Last year, I was lucky enough to interview Elizabeth Warren, a Harvard law professor and likely new head of the new US consumer protection agency.
We discussed the US banking crisis, but my interest in writing about Warren stems not from her views on the US banks, but from what she has been saying for years about the financial fragility of the American middle class.
In her book, The Two-Income Trap, Warren documented how middle class working families in the US were in a trap, and how their financial existence was becoming increasingly precarious.
She contrasted this experience of huge debts and constant bill-juggling with the reasonably secure experience of the same middle class in previous generations, particularly the post-war generation.
This phenomenon featured in an excellent article in the Financial Times last weekend.
Warren’s view is that the American middle class is getting progressively poorer, relative to those at the very top of the tree in the US, as well as to people with similar jobs and education elsewhere around the world. She has been writing for some time about the disappearance of the old US middle class and the American Dream.
This is not a revolutionary idea; many others have various theories as to why this is.
The reasons vary from the breakdown of the trade union movement to the rise of China and the constant peddling of debt from an unregulated finance industry.
Whatever the overall reason, the trend of a middle class that is either running to stand still or actually falling backwards is of crucial significance here, because the Irish middle class is about to take a giant leap backwards.
This group is now getting hammered by the collapse of property prices – which, ironically, has to continue if we are to get competitive and become a proper trading nation once again.
This is the central dilemma for all of us: we need to ‘lock in’ cheap property as a competitive advantage for the country, but that means trapping the property-owning middle class in a brace, where their debts remain static but the value of their assets falls.
This means, in its simplest form, that middle class Ireland is broke for the foreseeable future.
We can only avoid this vista by reengineering a property boom, which will just end in a bust a few years hence, putting us back to square one – with more debt.
This is not an option and, even if it were, it is unclear where the credit would come from to push up property prices, due to the broken banking system.
So the Irish middle class is stuck in a debt trap.
On top of this, we face the prospect of huge increases in taxation in all sorts of areas in the next few years, and we are using a currency which is far too strong for our enfeebled economy.
Regarding the currency, what our conventional wisdom peddlers don’t realise is that a strong currency makes weak economies weaker. In fact, no country in history has ever got out of a debt/deflation spiral without changing the value of its currency.
Meanwhile, the argument that euro denominated debts would just rise if were to have a new currency, while accurate, is not particularly compelling – because the ability to pay back debt is a function of being competitive.
This means generating a cash surplus from whatever you do for a living to pay back the debt.
This dilemma remains the case, irrespective of what currency you choose to pay yourself in.
The challenge is to get that economic surplus first and then translate it into hard currency – not get the hard currency first and hope to translate it into an economic surplus.
But there is little point explaining this basic economic truth because we will not leave the euro: the political establishment just won’t countenance it.
This leaves us with the prospect of the Irish middle classes overpaying themselves in an overvalued currency that bears little relation to the economic facts on the ground.
So the insiders who pay themselves in the hard currency, the euro, but don’t actually generate the surplus, get a huge subsidy from those who have to go out and actually generate the surplus in the first place.
This policy choice is a recipe for what we saw last week – much higher levels of unemployment.
This is what our government appears to tolerate.
The ‘insiders’ who have jobs will try to protect themselves, and the ‘outsiders’ – the ones who lose their jobs, or are already on the dole – have to make do.
It was the same in the 1980s and the 1950s. History is just repeating itself.
As in the 1980s,unemployment has now begun to rise dramatically among white collar workers.
This spreading of unemployment is always the way it happens. Initially, the jobs in construction go, but gradually, as demand evaporates, unemployment seeps into other areas which were initially thought to be immune.
In the 1980s, the middle class responded by emigrating. Atypical emigrant in the late 1980s was three times more likely to have a university degree than one who stayed at home.
This trend will probably repeat itself, and the fiscal situation will deteriorate as unemployment rises and tax revenue falls. Ireland is on course for a failed fiscal adjustment – all the indicators are pointing to it.
The state will then try to get its hands on cash from wherever it can.
This is why a tax on savings is likely to be introduced, as are all sorts of other charges and stealth taxes.
All the while, the position of the middle class – which seemed to be so strong a few years back, when the property scam blinded people – will become more and more edgy.
This is exactly what Warren documented in her book.
So what are the alternatives? Whether we like it or not, with the balance sheet shattered, some form of debt restructuring for Ireland’s private sector is a given.
Time will tell how this will work out.
Also, given an anticipated last-gasp, smash-and-grab exercise from the state, the middle classes will take some of their cash out of the country and the Irish banks.
This is what happened in Latin America for decades when capital flight was endemic.
The Irish middle classes have a choice. Either they vote for massive and radical economic change – if a new party emerges which advocates such a manifesto – or they will experience slow but gradual impoverishment.
The issue isn’t about the direction of the move; just the speed of getting there.
First time I came across Liz Warren was in The Corporation – worth a watch:
http://www.youtube.com/watch?v=Pin8fbdGV9Y
Spot on their David, Been unemployed now for two years and not in receipt of any form of support, Dole or otherwise I am slowly be drained of my independent financial resources, instead of helping me to re train I am left to rot on the scrap heap, having taken the chances and investing in my own companies I was quite successful for 20 years and at one time employing up to 13 people I took the risks and invested my own money I got no help from the state and I paid all my taxes due to no fault… Read more »
ASPHYXIATION
Thomas
I apologise for the mistakes as I pressed the post button before I had checked for mistakes
[…] You may view the full article and add your own comments at http://www.davidmcwilliams.ie/2010/08/09/middle-class-dying-a-slow-death […]
Hi, Having read this article in the newspaper it prompted me to think how the end game will finally come about. As David said there will probably be a tax on savings as the government will want to incentivise the citizenry to spend their money in the economy. Since the same citizens are lodging their large sums of money with the post office rather than the banks what they will probably do is take their savings out of the banks and lodge it elsewhere to “avoid” this tax. In other words a tax on savings may have the opposite effect… Read more »
My thoughts include : a)Is there a limit on charging citizens. Irish electorate ‘interest on interest’on bank loans and credit cards ; and b) Why are loans under sharia law from Irish Banks excluded from foreclosure of homes ; and c)Irish Taxation Laws are based on Equity of charge and enforcement so why can FF charge the Irish Electorate a tax on savings in an Irish Bank when tax was already paid beforehand to accumulate it?; and d) Irish Law Reform Committee needs a REFORM before they can work again and to include others outside the legal professions ;and e)… Read more »
Elizabeth Warren has a good head on her shoulders ( I wasn’t surprised to find she’s a practicing Methodist — that oldline American Protestant work ethic shines through). I recommend taking the time to watch her one-hour youtube video from two years ago about the decline of the middle classes. While obviously American-centric, I think people will recognise the relevance of the issues for here.
http://www.youtube.com/watch?v=akVL7QY0S8A
Every 50,000 extra people on the dole represents a minimum “cost” of 1 billion in lost taxation and welfare payments. This doesn’t take into account the soaring cost of running such services, means testing, healthcare costs, potential housing costs which can run into billions due to the excesses of the notorious “rent allowance” aka “Landlords Dole”. These people obvious are constrained in their spending so VAT reciepts fall and the knock on impact of lower spendng hits business. I think the traditional notion is dying for 2 reasons – firstly a lot of formerly qualified, skilled and well paid jobs… Read more »
David, “The Irish middle classes have a choice.” As far as I can make out in fact they don’t, at least not in the political domain. As somebody recently put it, policy is not constructed around facts, the ‘facts’ are re-interpreted to support policy. Ireland must be the hardest place in the world to be a political satirist, since the absurd is accepted as normal. Politics in Ireland, in the political parties themselves and within the public services, local government etc etc reduces to a collection of spectacularly unenlightened feudal lords protecting and building their dominions. The idea of long-term… Read more »
To capture ‘the surplus’ is indeed the problem, David, and had Ireland done this she would not have hiked up her land prices to nose-bleed heights. By Book 3 Marx was coming to conclusion himself that production’s surplus had to be captured for government. His US contemporary, Henry George, no communist, insisted that land and natural resource rents were the surplus that must be socialised if a halt was to be put to boom/bust cycles. But try to do it! Australia’s Secretary for the Treasury, Ken Henry, recently played his part, recommending both a land tax and a minerals resource… Read more »
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Reports in the US suggest Elizabeth Warren (intelligent and decent person by all accounts) may not get the consumer agency job. Larry Summers rules the economic roost in the White House (he also made the infamous comment while President at Harvard that the under-representation of women in science and engineering could be due to a “different availability of aptitude at the high end,” and less to patterns of discrimination and socialization.). Indeed as the New York Times and Huffington Post have highlighted, there have been several resignations from Obama’s economic team (Christina Romer is going with some reports suggesting she… Read more »
Very good article. The essence of being middle class was that your wages were not reliant on physical labour input. There was a status thing involved, for many people – the work was not sweaty or dirty. This meant that some participants had contempt for those below them, and were aspiring outwardly towards equality with those above them. This psychological condition has been used as a means of generating a more intense for of consumerism in the past twenty years, that has got progressively more dependent on borrowing. I think that we are about to find out in a realistic… Read more »
[…] with a large deteriotation in their expected asset wealth.With the death of the Celtic Tiger, David McWilliams argues this is the fate facing the Irish middle class. Large debts, decreasing asset values, shrinking real wages (whether via increased taxes or levies, […]
If you think the government are humping you, why give them lube? Take your cash out of Irish institutions (including An Post). Keep the minimum amount you need in a local ‘operating’ account, but keep all surplus elsewhere e.g. in a French or German back. It’s simple, and it’ll force the situation in Ireland to a head. If people don’t take some action, sites like this are just futile verbiage, right?
David. Following the logic of the article further, one can deduce the modern day *middle class* is an illusion. It never really existed due to the fact it was underpinned by more debt than surplus so in the final equation its property owners class and rentiers class. Then there is the social group in between keeping out of this *debt trap scamarama* and getting on with things, like your good self, lets call that group, the flexr class. Now, the illusionary middle class of modern day who are in the *red* and and sinking deeper into its quicksand is another… Read more »
So the middle class collapses, and Western countries begin to take on increasing aspects of 3rd world countries, stagnant to rising unemployment, declining services, high levels of corruption, trophy projects which go over budget, zero political accountability, cronyism, nepotism, dynastic political families, ignored poverty, democratic deficit etc
‘Third World America’: 11 Books Predicting The Collapse Of The Middle Class
http://www.huffingtonpost.com/2010/08/09/third-world-america-11-bo_n_672280.html?ref=fb&src=sp#s122928
Most of the middle class I know bought second , third even more houses. Why would anyone borrow money to invest, would you borrow money and then gamble it on the stock market, then why borrow money to gamble on property. I know one chap who bought 5 houses and he is only on 30k he is now left with a million euro debt and houses he can’t sell or let out because all the Polish renters have gone home. The middle class put all their eggs in one basket , Irish property and Irish stocks and shares linked to… Read more »
This is yet more fodder for the ‘what about the NAME for me’ brigade. The Irish middle-class described in this article want everyone else to pay for their mistakes. This is because they believe they have a divine right to stay middle-class, or do even better. They are too good to live in a smaller house, or drive a banger, or to move to a less affluent area. The biggest inertia of all is their own snobbery. People should pay their debts, even if it means sacrificing their creature comforts, including their visits to the theatre to hear their favourite… Read more »
Deco. Thought inducing comment as always. Middle class and its *lifestyle* destruction is a fascinating sociological event. Where do sympathies go. On the one hand there are those in middle class who have been suckered. On the other hand there are those middle class who knew buying into debt to fund a lifestyle is going to end slamming into a brick wall. So on the hand one must consider the middle class group duped and on the other hand one must finger point the middle class scammers who knew what was going on and milked it big time all the… Read more »
Trouble with we Irish is that we are too egalitarian. The English got it sorted long ago. The middle class could be instantly recognized by their trilby hats and the Esq. after the title.
Also smile with Cleese, Barker and Corbett:
http://www.youtube.com/watch?v=w0DUsGSMwZY
Why are you concerned that there should be a tax on saving? Most of the 450,000 out of work have no such concern. They don’t have savings of any kind to tax. The issue is the €20 billion annual gap in the State’s coffers. Spending €50 billion taking in €30 billion. There are options other than leaving the euro. Let those who benefited and are still benefiting pay through increased taxes,a property tax,removal of pension breaks and removal of heads of tax exiles. Yes, it will mean Scandinavian rates of tax. So what. Let the insiders pay, they are ones… Read more »
The alternative is, of course, that everyone joins the existing political parties, and starts to transform them from the inside, through sheer weight of numbers. And I mean ‘transform’. It was interesting to watch the party apparatchiks flood the entire media, after the George Lee thing. It was clear that he hadn’t fallen into line, and operated they way they expected him to. Well, perhaps it’s time the line was redrawn, and the expectations were changed. If every unemployed person could be persuaded to join one of the political parties (or all, come to think of it), and pay attention,… Read more »
As an outdated concept, for the first time, I can’t agree with this post from our host. This pigeon-holing of intellect only suits the insiders with day-one access to privilege. Any class system exists to limit general aptitude and as such is contrary to our Constitution and panders to a previous autocracy. Which allows Leeson Street and its environs to maintain control over the poor and the weak, those who have been penalised a paltry 5 euro a week to care for blind relatives whilst Ministers continue to claim 5000 euro per month in unvouched expenses. On top of their… Read more »
Well someone has got to pay the debts…. and thanks to Lenhian and his fellow traitors, it ain’t going to be the developers or the bankers.
I remember back on Feb 24th 2009 @12.50 pm Stephen Kenny posted that Elizabeth Warren link, of her one hour video, in which outlined the destruction of the middle income/ middle class in America. I remember saying to Stephen back then that I was “gob smacked” to hear that more American children would witness their parents filing for bankruptcy than filing for divorce. I wonder if the bankruptcy laws in Ireland were the same as America’s i.e. much more accommodating, then would the same be true of Irish children? On the more sober Economic point of the deterioration of the… Read more »
The Irish Middle class are too polite to revolt. For them ,it’s always “them” ( the government) that is the problem. Maybe it’s a post colonial hangover that people feel disempowered when it comes to real change.”We” are the people with the power and sooner “we” get this the better for our country.
Folks, we are caught in a triple lock. 1. The failed ‘static kill’ of NAMA leaking hugely as we speak, costs mounting through obsolescence, property damage, mirage of LTEV etc etc 2. Failure to reform the political system, the ‘boyos’ in charge who made the mess are making it bigger as we speak! What should take 30 minutes to examine a few invoices being dragged out over months, expensive committee meetings, waste of space. An end of the Seanad, a slimmed down and reformed Dail based on a Scandinavian list system not a chance while the ‘boyos’ are milking it.… Read more »
The Middle classes are on the slide because of debt . The way people speak of equity in relation to property is nuts . Anyone would think that with terms like ‘ release your euity ‘ or ‘ is your equity trapped ? ‘ You would think somebody ws going to knock on your door and hand you 25 grand , no questions asked . Equity is debt . To my mind the idea of paying a mortgage is to one day own your house . Not to treat it like an ATM tp pay for cars or holidays or… Read more »
Why is it that Irish Citizens living abroad cannot register to vote? Surely there sould be a campaign to change this to allow all Irish Citizens regardless of where they are to have a vote. This would be one way to introduce the needed step change in Irish Politics….to reverse the current Insiders hold on the Outsiders….how would we do this? Start with a Facebook campaign? A online page with signatures?
David – how about on your page?
From Peter Mathews and the Irish Examiner http://petermathews.files.wordpress.com/2010/08/examiner-aug-7-2010-page-13-analysis.pdf
Folks, further evidence (as if that were needed by readers here!) that the EU is “in on it”:
EU approves further injection of up to €10 billion in ANGLO (mentioned in the Indo link by Deco, above):
http://www.rte.ie/news/2010/0810/anglo.html
I’ve been busy this lunchtime. Below is a table from Ireland in Crisis showing the social composition of Ireland compared to Britain nearly a century ago. 29% of occupations ‘middle class’. No wonder there was little comfort for you if you were a ‘mere labourer’.
Population by Social Class. Britain (1921)
and Ireland (1926)
Occupation Eng/Wales Ireland
1Farmers 250,024 268,930
2Shopkeepers 470,842 29,106
3Clergy/nuns 36,987 14,145
4Other Profs. 387,274 21,896
5Tot. 1,145,127 334,077
6Tot. in jobs 17.178m 1.145m
Tot. pop. 37.9m 3.0m
5 as % of 6 6.7% 29.2%
5 as % of 7 3.0% 11.2%
And further to Stephen Kenny’s post above, this reminded me of a passage from Crotty’s A Radical Response which has stuck in my mind over the years. “In the matter of referendum campaign tactics, I somewhat regret, as indicated already, not having emphasized more the economic implications of the SEA. A more substantial regret was my failure to activate the country’s quarter million unemployed persons. This is the sector of Irish society with which I most closely identify. “They are the casualties of a corrupt, inequitable and inefficient socio-economic order which I have studied for decades. It is an order… Read more »
Savage Eye on our idiotic obsession on home ownership… priceless, genius stuff
http://www.youtube.com/watch?v=PJioWss7HeI
Alain de Botton: A kinder, gentler philosophy of success
http://www.youtube.com/watch?v=MtSE4rglxbY
Middle class are not dying a slow death- they are dead. As dead as dodo`s. It is only a matter of time. The waste, gross incompetence and lies continue, and all the while the incompetents who run this place, do nothing to come up with workable solutions for this country. They sit back and scratch their heads and raise taxes, cut social welfare, essential services etc…. They have no clue. The middle class is trapped in an ever downward spiralling morass of negative equity. That is until they lose their jobs, and get hauled off to a court to answer… Read more »
This is here is one of trade and the speed with which you can become operational. In the US, China has destroyed all reason to have any onshore manufacturing and thereby the real means of employing people. Am not blaming China. That’s the way the cookie crumbles. Ireland is no different. Trade. It is about being competitive. The orthodox system of generating fundamental wealth is broken. The powers that be are scrambling to maintain a rapidly ebbing status quo. It is over. Elections are coming fast and people are waiting in the long grass and a few changes will emerge,… Read more »
http://www.examiner.ie/opinion/editorial/energy-prices–levy-rooted-in-wishful-thinking-127390.html Another Middle Class Tax. Our elite either don’t pay taxes or are in receipt of bail-outs. Our jobless and / or unprivileged are subsidised to some degree or other (until we cannot borrow any more, given the rise in Bond spreads today). So the “Middle Class”, AKA anyone left lucky enough to still have a job, will pay for Ryans Fancy. Windfarms are 30% efficient at best due to lack of wind or excess wind forcing the machines to use their energy for braking measures so they don’t up sticks and fly off the hilltops. Notwithstanding the dubious carbon… Read more »
[…] August, 2010 David McWilliams blogged this week about Middle class dying a slow death “This is the central dilemma for all of us: we need to ‘lock in’ cheap property as a […]
For how long can While western economies continue to import products from China, while paying a huge minority (up to 20%)to their own citizens to remain idle? One must either discontinue social welfare or stop the nonsense of globalization. The so called bullshit that western economies will export “services” to China. The middle classes are caught in middle, trying to retain the ability to compete with workers on 1/20 of the wages. It cannot work. One further question? How is the unemployment percentage defined. Am I correct in saying that the denominator is all persons aged 15-70?. If so the… Read more »
Ban USARY and compound interest, print our own debt free money= all our problems solved!!!
This will all blow over in a couple of years and David will be back to commenting on the suburban decklanders again. First the Bono Boomers, then we had the Pope’s Children, and soon we’ll have the Boy George Brigade