which are inflationary however the technique of paying for them.
John Phelan is an Economist at Middle of the American Experiment.
