Do you ever feel that despite your salary rising over the past few years, you are being passed over financially? Or do you feel poor on a wage that you might have been very happy with a few years back? If so, you are not alone.
According to a recent survey published in the Financial Times, there is a popular backlash against globalisation and its handmaiden – wealth inequality – in all major economies. The middle classes all over the West see that they are falling behind and they don’t like it. Support for globalisation has collapsed partly due to the perception that the rich have got richer and the middle has been threatened.
In Ireland, this conundrum is being compounded by inflation. Milton Friedman said that “nothing so undermines the middle classes as inflation” and the reason is simple: inflation erodes pay packets and makes people nervous about the future path of prices.
The rapid rise in inflation in Ireland – where prices are rising due to a deluge of credit, which is pushing up the price of everything – has been wiping out much of the rise in wages in the past few years. Now wages are following inflation, trying to compensate at every stage of pay negotiations.
The Finance Minister is telling us not to try to match inflation in wage demands or else inflation will become embedded in the system. But what are people supposed to do – stand over the progressive devaluation of their pay packet?
It is up to the State to control inflation. But it has absolved itself of that responsibility. Worse still, it seems to be hoping that hundreds of thousands of immigrants will do the trick, by expanding the labour force and keeping wages down. The hardworking Poles and Lithuanians probably don’t realise that they are the Irish Government’s only anti-inflation strategy. However, the exclusive tactic of using poor people from Silesia can only go so far before it starts to anger those Irish people whose wages are falling as a result.
But quite apart from inflation and immigration, something else is contributing to the middle classes’ feeling that their position is being eroded. It is the yawning gap between the very top and the rest when it comes to wealth and access to assets. This was the source of discontent picked up by the FT/Harris poll this week (www.ft.com).
We are experiencing an extreme example of the development which has turned the majority in Britain, the US, France and Italy against globalisation. In the past few years, the gap between the very rich and the “merely affluent” has been increasing relentlessly. Across Europe, a large majority now wants to see “fat cat” bosses’ salaries and stock options capped. At a time when people may feel threatened by immigration and inflation, such a grievance might lead to a political backlash.
Consider what is happening here. According to the Bank of Ireland, the richest 1pc in our country own 20pc of all the wealth. They have assets of €92bn. The top 2pc own 30pc of the nation’s wealth and the top 5pc own 40pc. This is an extraordinary concentration of wealth in very few hands. While the wealth of the nation has gone up by 350pc in the past decade, those at the top have seen their wealth sky-rocket.
Balancing this somewhat, is the fact that Ireland has become more equal when we measure incomes. The traditional way to measure income inequality in a society is to divide the average income of the top 20pc of the society by the average income of the bottom 20pc.
According to this measure, Ireland is now smack in the middle of the European Union average. We are neither as equal as Denmark nor as unequal as Italy. The economic boom has caused all boats to rise in a way that has not been seen in Ireland since the foundation of the State.
So if we’ve all done well, why should we worry if the guy down the road has done much better than everyone else? On the face of it, we shouldn’t worry; but when you deal with the deep psychology that affects people’s sense of themselves, a very different picture emerges. We are all trying to “keep up with the Jones”.
In the Irish case, it is more like “keeping up with the Smurfits”, because the pace is set by the mega-rich and it percolates down. This is why the great division in wealth matters – it changes people’s behaviour without making them particularly happy because for every wealthy person, there are two or three aspirants coming behind him trying desperately to catch up.
As long as the economy is motoring along, the idea that everyone has a stake in society and has the possibility of bettering himself, renders the concentration of wealth tolerable. However, history shows us that when things turn down, the wealthy tend to get targeted as part of the problem.
In the first few years of the last century, after “the gilded age” had made a few American plutocrats immensely wealthy, successive US administrations – particularly Teddy Roosevelt’s – sought to rein in the power of the mega-wealthy. This was in response to public demand. In the good times, the American plutocrats were seen as something to aspire to and were therefore admired; in the bad times, they were seen as “robber barons” who had gained disproportionately from the boom.
As our economy slows down, it will be interesting to see whether the mood in Europe and the US towards the mega-rich, captured in this week’s FT/Harris poll, spreads to Ireland where the concentration of wealth at the very top is much more extreme. Interestingly, the American mega-rich responded to accusations of inequality by great acts of philanthropy. This has not yet happened in Ireland.
If you see national schools, hospitals and public parks built by rich men over the next five years you can be assured that they are worried and the public mood is changing.
* Bank of Ireland: The Wealth of the Nation July 2006.
David,
Do you think Ireland will go as far as Brazil , with it’s stunning inequalities? – shantytowns alongside modern skyscrapers.
It’s a well known psychological fact that people’s happiness depends not on the absolute level of weath, but how they are compared to everybody else; It could make for some (very) unhappy Irish people in years ahead.
Paul
In the July/August copy of Foreign Affairs magazine, Kenneth Scheve and Matthew Slaughter take a closer look at the negative sentiment in the US towards globalisation. Basically they find that while globalisation has been good for the overall American economy, the spoils have been very highly skewed in favour of the rich. They write that from 1966 to 2001 the median real wage grew by just 11% versus 58% for those in the top 10% bracket. The authors state that while the early days of the current surge in globalisation saw only the unskilled affected as factories moved to Mexico,… Read more »
Paul, I would doubt if Ireland will go like Brazil. First, though inequality in Ireland is disturbing, it is not as if we’ve shot to the top of the European league. As David says, we’re still mid table on a European basis – and that’s after more than a decade of one of the most spectacular booms ever seen. The economy is slowing down now and is likely to reach more sustainable levels – so the great leap in wealth made by rich is likely to slow too. Second, despite our wealth and our clear preference for an anglo-saxon form… Read more »
We are told that it’s near impossible for a rich man to enter the Kingdom of God. Now even if one happens to be an atheist this could interpreted as meaning that money can be destructive to a persons sense of well-being and happiness. You only have to look at the antics of some of the rich to realise they should be pitied more than anything else. I think what many of us need to watch out for – myself included – is that even if we don’t have mega-wealth to make us miserable ;-) we certainly have easy access… Read more »
The last post (“I was suprised at how Americans were completely unresentful of the billionares in the next neighbourhood”) reminds me of a story Bono told on TV once :
When a poor american walks by the rich man’s mansion on the hill he says “One day I’m gonna be that rich guy” but when when a poor Irish man walks by the rich man’s mansion on the hill he says “One day I’m gonna get that rich bastard!”
From this side of the pond I agree with Steve that up until now Americans do not get upset about their neighbors having more (actually even much more). But only now are Americans getting belatedly upset (as well they should be) about the effects of globalization. The lower middle-class and working poor are now beginning to realize that their future is in some low-paid, dead-end service job (if they’re lucky enough to get one). Globalization has been very good to the American Investor Class, but it’s wrecking havoc on the rest. Will there be a proletariat uprising? Not likely. Not… Read more »
Interesting to consider this from the point of view of a member of the elite wealthy. In order for your wealth to have meaning it is important that most people don’t have anywhere near as much as you do. So the desire to stay wealthy is synonymous with a desire for inequality. Fair enough. In the past, society has tolerated this inequality because there’s a perception that these people do us all good. And my experience in the US – with the microsofties – was that even if people had given up on themselves joining this elite group, there was… Read more »
David, you say the situation is ripe for a “political backlash”. The people just voted for another five years of the status quo. Far from there being a backlash, there seems to be a retrenchment. We are battening down the hatches, trusting the government that presided over this creation of inequality, and show no signs of changing tack now. Indeed, the Irish voters and general public are very conservative by and large. We may want to get that rich bastard on the hill, but aren’t prepared to do anything about it.
On these great acts of philantropy that you talk about David – shouldn’t the government (and maybe the people) get to say what the rich people do with their philantropy. I think that the word to describe this is “tax” which the rich have been able to avoid paying for the last couple of years. Also, I believe that the “Pope’s children” are too self-obsessed with themselves and isolated (physically and metaphorically) to do anything to help the current situation. I don’t think that Ireland can tax the rich as they are the ones who have the villas in Bulgaria… Read more »
The reason why the rich became philantropist in the late 1800s was because there was no such thing as income tax. The rich in this time felt the need to give back to society in which they did through philantropy. In todays age the rich now pay income tax and so they do not feel the need to be philantropist because they are already giving back to society through tax. Income tax came about in the 20th century just before World War 1. Income tax was designed to stop people from becoming rich and to redistribute the wealth. Obviously this… Read more »
The discontent is about property, I think. People don’t in general begrudge the millionaire or billionaire if he stays out of their lives, but if that guy owns hundreds, or thousands of buy-to-let properties and you or your children can’t seem to see a way that you will ever afford to buy a home, then he becomes a problem.
http://radiscriminaton.wordpress.com/
I agree, the discontent is primarily coming from those whom have been priced out of the housing market.
A whole genertaion has been ripped off…
The discontent will only grow as house prices drop and negative equity homeowners will add to that discontent….
http://radiscriminaton.wordpress.com/
Check out my blog about rent allowance discrimination. Rent allowance discrimination breeds discontent. It is prejudice personified and it is absolutely undemocratic.
Glen wrote “In a pure capitalist system a person from a poor background can make it”. And against all the odds they might. But don’t kid yourself Glen. Capitalist countries are very rigid too – with a tight structure – which is generally geared by and for the very rich. The US is probably the closest country to your “pure capitalism”, yet social mobility there is actually quite low. Have you any idea how hard it is for people in say the bottom 20% (earnings/wealth) to get a good education? to get good healthcare? Or take the way the fruit… Read more »
While the economic boom has caused all boats to rise one has to question HOW they have risen. It is ironic that the very thing we credit with our economic turn-around, partnership agreements, are the very things that have ultimately caused the rise in inflation. Firstly, higher level public servants (TDs included) have done much better…their 10% is worth more than a shop assistant (who may not even get it if her union is not part of SIPTU….assuming she is in a union). This is relevant later. Secondly, while we deserved to be compensated for contributing to the turn-around in… Read more »
For a teacher you should know better. Educate yourself as to the real facts and figures surrounding our economy and especially the housing market before you use labels Who was buying all the property during the boom (via wages) http://www.thepropertypin.com/forum/viewtopic.php?t=1859 We have a rising population thats why prices are so high? Well the rise is dependant….. http://www.thepropertypin.com/forum/viewtopic.php?t=1970&sid=3deda9bbf8a72a1ad0af2e43fc92a8e3 AIB HOUSING BULLETIN JUNE 07 http://www.thepropertypin.com/forum/viewtopic.php?t=2092&sid=1acbdf031727da59b772ba34e446a27e Why it was so important for prices to keep going up http://www.thepropertypin.com/forum/viewtopic.php?t=1869&sid=58ac758418d8fa3fe325b70bc2759fd9 I thought there was a housing shortage??? http://www.thepropertypin.com/forum/viewtopic.php?t=1258&sid=58ac758418d8fa3fe325b70bc2759fd9 All sourced from CENTRAL BANK reports and the banks themselves and other various financial institutions. What they… Read more »
Thanks for the links blindjustice. Maybe I’m dimmer than I thought, but what’s your point. Certainly I can’t see where you got your questions from or their (immediate) relevance to the point I was making. My point is that the economy is screwed, we have huge current expenditure that is unsustainable and an increasingly discontented middle class who, while their incomes have risen, have not risen sufficiently enough to insulate them from shocks such as the current round of interest rate hikes. These hikes being the main sources of rising inflation in Ireland. FYI the data in the second link… Read more »
My point is simple – dont use labels.
Your posting on David McWilliams blog and you have a problem with labels!
Try this. The recent ECB annoucment urges ‘strong viligance’….is that a label you don’t like either!
There is a worldwide inflation underway at present. The reinflation that occurred after 9/11 globally found its way into the housing markets globally and into resource stocks and commodities. This bubble followed the dotcom bubble of the the nineties. Central banks appear to be working in unison to avoid any painful correction in the markets and this is happening now with the subprime credit crunch. Inflation occurs when central banks inject large ammounts of liquidity and or lower interest rates. The historically low rates following 9/11 were dangerously low and have led to the current situation we face in western… Read more »