On January 11 around 25,000 British ambulance workers went on strike, their second since December, in an ongoing pay dispute with the government. ‘Mature’ Brits are reminded of the (in)famous ‘Winter of Discontent’ of 1978/79 when the country suffered a wave of strikes as unions resisted the Labour government’s attempt to limit pay increases to 5% to fight inflation. In January 1979 Bill Dunn of the Confederation of Health Service Employees appeared on television from a picket line outside a hospital saying “if it means lives lost, that is how it must be…we are fed up of being Cinderellas. This time we are going to the ball.” In May Margaret Thatcher’s Conservatives were elected with a mandate to get both inflation and the unions under control.
Unions or government?
Britain was plagued by high inflation in the 1970s. The Retail Price Index rose from 2.5% in 1967 to 24.2% in 1975. The unions were often blamed. The ‘cost-push’ theory of inflation said that, as the unions struck for and won wage increases, prices were pushed up. Acting on this theory, the main tool used by British governments to combat inflation were incomes policies, like 1976’s ‘social contract’, deals struck with unions to limit pay increases.
The unions found an unlikely defender in the economist Milton Friedman. In 1970 he had written:
Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.
In his 1980 book Free to Choose Friedman produced a number of charts supporting this, showing the relationship between changes in the money supply (as measured by the M2 quantity of money per unit of output) and changes in the Consumer Price Index (CPI) for a number of countries. These charts, Friedman argued, disproved a number of common explanations of inflation, including unions:
Unions are a favorite whipping boy. They are accused of using their monopoly power to force up wages, which drive up costs, which drive up prices. But then how is it that the charts for Japan, where unions are of trivial importance, and for Brazil, where they exist only at the sufferance and under the close control of the government, show the same relation as the charts for the United Kingdom, where unions are stronger than in any of the other nations, and for Germany and the United States, where unions have considerable strength? Unions may provide useful services for their members. They may also do a great deal of harm by limiting employment opportunities for others, but they do not produce inflation. Wage increases in excess of increases in productivity are a result of inflation, rather than a cause.
In 1976, noting the relationship between “the increase in money supply each year in excess of the increase in output with the increase in prices two years later,” an early British convert to Friedman’s ‘monetarism’, Times editor William Rees-Mogg, wrote:
If the Excess Money Supply determines the rate of inflation equally closely in years subject to incomes policy and in years without, there seems to be no evidence left that incomes policy has any significant influence on inflation.
Friedman commented that:
…the social contract, together with low monetary growth, will curb inflation. With rapid monetary growth, it will be another unsuccessful experiment.
Now is the winter…
That was the story of the ‘Winter of Discontent’.
In 1976 Prime Minister James Callaghan told the Labour party’s conference:
We used to think that you could spend your way out of a recession, and increase employment by cutting taxes and boosting Government spending. I tell you in all candour that that option no longer exists, and that in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step. Higher inflation followed by higher unemployment.
This monetary and fiscal restraint brought inflation down to 8.3% in 1978.
Then, with an election looming, Callaghan’s Chancellor, Denis Healey, announced tax cuts of £2 billion and over £500 million of extra spending financed by monetary expansion. Inflation began accelerating (it would peak at 18.0% in 1980). Unions, not unreasonably, resisted pay agreements which the government would, in effect, unilaterally repudiate with inflationary policies.
This is the story of the current ‘winter of discontent’. The British government has, once again, caused inflation by printing money to keep down the costs of vast borrowing. If it gives the unions what they want that won’t be inflationary provided they don’t fund it by printing money. As we once learned, it isn’t the pay increases that are inflationary but the means of paying for them.
John Phelan is an Economist at Center of the American Experiment.