(II) The first generation to face lower living standards

Paul Sweeney: Ireland’s younger generations may be the first since the Post War period not to have higher incomes than those of their parents. The combined impact of globalisation, liberalisation, and the technological and communications revolution on the labour market are squeezing the working and middle classes as never before.

The young will see no further rises in real incomes unless there are fundamental changes in society. Trends in income distribution and labour markets indicate that they will not have their parents’ lifestyle, security, nor expect to age comfortably.

Young people in the US and in parts of Europe already have lower living standards than those of their parents. It is not only that well paid manufacturing jobs have shifted to Asia, but many middle class jobs are being broken down into segments by technology and are shifting east too. Hundreds of millions are joining the middle classes in Asia, Russia and South America and competing for jobs. Many of the jobs will be servicing consumers in the West from there.

There has been a major shift in incomes to the very top earners, with labour’s share of national income in decline for decades in most advanced countries. The graph below shows how progressive income distribution has been rolled back in the US to levels last seen in the 1920s.

Source: Economist 21 Jan 2012

And those at the very top are reaping most of the benefits. And as they don’t spend all their money – because they have too much – aggregate demand is slowing. Nor do they invest it, as in the past. Many can pass it on, often undiminished and untaxed to their children.

The top 1% in the US had an average income of $1.8m in 2008 and in net worth the top 1% started at $6.9m in 2009 per the Federal Reserve, which was down 23% on 2007. The 1% richest get half of their incomes from salaries, a quarter from self employment and business income and the other quarter from capital i.e. interest, dividends, capital gains and rent (Economist 21 Jan).

There is a hollowing out of the middle with a growth in “Cool Jobs and Crap Jobs”. Solid pensionable jobs like banking and computing, parts of accounting, engineering etc. are being de-skilled and outsourced. One upside to this is that, at present, Ireland is winning some of these jobs, with its growth in export services.

Median male earnings in the US have not risen since 1975, in spite of substantial economic growth and growth in productivity. Nor have average household disposable incomes in Japan and Germany grown in a decade. It is no wonder Germany is not consuming as workers had no extra pay (until recently). The OECD found rising income inequality in 17 of 22 advanced countries.

The share of National Income taken by the top 1 per cent in the US had declined between the 1930s Depression and 1970, but 58% of the increase in total incomes since then went to this tiny group.

Is this because we are evolving into a “winner takes all” version of capitalism? Globalisation and communications have meant that entertainment and sports stars have turned local markets into one big global market, generating vast earnings for themselves and their backers. As stars are much admired in the celebrity society, they lead in the defence of the growing inequity of global income and wealth distribution. They are so unique, entertain us so much they deserve every penny they get. That is the market!

CEOs and CFOs may also argue that they are exceptional and talented and must be paid vast sums, untaxed, otherwise they will emigrate. Yet there is a clear inverse relationship between super pay and poor corporate performance world-wide, especially in finance. For example, as the remuneration, especially bonuses and share options, of the top executives of AIB, BOI and Anglo soared, they took bigger and bigger risks – to boost their remuneration packages. They took the risks with shareholders’ funds and they lost, bigtime. Their boards, likeminded men (some token women) who are still running many organisations in Ireland, cheered them on.

Most executives are not outstanding. They have simply “captured executive position.” There are many others just below them to take their place. In Ireland, it was the best paid of our business elite in banking who destroyed enormous value in just a few years. They almost destroyed the country as well, because the government socialised the losses of our “private enterprise” model.

There are hard lessons to be learned from America. The American Dream of real rising incomes and home ownership is dead. The stagnation in incomes was masked for some time because the working and middle classes borrowed against their homes. Now the home ownership dream has turned into a nightmare for many with negative equity and big debts. It was also masked by a dramatic fall in the prices of many goods now imported from abroad.

It was further masked by the growth in dual-income families, where there had only been on earner in the past. Male, unionised and in well paid manufacturing, these American workers had previously seen themselves as firmly in the “middle class.” From 1970, even with two incomes and their homes in hock, many workers in manufacturing and service industries began to struggle. Then came the property and the bank collapses.

Globalisation, accelerated by technology, falling prices in transport, instant communications, and in turn, accentuated by liberalisation of borders and markets, especially labour markets, have facilitated such radical change in incomes.

The decline of trade unions and the paucity of vision and lack of ambition in progressive parties, which should be counterforces to such trends, also facilitated the stagnation of incomes of the majority, in spite of economic growth and growth in labour productivity.

There is also a view that corporations and the rich should not have to pay “too much tax” as it is a disincentive to investment. Yet people are demanding more and better public services, but have been increasingly unwilling to pay for them through taxation. In spite of the outstanding crisis in Ireland, our leaders are terrified to demand that very profitable corporations pay a little more in corporation tax. We cut public services, instead, while we pay the debts of other corporations from worker’s taxes.

It is noteworthy that the very public services which people want more of are health and education, which are labour intensive and more costly. There is a real dilemma here and few politicians lead on it. It also seems that where people are willing to pay taxation, they seem to prefer to pay regressive taxes like VAT instead of progressive taxes on incomes and capital.

On the basis of what has been happening in the USA for thirty years, the stagnation of wages, mitigated for a while by extracting income from homes through credit and dual incomes, we can expect great insecurity. There is likely to be stagnating incomes, increasingly precarious employment and uncertainty - unless there is a radical re-think of key issues like taxation, sound regulation, labour rights and the governance of companies worldwide.

It is not just the recent Crash, with the ensuing immense burden of debt which governments and bankers have hung around our necks, which is driving this pessimistic outlook for incomes and thus living standards. There are the major trends in labour markets, in regressive income distribution, in power relationships between corporations and workers, between capital and labour, between governments, regulators and international bodies. The latter bodies appear to have been “captured” by corporations and these forces are driving down incomes for working and middle class people. These trends have been greatly exacerbated by globalization and by technology.

Ireland’s catch-up with Europe during the real Celtic Tiger period boosted incomes and wealth for many, and modernised our economy, but it has also masked these major trends for us.

A great many have gained from the benefits of technology and globalization, in gadgets and in communications, in lifestyle changes and in lower prices. But the globalization and technology have also brought change and disruption at an unprecedented rate, creating great insecurity as political systems lag behind these changes.

It is now clear that the post-war Social Contract in Europe and the US is breaking down and breaking down fast. This is a major step change in our world.

This is not just an economic and financial crisis. It is an existential crisis for society. We must look at a less consuming and more sustainable economy, which, happily, modern technology allows us to build. We, as citizens, have to decide what kind of society we want to live in. It is increasingly precarious, insecure, unstable, with increasing divisions, but it does not have to be like that.

The next post in this series on living standards will examine the “Squeezed Middle” where the middle classes are increasingly insecure as society changes rapidly.

Posted in: Inequality • Economics • Taxation

Tagged with: incomeinequality • incomes • taxation