July 25, 2007

Rich man, poor man divide merely breeds seething society of discontent

Posted in International Economy · 19 comments ·

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.

  1. 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.


  2. Ciarán Mc

    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, now even those with 3rd level degrees are affected (by either offshoring or a downward pressure on wages owing to the effects of competition from India and China). Their message is that apart from a short spurt in the 90s, the average worker in the US hasn’t done very well over the last 3 decades or so. And now, the authors argue, this discontentment is giving rise to protectionist measures in the US. They call for a “New Deal for Globalisation” whereby their government would take radical steps to flatten that curve that is so cruelly skewed. Personally, I find that unlikely, but no more unlikely than the Irish fat cats building hospitals or schools.

  3. Ciarán Mc

    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 of capitalism, our welfare state is held in high regard. What I mean is, there are resdistributive measures in Ireland that would be unthinkable in Brazil. Even our right of centre, pro-business government significantly increased almost all forms of welfare over the last 10 years (maternity benifit extended, OA pensions ramped up hugely, and so on). Why did they do this? Because our welfare state is still very popular. In other words, despite all, we still have a soft spot for the weaker in our society (thank God and long may it last). The weak spot I see is the growing privitisation in some sectors – notably health and education. It remains to be seen how far this can go politically and already it is a hot topic (had FG or Labour won a few more seats last election, some measures might already be in reverse gear)

    As a final note – you’ll recall that Charlie McCreevy was seen as one of our most right wing finance ministers. The public just didn’t like it, so FF, finger on the pulse to the last, moved him on.

    So there’s still a feedback loop from the ordinary man back to cabinet decisions. I’m not saying the rich don’t have a minister’s ear when they wan’t to, but our country operates in a way that, I think at least, will stop us from ever being as horribly unequal as Brazil.

  4. Steve

    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 to plenty o’ envy and resentment to accomplish the same thing !

    When I lived in the US (I lived a few miles from Microsoft HQ) I was suprised at how Americans were completely unresentful of the billionares in the next neighbourhood. But I think often in countries that are newly acquiring wealth (e.g. some former communist states, Ireland?) there is a sense that the people who have accumulated massive wealth are crooked and are doing so at the expense of others and the economy. And this sense can often be justified.

    So I would think if a such a country enters a period of economic difficulty then the massive wealth on one side and the massive debt other could have some destabilizing effects.

    Perhaps it will take many years of experience of seeing wealth being legitimately produced in ways that are sustainable and to the benefit of some individuals as well as the nation as a whole to make us immune from possible social backlashes.

  5. Tom Jones

    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!”

  6. Dan Hayes

    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 unless there is a economic depression of magnitude greater than 1929. I don’t know about you, but if that ever happens I don’t want to be around for it. The consequences will not be very pretty!


  7. Steve

    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 still a hope that their kids could do well by them.

    Now take the notion of ‘turf’ from sociobiology. In human terms one’s turf would include not just your piece of land but also your family, your livelihood plus your principles and aspirations for you and your family.

    So with the globalisation situation Dan described, we are in a situation where the wealthy individual in order to maintain and grow his wealth, must have a desire for inequality and a willingness to violate the turf of many of his fellow countrymen.

    Now that’s gonna get people angry. And if politics is about what makes people angry then you would expect a backlash against globalisation to start working its way through the US political system.

    That would be more bad news for Ireland, of course, because any sand thrown in the gears of globalisation in the US could be like be a spanner thrown in the gears of Ireland Inc.

  8. 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.

  9. Donall Garvin

    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 and Penthouses in Prague – they will just become tax exiles.

    Also, I suspect that if there is a recession, then the immigrants will have it hardest – that’s what the media will tell the proles – that immigrants are coming in here…………..

  10. Glen Quinn

    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 is not working. We should choose what type of a society we want, do we want a capitalist or a socialist (which will then lead to Communist) society. If we want a socialist society then we should set income tax at 60%.

    I prefer a pure capitalist society with no income tax at all. The country can get the money it needs through tax on imports and exports. In a pure capitalist system a person from a poor background can make it, where in a socialist system a poor person cannot come on because there will be regulations in place to stop it.

  11. Mark Graham

    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.

  12. 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….


    Check out my blog about rent allowance discrimination. Rent allowance discrimination breeds discontent. It is prejudice personified and it is absolutely undemocratic.

  13. Ciarán Mc

    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 of globalisation has been distributed. Since 1966 the real median wage has increased 11%. For those in the top 10% bracket, the figure is 58%. In fact, apart from a spurt in the 90s the ordinary man in the US has made little progress in the last 30 years. Or take the Bush tax cuts which will benefit, mostly, the top 3 or 4 percent! Meanwhile owing to spiralling prices of insurance, the number who cannot afford health care is shooting up.

    But I’ll stop. This is not a case against capitalism. For all other systems (like communism!) are worse. But I favour capitalism with very tight reins, not the pure form that you extol.

  14. Peter

    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 the economy, we forgot how we got to where we where that it required extreme measures to turn he economy around in the first place….unrestrained government (current) spending.
    So instead of sensible pay increases, we had massive increases (no….I don’t represent IBEC). The point is, we have put very little, if anything, aside for the rainy days that are now upon us (see Xerox outsourcing to Eastern Europe etc). We’ve spent the money that would otherwise help us whether the global down-turn imminent over the next five years.

    While we always had a soft spot for the weaker in our society, government increases in social spending (welfare primarily) had more to do with getting elected that looking after the weaker members of society…just ask any parent of an austistic child. Ultimately, we cannot afford this current spending in the long run. As competitiveness has been eroded, the jobs will dry up and unless we can negotiate decreases in real wages, we are in for a bad time indeed.

    While my boat has risen, my relative position has worsened dramatically. As a teacher, I feel particularly aggrieved that I could not afford the average family home when in the past this would have been a given for a teacher. I went to college from a disadvantaged area and was told that my life chances were better if I went to college. Teaching was my calling and I expected that while it wouldn’t make me rich, I could live comfortably. This hasn’t transpired. The problem isn’t that I am badly paid (it’s not great, but it’s not bad either)…the problem is that many others are SO much better paid that their spedning has helped accelerate prices.

    Unfortunately, unrestrained (open price contracts) government spending, particularly in construction, fuelled housing inflation (as well as other types). It wouldn’t have been so bad if the backdrop was high interest rates (not necessarily an impossibility…after all we had ten years of low interest rates AND low inflation AND low unemployment…whoever heard of that?) but the inevitable recovery in Germany was bound to lead to higher rates than we’ve enjoyed over the last ten years… hence even higher inflation.

    The point is that those who had already had higher incomes before Partnership did so much better under Partnership that they are, to a degree, better insulated against current inflation and higher interest rates.

    The worrying thing for Bertie (if at al), is that the only mechanism for controlling inflation is higher income taxes. Higher ‘stealth ‘ taxes merely increase inflation. Higher income taxes would be bad for business confidence and would lead clearly to EVEN MORE discontentment among the middle income PAYE earners. So it looks like we are stuck with inflation unless the population can grow sufficiently to generate the demand to drive the productivity needed to counteract it. Unfortunately, the housing market has dipped, thanks to some poorly timed words on stamp duty from a former Minister. So we could look at an outflow of the foreign workers we have had so some time.

    Doom and gloom merchants must be rubbing their hands with glee now.

  15. 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)

    We have a rising population thats why prices are so high? Well the rise is dependant…..


    Why it was so important for prices to keep going up

    I thought there was a housing shortage???

    All sourced from CENTRAL BANK reports and the banks themselves and other various financial institutions.
    What they say on TV/radio and what their own reports says differs especially when they spin it.

  16. Peter

    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 for ye April 2006 is based on the 2002 census and does not reflect the current reality in Ireland. At that, it only shows percentage increase for each group. The real significance is the number of people inthe 25 to 44 age group as these are the key drivers of demand in the economy.
    There is another bump in the 10 to 15 age group which as it makes its way up will generate further pressure on house prices. The consequent impact on wage demands will exert downward pressure on inward FDI.
    Housing stock is currently in excess of needs. Inability to purchase due to jobs shortages will cause investors to sell of as their main interest in property is capital appreciation. House prices will fall (already happening).

    The only way to buck this is to encourage massive immigration to keep wages down, maintain competitiveness, keep demand for housing (rented) up so that investors longer term interests are protected.

  17. My point is simple – dont use labels.

  18. Peter

    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!

  19. John

    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 economies. Inflation is not the price of things. The price increases are a symptom of the depreciation of money against assets. It indicates a loss of purchasing power which is experienced as inflation. Essentially the US dollar and Euro are desintegrating against the price of hard assets, land, housing, metals and commodities. The banks will inflate again as has been shown in their reaction to the credit crisis and this will further diminish the value of currencies. Inflation is a hidden tax which serves to enrich the wealthy who can invest against it and impoverish the average person. All great inflations have ended badly and have polarised societies into the haves and have nots.

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