Inflation\’s a tricky thing you know

Michael White:

For the record, MPs were unpaid until the radical Liberal chancellor David Lloyd George found them £400 a year in 1910, the annus mirabilis of progressive taxation when LG faced down the Lords. According to the National Archives ready-reckoner, that £400 is worth £22,824 today – so MPs on £65,738 have achieved a steady real-terms pay rise.

Ministers have done less well. Pitt the Younger got £5,000 a year as PM in 1800, a sum worth £160,000 today, but £292,000 in 1850, more stable times. The pay was increased to £10,000 in the 1930s when, according to the reckoner, it would be worth £396,000 in today\’s funny money.

Thanks to Brown\’s unilateral cut and his own 5% further cut, Cameron gets £142,000, including his MP\’s salary.

Comparing money across time is not all that easy a thing. Should we just calculate, as above, by the straight old inflation rate?

Well, we can, but that doesn\’t really give us the right idea. For, at least since the invention of this capitalism thing, we\’ve also had rising living standards in general, economic growth in general. This leads, quite naturally, to the thought that we\’ve had rising real wages over time.

So there are a number of alternatives: note that none of these are perfect. We\’re making ranging shots at judging which is the best number to use, not plumping for one or other method which is precise.

The above simply inflation one is the worst of our alternatives. For many reasons but perhaps the most important is that we\’re simply ignoring the fact that everyone\’s standard of living has risen since 1800, or 1910, or 1930. And as a good lefty like Michael White would be happy to agree, a goodly chunk of the point about wages is not the absolute value, but the value relative to everyone else.

We can also use in relation to GDP (ie, what\’s the wage as compared to the total economic output of the country, adjusted for population) and so on, but probably the best, when we\’re looking at incomes, is to upgrade by the rise in average incomes. So, for example, if average incomes have risen by 1-2% above inflation, as they pretty much have done, over the couple of centuries, then we should be upgrading those income figures by that 1-2% above inflation.

One reason why even this isn\’t perfect is that this would take no account at all of a change in the distribution of incomes. Recall in Jane Austen that £3,000 a year made one very wealthy indeed landed gentry so £10,000 as PM was way, way out in the very tippy top of the income distribution. Not equivalent at all to that £160,000 which is about the top 1% today isn\’t it?

To use these various different measures, there this great little site.

The results are that £400 in 1910 is more like £145,000 now. £5,000 in 1800 is around £3,500,000 now and £10,000 in 1930 is £1.7 million now.

Which means that, in relative terms, MPs are about right now (pay plus expenses isn\’t far off £145,000) while the Prime Minister is grossly underpaid.

Another way of looking at it: That £5,000 in 1800 if considered as a capital sum was enough, when invested, to produce a solidly upper middle class income forever. £200 a year or so*….as compared to a Naval Post Captain\’s wages (without prize money of course) of some £140 a year**. That £10,000 in 1930 similarly treated would give £400 a year in perpetuity, again a solid upper middle class income. You would need a capital sum of that £2 million and above to be providing top quintile income from investments today (top quintile household income starts at £80k today ish).

So another way of thinking about this is that back then the PM was paid the capital sum, each year, necessary to have that upper middle class lifestyle for life. Today he\’s paid that upper middle class lifestyle amount as income each year that he\’s PM. A very different amount indeed.

*Assuming 4% interest which isn\’t far off gilts in those days

** Guestimated from Bligh being reported as getting £70 a year as a Post Captain on half pay.

12 thoughts on “Inflation\’s a tricky thing you know”

  1. Not so sure the ordinary MP comparison works out so well.
    An MP in the early days of last century would have likely had live in domestic staff & a house I owned changed hands for less than that £400. How many MP’s can afford much more than a part time cleaner & the same house recently sold for around £350,000.

  2. What Pete said. Also, expenses is not the same as income, a huge chunk of that amount, as you well know, goes on staffing and other costs.

    I’ve always favoured the comparator method myself–should be the same as a school headteacher, police superintendent, GP, reasonably succesful solicitor and, um, merchant banker.

    Which is what good olf Lloyd George used to determine the original amount.

    Don’t think they’d get away with voting themselves an increase to todays bonus culture city wages, do you?

    But do think the lowe salaries are part of the reason why so many of the useless idiots are, well, useless idiots. Method of selection/election explains the rest.

  3. Not sure if MP wages are much of a guide to anything anyway. It’s their rate of wealth accretion. For a start an MP first elected goes straight onto, what in other job, the retiring salary. No tedious career ladder for them unless they aspire to ministerial office.
    One of the 2 MP’s I’ve had much personal contact with lived opposite me in a street off of Portobello Road in the early seventies. (Our personal contact usually consisted of him coming over to rant about my visitors cars blocking his gateway. Pointing it out as a convenient parking space helped of course.)
    At that time he was a fairly recent arrival in Parliament from a northern industrial Labour seat. I was struggling to a afford half the rent on a small flat. He owned his house. Further down the street was a similar one owned by a very well known & successful TV producer.
    He, in due course, rose to ministerial office, published an autobiography serialised in the Sunday’s & was often on TV discussion shows. He certainly wasn’t living in penury when I knew him & must have retired seriously wealthy. How many school headteachers would manage that?

  4. Don’t forget that MPs and Ministers get pensions now. Fairly generous ones – worth an extra 30% of salary (fag-packet calculation).

    For the PM the pension was incredibly generous – 50% of PM salary, for life, from the day you stood down, no matter how short a time you’ve held office. On top of your MP’s pay if you stayed. The previous government did announce that it was removing that perk and just giving them the normal Ministers’ pensions, but I’m not sure if they ever actually did.

    Former PMs also get an expenses allowance (currently over £90,000) for life, from the day they stand down.

  5. As Adam Smith wrote: “The real price of every thing, what every thing really costs to the man who wants to acquire it, is the toil and trouble of acquiring it..”
    Suppose you were PM and offered the chance to swap with Pitt.
    Would you take the money and have to deal with stroppy scullery maids instead of a reliable washing machine, have your teeth pulled without anaesthetic, have to pay a fortune for a simple repair because there is no standardisation of parts, hire someone specifically to carry your words over even a short distance, charter a ship to send your instructions further…?
    Thought not.

  6. And expenses are important – MPs used to have to pay their expenses out of their salary (they would still have needed to stay in London whilst Parliament was sitting, and travel to their constituencies (especially after the Reform Act), and I suspect most would have had a secretary or assistant of some sort).

    Those costs would make the old salaries worth considerably less than the new ones. For example:

    “William Pitt the Younger, had a net income as First Lord of the Treasury of about
    £5,000 and from late 1792 he also received £4,382 gross as Lord Warden [of the Cinque Ports]. However, the costs of official life were such that this was insufficient and he died deeply in debt.”

    Lord North needed a £16,000 loan from the King to stop him going bust.

  7. “have your teeth pulled without anaesthetic,”

    Equivalent to listening to Harriet Harman in full flow one imagines.

    Surprising how little changes.

  8. All political dross are overpaid. Nothing would be too much.

    Pitt at least had some merit. Major,Bliar, the bottle-fed boy and his plastic-faced successor should be paying US to compensate for their crimes and that amount of money does not exist.

  9. Also since the 1920s the PM has had the use of Chequers, complete with staff.

    The theory of Chequers was that it saved PMs from the expense of buying and maintaining a large house for entertaining. So like expenses, a PM’s pre-Chequers salary is effectively lower because it had to pay for a ‘suitable’ country house.

  10. Just looking at late Victorian and Edwardian PMs, they don’t seem to have become rich as a result of being PMs. They were either rich beforehand (by inheritance or marriage), or were supported by wealthy families, or struggled.

    – Asquith had to sell his mansion in Cavendish Square after he stood down as PM, and despite his profitable legal career he owned less than 2 years worth of PM’s salary on his death.

    – Campbell-Bannerman inherited money, land and a country estate from an uncle (hence the Bannerman bit).

    – Not sure about Balfour, but I imagine his relatives made sure that he had all he needed.

    – Salisbury inherited a fortune, but even he declined a dukedom because he couldn’t afford to live in the style of a Duke.

    – Rosebery married a Rothschild, so no got his money that way.

    – Gladstone lived in a country house owned by his wife’s family, which suggests that he wasn’t wealthy himself.

    – Disraeli needed a huge loan from the Duke of Portland to be able to buy a house suitable for a Conservative leader.

    Before that, I think they all inherited their money. Or, like Russell, they came from wealthy families who looked after them (Russell lived in, and took as his peerage title, a house owned by his family).

  11. Anyway, I think that MPs should be paid what they earned before they were elected.

    So it’s not a salary, but compensation for loss of former earnings.

  12. I made some calculations based on average wage comparisons for a (pointless) submission to the MPs expenses commission and they all came up with the original MPs salary being the equivalent of £100,000 in 2009.

    We expect MPs to do more these days (such as paying for constituents’ problem solvers and researchers) so, although a few manage to do without such add-on costs, I reckoned that £150,000 would be a fair equivalent, out of which MPs should also provide their own self-employed pensions and any other expenses. Add £100 per mile distant from Westminster and you get a FEE (not a salary) range from £150,000 to about £200,000 (with a bit more for Orkney and Zetland).

    Only some such simple system will get rid of the distrust, cynicism and corruption caused by having an expenses system and an expensive bureaucracy to police it. To give the right incentives, this fee should rise by the target rate of inflation each year and perhaps be corrected to average earnings every dozen years.

    A flat fee would save taxpayers many millions. It will not happen because politicians have no faith in their own ability to persuade the rest of us (including tabloid editors) that the higher figure is a fee to cover everything they need to do to represent us properly rather than a fat salary.

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