February 16, 2003

Why are we all so poor with so much money around?

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If we have full employment, why do people feel poor? How come so many of us think that we are running to stand still? Why is there so little left at the end of the month? What have we to show for the past week of traffic, long hours, stress and bills?

Back in 1990, if you had suggested that the economy could generate as many jobs as it has, people would have forecast a golden age of contentment. But that has not happened. We are not content. People feel cheated, less happy, and, despite consecutive increases in wages and income, many people feel indebted rather than secure.

A variety of reasons have been put forward to explain this lack of contentment.

On the right, people argue that we have lost religion, tradition and family. On the left, commentators contend that big business and the relentless demands of the 24/7 economy have enfeebled the average worker vis-a -vis the all-powerful corporation.

The answer could be much simpler. People feel relatively poor in a relatively affluent society because they are.

There is a growing equality gap between those who depend on wages and those who depend on the wealth accruing from rents and windfall gains.

Ownership of assets, not disparities in take-home wages, distinguish the rich from the poor.

We have seen an unprecedented transfer of wealth, unparalleled in peacetime. The property boom has resulted in the transfer of billions of euro from workers to landlords. More detrimentally, money has been transferred from relatively young twentysomethings to relatively old sixtysomethings.

The old are the winners and the young the losers, so that the counterpoint to high levels of stress and indebtedness in the typical first-time buyer is an asset-rich Irish 60-year-old playing golf in Marbella.

Historically, it would take a war and the consequent forced expropriation of assets to result in such a transparent and blatant movement of wealth from the majority to the minority. Yet this is precisely what we have seen in Ireland.

Appreciating this fact can be very helpful when analysing the present difficulties in partnership, benchmarking, above inflation wage increases and the like.

All discussions on the economy, pay, income, immigration, tax and so on should be seen in light of the land-inspired transfer of wealth. The property boom has acted like an extraordinarily regressive tax, imposed on the working population of Ireland by the state to the benefit of a small, powerful class of landlords.

I am not contending that this was absolutely intentional or pre-planned, but that is the outcome. Rising land prices have indebted the productive sector of the society and enriched a modern class of unproductive drones who live off exorbitant rent.

The present difficulties over wage increases are really irrelevant both in terms of competitiveness and equality. Left-wingers will say that a 10 per cent wage increase across the board today is necessary to reduce wealth inequality. This is nonsense. Right-wingers also miss the point when they argue that lower wages will help competitiveness and ultimately deliver jobs and equality.

We have a growing gap between rich and poor — because of full employment, not despite it. The reason is straightforward. Full employment gives banks the security to lend. Worker/commuters who want a new car or holiday but can’t afford this out of their after-tax incomes get a loan.

Over the course of a year, a person with assets on deposit even at very low interest rates will be richer than someone who is repaying a loan. As each year goes by this situation reinforces itself. The banks make money from lending money, so they have every incentive to keep people in a manageable level of indebtedness, so the cycle continues. Even if wages rise, real wage increases that are outpaced by rises in asset values (houses) will make the worker poorer.

The wealth gap dwarfs the (much more talked about) income gap not only in size, but in significance in a number of ways. Ownership of assets — a home, land, investments, businesses, savings — brings with it a certain security that permits planning for the future, university fees etc.

Although a job and a wage are important, they can’t be passed on from one generation to the next, whereas wealth with the status and opportunities it brings can. And with wealth comes political influence.

This political influence is everywhere. Take the huge tax breaks available for private pensions. Private pensions financed largely from tax breaks simply ensure that the rich are well provided for in their old age.

Most poor people have nothing left at the end of the month to put away, let alone an outstanding tax bill to benefit from. Here again we see the political influence of property and asset owners. Pensions are a legal way for rich self-employed people to avoid tax. It keeps the financial industry here ticking over very nicely, but ultimately reinforces the point: inequality comes from the ownership of assets, not income.

If asset building is good for wealthy Irish people, then it must be good for all Irish people.

A way to ensure that everyone has a minimum of assets when they reach 30 could involve using some of the money set aside for the national pension fund to start an investment fund for every child born in the country — all 58,000 of them. For example, a fund starting with €10,000 for every child would cost €580 million, just over half what we are setting aside for pensions. A well-invested fund could generate substantial assets for everyone in the society, maturing when these kids are 30.

If compounded at 7 per cent per annum, we could be talking of assets in the region of €76,000 for 30-year-olds in the country by the 2033.

This would shrink the huge wealth gap that has emerged over the past decade and give everyone a real stake in this society. Funds could be restricted to paying for other wealth-enhancing pursuits such as financing education, making other investments, business startups and ultimately home building.

This would shrink the equality gap, and it could be achieved without heavy interference in the tax system. We could still respect the natural inequality of outcomes, which reflects a lifetime of hard work while levelling the playing field as much as possible. Most importantly, such an approach would allow everyone to buy into the society, not on the basis of handouts, but on the basis of the real promise of wealth.

It would rebalance the huge transfer of wealth from the young to the old that has characterised Ireland since the1990s.