During the mid- to late 1960s, the Lyndon B Johnson Administration tried to deal with the mounting inflationary pressures by direct government influence. Wage-price guideposts were set up, and the power of the presidency was used to coerce big businesses and labor into going along with these guideposts. This general approach came to be known as “jawboning” (sometimes known as “moral suasion”) — an unofficial but usually quite effective technique of arm-twisting to prevent labor and businesses from getting big wage or price increases, which works essentially by the implicit threat of future Government “regulation” of their industry, such that would impair their profitability. (Wikipedia)

Jawboning isn’t just a historical footnote, politicians still use it today for a variety of topics when they try and justify a particular stance on policy. These days its a bit more sophisticated than the ’60s, the use of the media to hammer home the message is prevalent.

Why jawbone? Well, it is a way of planting the idea that a policy move is the correct thing to do when faced with the “facts” as presented by the politician. Jawboning works particularly well when presenting a subject that few of the general public fully understand and in agreement with the majority of experts.

 On Monday morning a new jawboning assault was launched, with media coverage, by the Prime Minister of Great Britain – Mr Brown. The target is the general public, the aim is to get them to accept below inflation pay awards. The below inflation pay award is already a reality for the public sector workers, even if their pay review bodies suggested awards should be higher. (We await the outcome of the Members of Parliament decision on their wage increase with interest.)

What is more interesting to me is the way the jawboning argument has been structured and the “facts” used to steer debate into a particular direction. Let’s have a look at some of what Mr Brown said:

“I’m going to be vigilant about the events around the world,” Brown told Sky News. “It’s not an easy world at the moment. I want to achieve both for business low interest rates and for homeowners low mortgages.”

“There was an under pricing of risk for a period of time,” Brown told BBC Radio 4’s Today program. “That’s going to affect the whole global economy.”

“All the decisions we’re taking,” Brown told the BBC, “are to ensure that Britain can come through a period where in America it’s estimated 2 million people might lose their homes, where the housing market has gone into reverse, where there’s a fear it may spill over into the economy.”

   Mr Brown said: “Government ministers must have a rate of pay increase that is below 2% – 1.9%. At the same time, my recommendation is that that is what goes for MPs.”

The prime minister also said he would “like to pay… more” to nurses and but it was not possible at the moment.

“This is a decisive year for the economy. We’ve got to take the right long-term choices this year,” he said.

“I will be judged, as will the chancellor, by whether we take the right choices for the economy.”

Mr Brown has been criticised by unions for staging public sector pay increases, effectively bringing them below 2% for the year.

He said: “We must show exactly the same discipline that we ask of other people.”

“In fact, the recommendations for significant pay rises will be rejected and I think it’s very important that we send a message to nurses, police and all those people in the public sector, it is very important in this year that we break the back of inflation.”

It is clear that Mr Brown is attempting to reinforce the thought that inflation is caused by high pay awards and that the only way to control inflation, to “break the back of inflation”, is by restricting the amount awarded in upcoming wage negotiations.

Mr Brown refers to problems in the global and US economies, an under-pricing of risk, that will lead to tougher economic times in the UK. The inherent threat is that the UK could face a similar housing meltdown as the US if his policy is not implemented. The cause for the upcoming woe is firmly placed beyond his ability to have affected it. Only the consumer, by taking below inflation wage increases, can avert the crisis. Moral suasion indeed.

There is however a problem with Mr Browns’ line of thought.

Inflation is not caused by wage rises. Inflation is caused by an increase in monetary liquidity that inflates the price of commodities, increasing the cost of production. Those increases are then passed on in the price of finished goods, to the level that the consumer will tolerate. Increased wage demands are the result of higher prices, as consumers attempt to rebuild a premium (increase their tolerance) to rising costs.

Attempting to break the back of inflation by restricting wages is useless unless it is accompanied by a decrease in monetary liquidity, be that cash or credit. Indeed, restricting wages whilst allowing a continued rise in monetary inflation will place businesses in a no win situation, where higher material costs are not met by higher selling prices, forcing a curtailment of production, contraction and a loss of profits.

The attempt by Mr Brown to avoid the blame for what is to come does not bear close scrutiny. A look at the Bank of England figures for M4 and M4 lending show the increase of monetary liquidity on a 12 month basis continues to grow at a phenomenal rate:

If Mr Brown thinks jawboning a policy of wage restraint will solve the upcoming problems for the UK economy, he is wrong. As the hard times for the UK economy and its people rapidly approach, he seems more concerned with dodging the blame than sorting the problem. It can be a dangerous game persuading people into a painful course of action if eventually the pain is seen as needless.

Market Snippets

WASHINGTON (Thomson Financial) – The Federal Reserve said today it will auction off 60 bln usd in short-term funds to banks this month, up from the 40 bln usd the Fed auctioned off in December.

US OUTLOOK: JPM confirms changes to their US outlook: 4Q07 GDP growth now seen 2% (from 1.5%) while lowering 1H07 to 0 (from 1%) and 2Q07 to 2%. “We now think the probability of the economy sliding into recession — an event that prompts sustained job losses and declines in labor income — has moved to 40%.

Commentary by Mick Phoenix

on behalf of An occasional letter from The Collection Agency

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