Forget the Spanish ‘flu of 1919. The real biggy in terms of mortality was the Black Death which raged through Europe from 1347 to 1351 and which in some places was responsible for a quarter to a half of the population dying. Such a dramatic event had an enormous impact on European economies, not least in terms of inflation, labour relations and standards of living. Can we draw any comparisons to our post-pandemic world after so many centuries?
With 9 out of 10 people working on the land, the huge decline in population following the Black Death led to a significant rebalancing of labour relations between landowners and the peasantry leading to a decline in demesne farming (more commonly known as feudalism). Agricultural labourers could increasingly move around and demand higher wages, while land ownership amongst the peasant classes rose as the price of land fell. For vulgar Marxists, the rise of the yeomanry and the ‘middling sorts’ in England marked the shift from the feudal to the bourgeois economy.
Optically at least, when the pandemic restrictions ended in 2021, there suddenly seemed to be no workers around. In the UK, this was naturally blamed on Brexit - perhaps there was now a town in Poland where lots of waitresses were serving food from a well-staffed kitchen to tables filled with well-paid truck drivers no longer wanting to toil around the M25.
But ongoing labour shortages elsewhere (US JOLTS job openings for June 2022 still sits at 11.5 million for example) suggest it wasn’t just about Brexit. The ‘great retirement’ of older workers over the pandemic was clearly a phenomenon, and one which might at least partially reverse with retirees’ equity and bond portfolios being crushed in 2022, forcing people back into the workforce.
In terms of labour relations, people have a funny view of the middle ages. It wasn’t necessarily all toil and disease, nor was it a golden-age for the masses. Writing in the middle of the nineteenth century, the historian Thorold Rogers said of the fourteenth century, “At that time a labourer could provide all the necessities for his family for a year by working 14 weeks”, with many communities having as many as 180 holidays in a year. That sounds great. Yet while nominal wages rose after the Black Death, real wages (adjusted for inflation) actually fell for 30 years.
The problem was monetary inflation. For those who think central banks are always the cause of inflation, it is worth considering that when a quarter of the population dies and your money consists largely of a fixed stock of silver and gold coinage, suddenly there is a lot more money around relative to goods being produced in the economy, and this is necessarily inflationary. When we look in retrospect at the pandemic furlough payments, there is an eerily similar development - much less work being done and lots more money around relative to that.
As with the Black Death, the post-Covid world of employment has clearly shifted. While some enthusiastic CEO’s like David Solomon of Goldman Sachs have got all their workers back in the office, three days a week for office-jobs is a lot more common. Some companies are now even experimenting with a four-day working week. The WFH phenomenon has also led to a real shift in the supply and demand dynamics between goods and services in the economy, and this is in itself inflationary during the period of adjustment.
Yet the real problem is still the effect of all that government furlough spending and the monetisation by central banks of the debt resulting from it. Monetary inflation takes up to two years to work itself through the economy, so it’s not surprising that 2022 is seeing inflationary highs, the Ukrainian war and other supply disruptions not withstanding.
So with UK May consumer price inflation (CPI) hitting 9.1%, it’s hardly surprising that workers are demanding more money. the UK rail unions went on strike on Tuesday 21st June, demanding a 7-8% rise while rail bosses were offering 3%. On the continent, IG Metal union workers are demanding a similar 7-8% rise in the face of massive energy- and food-price inflation in Germany. Central bankers are not just unamused, they are growing fearful.
Back in February, Bank of England Governor Andrew Bailey was slammed for urging workers to restrain wage demands in the face of rising inflation. Cue peak outrage in The Guardian, which pointed out (with some justification) that he earned £575,538 a year, not exactly an income which gave him the right to lecture others (Guardian Link). Mr Bailey’s fears are that a wage-price spiral reminiscent of the 1970s will ensue, de-anchoring inflation expectations. Sorry guv’nor, but it’s starting to feel like that horse has already bolted.
While we may not see a repeat of the chummy beer-and-sandwiches union meetings at 10 Downing Street that characterised the UK’s Labour-led governments of the 1970s, social dissatisfaction is already leading to swings to the extreme in politics. In France, the crazies on the left (Melanchon) and the right (Le Pen) have polled remarkably well in this past weekend’s French parliamentary elections. Governments are already ramping up fuel subsidies and other benefits for hard-pressed families, and while popular in the short term, such demand-side stimuli will only prolong inflationary impulses which in turn will lead to greater wage demands.
For their part, central banks are trying to fight inflation with rate hikes and some quantitative tightening measures. Yet with consumer and housing sentiment rolling over in the US, with sovereign bond spreads in the Eurozone approaching critical levels, and with a number of currencies (including the pound) struggling on the foreign exchange markets, central banks’ ability to halt inflation without causing a severe recession seems limited at best.
The danger is that a rate-hike-induced downturn will necessitate more fiscal intervention, causing bigger government deficits, and with the stock of debt so high, most likely central banks will have to about-face and start easing monetary policy, both in terms of rate cuts and more quantitative measures.
The Fed’s successful attack on inflation in the early 1980s saw US unemployment rise to almost 11%. It just seems improbable that developed-world governments and central banks can tolerate such misery, especially in a far-more-indebted world. Real wages in England peaked about a hundred years after the Black Death, and didn’t reach those levels again until the middle of the nineteenth century. Sadly it seems the workers are not going to be blessed with a similar windfall this time around.
"Spanish flu" is fake news. I always call it Kansas flu, because that's where it started.