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RIP-Real Incomes Policy
Thematic note

UK's real income trap

Hector McNeill1

This note is part of a series as a sequel to the article, From nominal growth to stable real incomes. To place this note in context readers are encouraged to read this article before reading this note.

This short note is to explain a simple reality of why the so-called "transitory" inflation is a permanent feature of what constitutes monetary policy today.

What is the real incomes trap?

Please note the assets diagram on the left (above) was changed on 17/08/2022 to account for advance in knowledge. See, "The constitutional crisis created by monetary policy"

The real incomes trap is a decline in the purchasing power of wages, or real incomes, created by financialization and intensified by quantitative easing.

The salient impact of QE is a rise in asset prices which is very much to the benefit of those who earn their income from asset dealing and holding. The note "RIP and real wages" presented two diagrams to explain why the interests of wage earners and asset dealers are represented by diametrically opposed movements in prices of goods and services, on the one hand, and asset prices on the other. This fact is indicated by the turquoise arrows in the diagram on the right. To examine the detail please refer to the original note.

Asset prices include land, housing, offices, commercial, industrial and infrastructure real estate, commodities (including food, petroleum, energy and water), financial assets including shares, precious metals and rare art objects. QE drives the prices of these assets upwards and eventually these prices work their way into costs on the supply side as well as prices faced by constituents and companies in the price and rentals of houses and commercial properties in general. The creates cost push inflation leading to rises in the prices of goods and services.

Since QE funds have gone into assets rather than investment and raised productivity the movement in wages has been sluggish to non-existent resulting in a constant decline in purchasing power in the face of price rises. As long as the government pursues this financialization policy, now for force for 46 years and intensified with QE during the last 12 years, this real incomes trap will persist and affect a growing proportion of wage-earners. As it progresses it will affect a larger proportion of middle income constituents and not just lower income segments. In order to remove this real income trap there is a need to introduce a Real Incomes Policy.

Real Incomes Policy

RIP has two macroeconomic policy instruments:

The PPR is a measure of progress of each economic unit in lowering the ratio between changes in output prices against variations in input costs. The PPL is a rebate on a basic levy according to the PPR values achieved. Economic units can manage their affairs to minimize the levy even to zero. In this way the macroeconomic policy is coordinated by the participatory development of companies and their work forces and not by largely arbitrary interest and debt targets.

RIP bases policy impact and success on the knowledge and calculations made by the economic actors thereby solving the calculation and knowledge problem in an operational structure that more closely approximates participatory constitutional economics. For further information on these effects see the document "Why Monetarism doe not work" and "Why the purchasing power of wages fall".

1  Hector McNeill is director of SEEL-Systems Engineering Economics Lab

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