Average income is quite deceptive. In the US we have had for 20 or more years huge increases in the income of the top 1% and falling relative incomes for the rest. In Germany, the great economic “success story,” wages have been stagnant or in decline for years. Yet the rich get richer, rendering a high income growth. Europe is heading in the same direction as the US and Germany, with growing and accelerating income inequality. This disparity makes “average” misleading.
Hi guys,
Both of you have made similar points. The experience of the American unskilled worker over the last 30 years is indeed one of static or even falling incomes. It’s a very active debate in the economics sphere. I would have two comments, neither of which is an attempt to brush away distributional concerns:
1. Thirty years of stasis must be set in the context of 150 years of phenomenal growth in incomes of unskilled workers in the US prior to that. Incomes there being so high relative to the rest of the world were what drew millions to the U.S. decade after decade until they shut up shop on the migration front.
2. We are talking about a shrinking cohort of the labour force. In Ireland, for example, the proportion that are “unskilled” is a fraction of what it was two generations ago. Take two 20-somethings now – one will have third level education. In 40 years, I imagine that will – or at least should – be significantly higher again. Investment in education (“human capital”) is hugely important as it is the best weapon against marginalisation.
Thanks for the comments,
Ronan.
John Tracey
,
Nice article, enjoyed the read.
Just one point i’d mention- the argument assumes that inflation will return to historic levels however Ireland (and Europe and probably soon the US) is going through a period of intense deflation. With a strong euro policy from the ECB and now a peg to the swiss franc @ 1.20 coupled with near zero demand for credit- do you not see the chances of a renormalisation to previous inflation numbers as being slight?
In other words, where in the past, debts have been inflated away, the situation today (and indeed for the next 5 years or so) is different due to the higher debt levels vs. past crises including the US in 1930. Do you think that the economic / financial system can “make it through” the deflationary period so it can reach a stage where inflation will be prevalent enough to reduce the relative debt size?
Best Regards,
John.
Donal O'Brolchain
,
As regards the effects of the state taking on the bank debts, I prefer to think of it not just in the kind of “cash-flow” terms presented here.
It is the opportunity cost – which includes the loss of trust in our financial institutions and also our way of governing ourselves. The bank debt is symptomatic of a serious lack of checks and balances to limit the scope for excess by the powerful.
IMO, the real effects are that the state now has no capacity to use countercyclical economic policies to try to limit the effects of the fiscal crisis brought on by undisciplined bankers, aided and abetted by government*
There will be all kinds of social and infrastructural “deficits”.
On the social side, just think class sizes in primary schools, SNAs, management of health services.
It is not just the loss of jobs, but also the accumulation of experience of doing all kinds of things better – the gradual accretion of skills and know-how to enhance living standards here – not just financial effects measured by economists and
accountants.
The infrastructural deficits usually get more attention eg. water supplies, ood public transport services in urban areas especially Dublin, road improvements all over the place.
On the plus side, maybe our children/grandchildren will benefit from the kinds of reforms being sought in the EU-ECB-IMF programme.
However, the new government has made a very bad start eg.
1) In the name of jobs, Richard Bruton has gone at the low paid first;
2) No sign yet of any drive to tackle the issues of competitiveness in the higher paid white collar sectors of law, medicine and senior public service;
Joe Lee put his finger on this over 30 years ago “It would be hard to argue that even the most selfish groups of workers, like the maintenance men who went on strike in 1969,
exhibit a cruder moral sense than the most selfish sectors of other and more affluent groups, like the veterinary surgeons laden
down with their trophies from the battle against brucellosis, or the big farmers wending their way in sombre procession to the poor house in Brussels, or the doyens of the Incorporated Law Society, striving might and main to ensure fair entry to their profession or of Hippocrates deluging the Revenue Commissioners returns.”
Lee. ‘Worker and Society in Modern Ireland’ in Donal Nevin (ed) Trade Unions and Change in Irish Society. RTE Thomas Davis Lectures. Cork. Mercier Press. 1980. P. 23-24
(OK, some of these particular issues have been tackled – only to be replaced by more)
3) NAMA has proposed putting a floor under house prices, without any countervailing reforms of the whole property transactions sectors eg. register of prices actually paid, implementation of the 1974 Kenny report on controlling the price of building land.
4) The Government decision not to transfer the electricity transmission assets from one wholly state-owned company (ESB) to another (Eirgrid).
*The National Economic and Social Council (NESC) has clearly admitted how the political, administrative and financial elites failed over the past 10 years.
“In the past decade, Ireland’s approach to fiscal policy, prices, costs and financial
regulation were not sufficiently adapted to the disciplines of a single currency.“
Press Release from National Economic and Social Council (NESC) on a report “The Euro: an Irish
Perspective” 17th August 2010. NESC is 30-person social partnership body made up of representatives of government, business, trade unions, agriculture, community and environment. The Secretary General
of the Government chairs NESC. Among the seven Government nominees are the Secretaries-General of five Government Departments. http://www.nesc.ie/dynamic/docs/The%20euro%20MEDIA%20RELEASE%20from%20NESC.pdf
Sam
,
Good analysis as usual Ronan but when many talk of their children & grandchildren they are talking about the generation that is in school or college now.
I would argue the 90bn or so debt accumulated between 2008-2015 to maintain high public sector pay, high social welfare & low tax rates during this period(defecit borrowing) will result in a significant burden for the period 2015 – 2025. As you have pointed out the burden will be in the region of 10bn per year. It will be very difficult for those attempting to enter the jobs market during period. Employment opportunities & wages will be inhibited by the burden of the debt.
Even if this burden is managable in economic terms it is still immpral in my opinion to impose this burden when this was easily avoidable, not by savage cuts, but by normalising our Public sector pay, welfare, and tax rates to european norms.
John Mack
,
The shrinking of relative wages and income is not confined in the US to unskilled labor. It cuts across most office jobs as well. The income gap was bridged by two person family incomes and most of all by credit card borrowing. The same I am sure is true in Ireland. My prosperous relatives in Ireland are doing fine (no engagement in the real estate bubble) but you know that many are deep in debt, with falling income. By the way, some of those prosperous relatives would vote Socialist if they could, They are not blind to the dysfunction and injustice of finance capitalism.
Very sympathetic to this argument — and it’s nice to see people taking after the late Wynne Godley in being careful to distinguish between stocks and flows. But you begin with a VERY dubious assumption:
“Well, to get a figure for that, let’s assume that Ireland’s austerity measures deliver a balanced budget by 2016.”
If you’re going to use Godley-esque economics you’ve got to go whole hog. If we consider sectoral balances the above simply cannot happen. Even if exports improve — which they won’t in the current environment but let’s be crazy optimistic — taxing people and spending less amidst a debt-deflation/balance-sheet recession will tank the economy.
I did a piece on this here (excuse the shameless plug but it saves me from writing the argument up):
The key to robbing future generations is to leave them unemployed. In this no-one bothers thinking of the children — perhaps because it doesn’t serve self-interested rhetoric so well when looked at in this rather more immediate manner. But here my generation sits. Rotting their skills away in unemployment or in sub-par jobs while the previous generation justify making cuts to their third-level education system in order to save them for the horrible fate that supposedly awaits them.
Bloody generation of self-interested hypocrites. Sorry, that’s harsh — but that doesn’t stop it from being true.
John Mack
,
The lineup of charts at this site – very easy to read, grasp – show the not so rosy picture on wages in the USA. You need to look to the bottom charts to put the upper ones in perspective. Whatever you want ti say about growing average wages, the average person in Ireland and Europe is going to harmed in the future, with lower wages and a badly damaged social infrastructure.
Martin Neary
,
A good analysis. As we will all be dead, that is another reason for us not to worry about the effects of our debt on our grandchildren. And much will depend on decisions in the Euro area and USA. Sam’s point though is valid; we simply must bring our public pay, welfare and taxation arrangements into line with European and wider international norms. I see no evidence of the current government taking the necessary steps to do this.
Mick Costigan
,
Nice piece Ronan.
However in looking out to 2050 you have to factor Irish politicians running the economy off a cliff at least once more in the intervening period, given past evidence. And then there’s the ecological and resource constraints to the future of the perma-growth economy biting…and suddenly things don’t look like quite so rosy.
Hi all,
Thanks for the comments. I didn’t mean by this post to diminish the scale of the challenges we do face – chief among these financially the ongoing deficit. I was merely trying to place one of the challenges in its place!
On the resources/ecology point, I don’t want to appear to portray business-as-usual as healthy (doubling the global consumer base 1990 to 2020 will consume A LOT more resources). However, I’m a lot less fatalistic about this than many. We know there are effectively four main challenges on this: (1) cars/transport, (2) homes/buildings, (3) food/agriculture, and (4) the rest. We also know by this stage the broad shape of the vastly-reduced-carbon path for each [shameless plug: check out Joe Curtin’s chapter in nextgenerationireland.ie].
What is extremely relevant for this post is that services, which tend to have a much much smaller carbon footprint (they are experiences, not goods), already comprise the majority of modern economies and will, as we drift towards 2050, become ultimately 95% or more of all economic activity. Richer means more services, not more goods.
[…] what kind of Ireland this generation is leaving to its children. I’ve outlined before how the banking debt is almost certainly going to be not a worry for our children and grandchildren. On the other hand, while falling property prices are bad for the generation who […]
John Mack ,
Average income is quite deceptive. In the US we have had for 20 or more years huge increases in the income of the top 1% and falling relative incomes for the rest. In Germany, the great economic “success story,” wages have been stagnant or in decline for years. Yet the rich get richer, rendering a high income growth. Europe is heading in the same direction as the US and Germany, with growing and accelerating income inequality. This disparity makes “average” misleading.
iamreddave ,
Does this not assume that the 2% income increase will go to all workers. Something that has not happened during the last 30+ years in the United States
http://www.nytimes.com/imagepages/2011/09/04/opinion/04reich-graphic.html?ref=sunday
If your wages have not gone up 2% a year and those that have do not pay higher marginal tax rates is your calculation wrong?
Ronan Lyons ,
Hi guys,
Both of you have made similar points. The experience of the American unskilled worker over the last 30 years is indeed one of static or even falling incomes. It’s a very active debate in the economics sphere. I would have two comments, neither of which is an attempt to brush away distributional concerns:
1. Thirty years of stasis must be set in the context of 150 years of phenomenal growth in incomes of unskilled workers in the US prior to that. Incomes there being so high relative to the rest of the world were what drew millions to the U.S. decade after decade until they shut up shop on the migration front.
2. We are talking about a shrinking cohort of the labour force. In Ireland, for example, the proportion that are “unskilled” is a fraction of what it was two generations ago. Take two 20-somethings now – one will have third level education. In 40 years, I imagine that will – or at least should – be significantly higher again. Investment in education (“human capital”) is hugely important as it is the best weapon against marginalisation.
Thanks for the comments,
Ronan.
John Tracey ,
Nice article, enjoyed the read.
Just one point i’d mention- the argument assumes that inflation will return to historic levels however Ireland (and Europe and probably soon the US) is going through a period of intense deflation. With a strong euro policy from the ECB and now a peg to the swiss franc @ 1.20 coupled with near zero demand for credit- do you not see the chances of a renormalisation to previous inflation numbers as being slight?
In other words, where in the past, debts have been inflated away, the situation today (and indeed for the next 5 years or so) is different due to the higher debt levels vs. past crises including the US in 1930. Do you think that the economic / financial system can “make it through” the deflationary period so it can reach a stage where inflation will be prevalent enough to reduce the relative debt size?
Best Regards,
John.
Donal O'Brolchain ,
As regards the effects of the state taking on the bank debts, I prefer to think of it not just in the kind of “cash-flow” terms presented here.
It is the opportunity cost – which includes the loss of trust in our financial institutions and also our way of governing ourselves. The bank debt is symptomatic of a serious lack of checks and balances to limit the scope for excess by the powerful.
IMO, the real effects are that the state now has no capacity to use countercyclical economic policies to try to limit the effects of the fiscal crisis brought on by undisciplined bankers, aided and abetted by government*
There will be all kinds of social and infrastructural “deficits”.
On the social side, just think class sizes in primary schools, SNAs, management of health services.
It is not just the loss of jobs, but also the accumulation of experience of doing all kinds of things better – the gradual accretion of skills and know-how to enhance living standards here – not just financial effects measured by economists and
accountants.
The infrastructural deficits usually get more attention eg. water supplies, ood public transport services in urban areas especially Dublin, road improvements all over the place.
On the plus side, maybe our children/grandchildren will benefit from the kinds of reforms being sought in the EU-ECB-IMF programme.
However, the new government has made a very bad start eg.
1) In the name of jobs, Richard Bruton has gone at the low paid first;
2) No sign yet of any drive to tackle the issues of competitiveness in the higher paid white collar sectors of law, medicine and senior public service;
Joe Lee put his finger on this over 30 years ago “It would be hard to argue that even the most selfish groups of workers, like the maintenance men who went on strike in 1969,
exhibit a cruder moral sense than the most selfish sectors of other and more affluent groups, like the veterinary surgeons laden
down with their trophies from the battle against brucellosis, or the big farmers wending their way in sombre procession to the poor house in Brussels, or the doyens of the Incorporated Law Society, striving might and main to ensure fair entry to their profession or of Hippocrates deluging the Revenue Commissioners returns.”
Lee. ‘Worker and Society in Modern Ireland’ in Donal Nevin (ed) Trade Unions and Change in Irish Society. RTE Thomas Davis Lectures. Cork. Mercier Press. 1980. P. 23-24
(OK, some of these particular issues have been tackled – only to be replaced by more)
3) NAMA has proposed putting a floor under house prices, without any countervailing reforms of the whole property transactions sectors eg. register of prices actually paid, implementation of the 1974 Kenny report on controlling the price of building land.
4) The Government decision not to transfer the electricity transmission assets from one wholly state-owned company (ESB) to another (Eirgrid).
*The National Economic and Social Council (NESC) has clearly admitted how the political, administrative and financial elites failed over the past 10 years.
“In the past decade, Ireland’s approach to fiscal policy, prices, costs and financial
regulation were not sufficiently adapted to the disciplines of a single currency.“
Press Release from National Economic and Social Council (NESC) on a report “The Euro: an Irish
Perspective” 17th August 2010. NESC is 30-person social partnership body made up of representatives of government, business, trade unions, agriculture, community and environment. The Secretary General
of the Government chairs NESC. Among the seven Government nominees are the Secretaries-General of five Government Departments.
http://www.nesc.ie/dynamic/docs/The%20euro%20MEDIA%20RELEASE%20from%20NESC.pdf
Sam ,
Good analysis as usual Ronan but when many talk of their children & grandchildren they are talking about the generation that is in school or college now.
I would argue the 90bn or so debt accumulated between 2008-2015 to maintain high public sector pay, high social welfare & low tax rates during this period(defecit borrowing) will result in a significant burden for the period 2015 – 2025. As you have pointed out the burden will be in the region of 10bn per year. It will be very difficult for those attempting to enter the jobs market during period. Employment opportunities & wages will be inhibited by the burden of the debt.
Even if this burden is managable in economic terms it is still immpral in my opinion to impose this burden when this was easily avoidable, not by savage cuts, but by normalising our Public sector pay, welfare, and tax rates to european norms.
John Mack ,
The shrinking of relative wages and income is not confined in the US to unskilled labor. It cuts across most office jobs as well. The income gap was bridged by two person family incomes and most of all by credit card borrowing. The same I am sure is true in Ireland. My prosperous relatives in Ireland are doing fine (no engagement in the real estate bubble) but you know that many are deep in debt, with falling income. By the way, some of those prosperous relatives would vote Socialist if they could, They are not blind to the dysfunction and injustice of finance capitalism.
Philip Pilkington ,
Very sympathetic to this argument — and it’s nice to see people taking after the late Wynne Godley in being careful to distinguish between stocks and flows. But you begin with a VERY dubious assumption:
“Well, to get a figure for that, let’s assume that Ireland’s austerity measures deliver a balanced budget by 2016.”
If you’re going to use Godley-esque economics you’ve got to go whole hog. If we consider sectoral balances the above simply cannot happen. Even if exports improve — which they won’t in the current environment but let’s be crazy optimistic — taxing people and spending less amidst a debt-deflation/balance-sheet recession will tank the economy.
I did a piece on this here (excuse the shameless plug but it saves me from writing the argument up):
http://bit.ly/pYKNUx
The key to robbing future generations is to leave them unemployed. In this no-one bothers thinking of the children — perhaps because it doesn’t serve self-interested rhetoric so well when looked at in this rather more immediate manner. But here my generation sits. Rotting their skills away in unemployment or in sub-par jobs while the previous generation justify making cuts to their third-level education system in order to save them for the horrible fate that supposedly awaits them.
Bloody generation of self-interested hypocrites. Sorry, that’s harsh — but that doesn’t stop it from being true.
John Mack ,
The lineup of charts at this site – very easy to read, grasp – show the not so rosy picture on wages in the USA. You need to look to the bottom charts to put the upper ones in perspective. Whatever you want ti say about growing average wages, the average person in Ireland and Europe is going to harmed in the future, with lower wages and a badly damaged social infrastructure.
Martin Neary ,
A good analysis. As we will all be dead, that is another reason for us not to worry about the effects of our debt on our grandchildren. And much will depend on decisions in the Euro area and USA. Sam’s point though is valid; we simply must bring our public pay, welfare and taxation arrangements into line with European and wider international norms. I see no evidence of the current government taking the necessary steps to do this.
Mick Costigan ,
Nice piece Ronan.
However in looking out to 2050 you have to factor Irish politicians running the economy off a cliff at least once more in the intervening period, given past evidence. And then there’s the ecological and resource constraints to the future of the perma-growth economy biting…and suddenly things don’t look like quite so rosy.
Ronan Lyons ,
Hi all,
Thanks for the comments. I didn’t mean by this post to diminish the scale of the challenges we do face – chief among these financially the ongoing deficit. I was merely trying to place one of the challenges in its place!
On the resources/ecology point, I don’t want to appear to portray business-as-usual as healthy (doubling the global consumer base 1990 to 2020 will consume A LOT more resources). However, I’m a lot less fatalistic about this than many. We know there are effectively four main challenges on this: (1) cars/transport, (2) homes/buildings, (3) food/agriculture, and (4) the rest. We also know by this stage the broad shape of the vastly-reduced-carbon path for each [shameless plug: check out Joe Curtin’s chapter in nextgenerationireland.ie].
What is extremely relevant for this post is that services, which tend to have a much much smaller carbon footprint (they are experiences, not goods), already comprise the majority of modern economies and will, as we drift towards 2050, become ultimately 95% or more of all economic activity. Richer means more services, not more goods.
Can Ireland improve its competitiveness while raising taxes? | Ronan Lyons ,
[…] what kind of Ireland this generation is leaving to its children. I’ve outlined before how the banking debt is almost certainly going to be not a worry for our children and grandchildren. On the other hand, while falling property prices are bad for the generation who […]