(III) The squeezed middle

Paul Sweeney: There has been much discussion on what is called the Squeezed Middle. This refers to those middle class families who are seeing declines in their incomes and in additional benefits, like free college fees in the UK or reduced health care. It is a real issue. There is a strong case for what are called middle class people to join with the working class for a rebalancing in society through a downward adjustment in the incomes and wealth of those who are taking too much – those at the top.

This would not just be a redistribution on grounds of equity: a more equitable society also generates more demand and investment in the economy.

As will be seen in other posts in this series, the decline in incomes was hidden or masked by the credit boom when the chattering classes could only talk about the rise in the value of their homes. They believed that they were substantially better off and took longer or more expensive holidays, bought cars they really could not afford, and ate out more.

With the credit boom well and truly over, the middle classes everywhere are now feeling the squeeze. Politicians are raising taxes to pay for big holes in public finances and cutting public services, many of which the middle class also enjoy. It is hurting nowhere more than here in Ireland, as our collapse is the biggest and worst, exacerbated by the gravely erroneous decision to repay all private bank debts, in full and with all interest.

It has been seen that there are harsh lessons from the USA where median incomes have not risen since the early 1970s in real terms. This means that most Americans have not seen any improvement in their living standards for about 40 odd years. Many had the illusion of improvement when they took equity out of their homes during the housing bubble. In contrast, here in Ireland we have seen a great rise in real incomes in the 20 years up to the Crash of 2008.

As there has been substantial growth in the US and also in productivity in the period, where is the rise in national income per head going? As the Occupy Movement correctly reminds us, it is going to the very top. It is the top 1 per cent in the US who are pocketing all the money earned by the majority. Back 40 years ago, this elite pocketed 8 per cent of national income, but now they take almost one fifth of all income in the US.

While there are varying statistics on the infamous top 1 %, I have not seen any reasonable analysis which does not broadly concur that they have been reaping most of the rewards of growth in the US.

In the US the cost of healthcare and of college education has soared. In the States one can go to university in one’s own state for modest fees, but as the public universities are strapped for cash, with the cutbacks in public funding – because of the tax cuts over the decades, they are raising fees. And private colleges charge fees of $30-40,000 and more a year. 75% of Americans now think college is too expensive, according to Pew Research. And when you graduate, all is not rosy. Many graduates have huge debts to repay. Also while college graduates typically earned €20,000 a year more than non graduates in the US, this is changing. Average starting salaries for college graduates in the US have been falling in the past four years.

Owning your own home, and latterly getting a college education, was part of the American Dream. Now both are not repaying in the way that hard working American families expected. They feel very let down by the system.

There are similar trends in many other countries of the Western world, where education is not the social escalator it once was. European states are cutting public services and that includes education and health. Both are labour intensive and expensive. Health inflation has been far higher than average inflation for years. People want better public services but do not want to pay for them. Our government, certainly the FG wing, promises no rise in income tax. The government programme laid out to 2015 for the Troika shows a reduction in public spending from 45 per cent in 2011 to just 38 per cent in 2014 (assuming growth at 4 per cent!).

And we are to repay the bondholders in full, which may knock perhaps up to two per cent off GDP for decades? Meaning less for schools, roads, hospitals and other public services, which are not just used by the working class.

A further insecurity for the middle class, which we have seen very clearly in Ireland, is the reneging on the promises made for employees on retirement. In many middle class jobs, you could expect to retire at 60 or 65 with a good pension of half your final salary - or in some cases even two thirds. And it was linked to rises in salaries (which generally rise faster than inflation) back in the office. The wholesale move by employers, including some of the very best employers and richest firms, to get rid of defined benefit pensions has hit the middle class very hard. Many younger people have not realised how much this action will cost them. And pension adjustments include working longer, though we are all living much longer. But that is cutting off job opportunities for graduates and other young people at the entry scales.

Many of the pension changes represent a unilateral change to a key element of the social contract which people in Western societies had come to expect. Of course, such pensions were based on financial markets. They had been moved from solid investments to more speculative investments by fund managers, and so the schemes got severely burnt. People are also living longer than the actuaries had calculated. For some years, these pension funds performed so well that few considered the possible alternative of paying more for an enhanced and safer state pension. That must be an alternative now.

Of course, if the middle class are being squeezed, spare a thought for the working class. In the US and Europe the mass departure of well-paid manufacturing jobs to Asia has hit this class hard. In Ireland the huge collapse of construction has hit manual and skilled workers (and professionals and others) brutally too. Ireland still has a fair proportion of manufacturing jobs, but many are taken by the middle class. But the manufacturing sector is not as safe as it used to be. Weekly we see the threats from mobile capital to shift abroad unless our government does this or that. The alternative service sector jobs are not as well paid, though here in Ireland, where service exports now almost equal good exports, service jobs can be very good.

But it could be worse. The West has built up a good safety net in social security, healthcare and education for its citizens which has helped. Middle classes also benefit hugely from public spending in these areas. This safety net has also acted as an “automatic stabiliser” in this major recession, boosting demand to a level it would not have reached in it its absence. It is important that the welfare state is preserved and maintained even with the stark challenges which face us here in Ireland and elsewhere.

While the growth in the incomes and wealth of the top 1 per cent has soared to levels which have brought the divide back to around the level of the 1920s in the US, and perhaps also in the UK and some other states, it is unlikely to go back to the level of Victorian times. This is because of the safety net which protects both those at the bottom and many in the middle. What is most interesting is that, with several decades of growing pressure on the Squeezed Middle in the US, as it is they who represent most voters, they have not found a way to rebuild the American Dream. Indeed, astute observes would argue that the Squeezed Middle in the US seems hell-bent on increased, python-like squeezing of itself.

Is this what awaits us in Europe? The current leadership in Europe, while incapable of real leadership and decisiveness on dealing with the Euro and the broader European economic crisis, is very cunningly dismantling Social Europe. Three currently proposed Commission “reforms” will make things a lot worse for the vast majority of EU citizens. First, Monti 2 will curb trade unions greatly in collective bargaining; the Euro Plus Pact will institutionalise the shift in national income from labour to capital under a lot of verbiage about “competiveness” and thirdly, the pre-Keynesian straight jacket which it is designing for “balanced Budgets” will greatly hamper any actions that progressive governments can take in times of crisis.

In conclusion, trends generated by globalisation, technology and de-regulation have rapidly transformed western economies, brought much progress, but also much change which is uncomfortable for many, including the middle classes. Cuts in public spending by governments, which have had to bail out private banks, and the loss of revenue through the general collapse, have engendered greater insecurity. The shifts in jobs to lower cost areas and enabling technology which allows former higher quality jobs to be outsourced abroad is hitting middle class security. Whether the “coping classes”, who are the voting classes, will seek an effective re-alignment in politics to give greater protection from rapid change and recognise the value of taxation, remains to be seen.

In the next post I will look at the great improvements in living standards enjoyed by the new aristocracy, the great “entrepreneurs” - i.e., top executives of top firms.