Life on the West Island - Greed is not good

Greed – for lack of a better word – is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms – greed for life, for money, for love, knowledge – has marked the upward surge of mankind – Gordon Gekko in “Wall Street”.

For at least the past decade – and probably much longer – West Island government and politics have been dominated by neo-liberal economics. A key tenet of this misguided approach is that the private sector is always more efficient and effective than public enterprise. The argument is that the drive to maximise profits is a good thing because it causes businesses to be lean and productive, hence the unseemly rush to privatise everything from banking to energy production to the keeping of land titles registers. A corollary to this argument is that it is good to have big profits in the private sector, as that will create more jobs and higher wages – the so-called but elusive “trickle-down effect.”

Just now, Western economies, including the West Island, are panicking at the rapid rise of inflation, but largely missing a major reason for this fast increase in the cost of living and the prices of business inputs. This week, ABC economics analyst Daniel Ziffer considered the situation:

Interest rates, the Russian war in Ukraine and a supply chain crunch are all blamed for surging inflation that is eroding the value of worker's pay packets. But there's another element: soaring company profits. "The strength in profits has come despite firms facing very elevated cost pressures," NAB senior economist Brody Viney said. Australia Institute executive director Richard Dennis added: "What the data says is that profits are rising across Australia. Collectively, firms have never had it so good."

The other side of the coin is that real wages are continuing to fall. That is, although there is a small growth in average wage rates, the cost of living is rising much more quickly, leaving an ever-widening gap in household budgets. For the past full year, wages rose by just on 2%, while inflation hit 7.3%. That means that on average West Islanders are over 5% worse off that they were a year ago. This week’s Bureau of Statistics figures were hailed by some business economists as showing that average wages were in fact beginning to rise, with a 1% quarterly jump – but that is still leaving wage earners behind the rate of rises in cost of living.

For years, the Reserve Bank has preached that when unemployment falls, demand for labour will increase and therefore so will wages. But at the same time it is adding to inflation by continually putting up the cost of living for many households through monthly interest rate increases, while real wages remain in negative territory.

Perhaps Daniel Ziffer is right – inflation is being driven in part by international factors but a key contributor is being overlooked – corporate greed. He reports that ACTU secretary Sally McManus calls it a crisis, blaming the greed of companies for boosting inflation that is hitting every consumer. "We've definitely got a profit crisis at the moment. It's driving inflation. It's the reason why inflation is high," she said.

That might seem a predictable answer from a union leader, but probably not from the chief economist of UBS Global Wealth Management. The gigantic global firm's Paul Donovan wrote in the Financial Times that, outside of commodity prices, inflation is rising around the world because of corporate profits, not wages. "The broadening of inflation beyond commodity prices is more profit margin expansion than wage cost pressures," he said.

Senior economist Dr Richard Denniss is in no doubt about the contribution of corporate price gouging to the spike in inflation. He says that rising wages costs have played an insignificant role in the recent inflation spike. He reports that his recent research suggests bigger pay packets account for just 15 per cent of price increases, while profits have played a much larger role, accounting for about 60 per cent of recent inflation: the data says that profits are rising … but every individual company that speaks out is apparently the one that's doing it tough right now. I'd just like one company to come out and say, 'It's us. We're the ones making record profits.'

Daniel Ziffer adds that Dr Denniss acknowledges that some individual companies are not doing well, but his broad assertion about the rude health of most businesses is backed up by the national accounts from the Australian Bureau of Statistics. Corporate profits, as a share of key costs hit 32.9% in the June quarter – a new record. Wages were at a new low of 48.5%. "We just need to stop this phoney conversation about employers having no choice but to lift prices and no capacity to lift wages," he said. "They have a choice; they're just making choices that are good for their profits. Not good for us. They can accept lower profit margins. And they could also pay higher wages."

ACTU Secretary Ms McManus says that big companies think they can get away with price-gouging consumers by putting up prices while reaping massive profits. Companies are shooting themselves in the foot, she said, because wages are not growing. Workers are also consumers and inflation means they have less money to spend. Meanwhile, real wage growth is always promised but never delivered. She says that workers are told that when profits rise, wages will go up. When that doesn’t happen they are told that wages will rise if productivity improves. Well, productivity goes up and wages don't. And then we get told, 'We've just got to wait for unemployment to get low enough'. Well, it's at record low levels; still, wages aren't going up.

Rises in West Island inflation and the cost of living are being driven by greed. If you doubt this, just look at the energy sector with its plans for massive price increases. Industry Minister Ed Husic put it in a nutshell: This is not a shortage of supply problem. This is a glut of greed problem that has to be basically short circuited and common sense prevail.

Sorry, Gordon Gekko, greed is definitely not good for us.