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Behold, labour’s coming victory over capital (?)

It might not feel like it to striking workers, but for the first time in decades the (im)balance of power between labour and capital is apparently tilting back in their favour.

A new “macro supercycle” approaches, writes TS Lombard’s optimistic head of global macro Dario Perkins, and there’s nothing anyone can do to stop it.

Neoliberalism gave us free trade, globalised supply chains, deregulation, smaller government, independent central banks and the death of trade unionism (especially in the US and the UK). The 2020s are set for a partial reversal. Deglobalisation, which started even before Covid-19, is likely to gather pace.

The pandemic underlined the vulnerabilities inherent in long, complex supply chains, while the conflict in Ukraine has caused political alliances to splinter more clearly into regional trading blocs. Since globalisation reduced inflation, lowered interest rates and destroyed worker power, it is reasonable to think deglobalisation will have the opposite effects.

Perkins is far from the first to have called time on the era of near-zero interest rates and relative price stability. For example, JPMorgan analysts spoke of “regime change” in June when they predicted US inflation could average between 3 and 4 per cent over the next decade, and Zoltan Pozsar at Credit Suisse has written on the inflationary implications of a “crisis of commodities” that could weaken the dollar’s stranglehold on the global financial system.

© Dario Perkins, TS Lombard

Perkins’ political economy is particularly spicy, however, and homes in on the role central banks (variously described as “the ultimate guardians of neoliberalism” and “enemies of the people”) have played in suppressing worker power in their pursuit of stable prices.

Economic historian Edward Chancellor made a similar point the other day. He argues that a decade of “monetary extremism” has given us little more than stock market bubbles, rampant indebtedness, anaemic productivity growth and “rising and unstable” inflation that is “much more painful for working people than when it was deemed too low”.

But back to Perkins, who insists “institutions affect macro outcomes, [which] in turn alter the balance of power”, all while maintaining that central banks will be helpless to prevent the coming period of “deglobalisation and secular reflation”.

Powell, Lagarde and Bailey may still captain the good ship Neoliberalism, in other words, but storm clouds are gathering and there’s talk of mutiny below deck:

[Central banks] will try to prevent this secular transition, even at the cost of a recession. But a mild recession is not going to eliminate current worker shortages or tilt the balance of power back to capital. Central banks cannot stand in the way of structural shifts, such as deglobalisation, climate change and “wartime economics”…

Existing worker shortages + deglobalisation + structurally easier fiscal policies (especially on defence spending and climate change) + population ageing = structural labour shortage, which will start to shift the balance of power away from capital for the first time since the early 1980s. 

Perkins’ point on population ageing builds on work done by economists Charles Goodhart and Manoj Pradhan, whose 2020 book The Great Demographic Reversal highlights how China’s shrinking working age population and the broader retreat of globalisation could well lead to a “return of inflation, higher nominal interest rates, lessening inequality and higher productivity”.

But a few of Perkins’ other assumptions require unpacking. The first — that globalisation is indeed in retreat — is hotly contested, as is the notion that workers will be able to secure above-inflation pay rises even accounting for the labour shortages Perkins foresees. Unemployment is already at historic lows, after all, yet in many large economies the dreaded wage-price spiral has so far failed to materialise.

Finally, central banks may or may not be able to stand in the way of epochal change, but many of the political leaders to whom they ostensibly report don’t appear overly fond of implementing economically rational or distributional policies anytime soon. It also looks like workers/consumers rather than companies will end up bearing the brunt of the energy-driven inflation we see all around us.

Painful as it is to admit, we prefer JPMorgan’s assessment: that the so-called “Great Moderation” just gone will morph into what the bank’s analysts nickname the “Great Instability”, a regime defined by “higher inflation, bigger deficits, greater macro volatility, and faster moving business cycles”.

What all of this means for labour’s share of the pie goes unmentioned. We think we can guess though.

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