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 â‚¬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.