New report records Ireland’s wealth and a ‘Golden Age’
Inequality Part 1
25 March 2008
The ‘Wealth of the Nation’, a new report from Bank of Ireland Private Banking Limited, has been reported by the media as revealing the enormously increased wealth of the Celtic Tiger generation. In fact private banking is banking only for the seriously rich and the sub title of the report is ‘how Ireland’s wealthy will invest in the next decade.’ The report’s purpose is therefore to help Bank of Ireland get a bigger share of the investment business of the very rich and if this were all there was to it there would be no reason to review it. Despite this, and the very tenuous estimates sometimes employed in the report, it is interesting for two reasons.
The first is what it tells us about the nature and distribution of wealth, although it is not really concerned about the latter, and the second is what this tells us about the purpose of economic activity in general, for which we are always called upon to work so hard in order to keep competitive.
The figures that grabbed the headlines are striking. Wealth per capita (per head) places the Irish economy second amongst the leading OECD (Organisation for Economic Cooperation and Development) countries, behind Japan but ahead of the US and UK. Total wealth per capita was €148,130 at the end of 2005, up from €45,995 only ten years before. The report estimates that net wealth increased by 350% between 1995 and 2005 while it increased by only 96% in the UK during the same period. The major factor in this enormous increase has been the growth in value of residential property, rising from a value of €92 billion in 1995 to €542bn in 2005.
While the level of debt has increased to €115 billion this must be set against total assets of nearly €800 leaving a large positive balance. This positive position, after taking account of debt, is estimated by the bank to increase to €864 billion by 2010 and €1,222 billion by 2015, an increase of 79%. It justifies this by using growth rates at the high end of current economic forecasts and claims that the high values of residential property are supported by demographic trends, although Marxists would argue that these are not in themselves independent variables and are strongly influenced by economic growth, i.e. the pace of capital accumulation.
Debt has been increasing faster than in most other countries, rising from 12.4% of total assets in 2003 to 15.5% at 2005, or 140% of disposable income. The report’s rather sanguine view of the future is supported by its noting that by 2005 total debt as a percentage of asset wealth had only reached the European average. It is silent on the possible consequences of debt continuing to rise at such a rapid pace.
In comparison to other rich countries Irish wealth is disproportionately skewed towards residential property with the State having the lowest proportion held in financial assets such as stocks and shares. The report notes that these hardly increased after the dot com fall in share prices but that on the other hand there has been a three fold increase of flows into cash and nine-fold increase in investments into commercial property. It forecasts that a much greater proportion of future wealth will be invested in financial markets although the Irish stock exchange has recently been one of the very worst performing markets. Since the emphasis is on diversification of assets and the Irish exchange is top heavy with banking and construction – very unfashionable at the moment – this is really a forecast of greater export of wealth to other countries. The report further notes that most Irish money is first generation while in other countries, such as the US and UK, it has much older lineages.
The report speculates about what this means for even greater levels of conspicuous consumption, possible areas for future investment and even a possible increase in philanthropy and charitable giving. As befitting a private bank it says nothing about the much more certain effects on inequality and social solidarity, and their inescapable expressions in health and crime – both heavily influenced by inequalities in income and wealth. On a political level we can more easily appreciate the constituency for current neoliberal policies and speculate on the determination of the new rich to protect their relatively recently acquired wealth. Hard headed viciousness is much more likely than a flowering of charitable giving, not that charity is any sort of panacea.
The report invites us to bask in a ‘golden age of wealth accumulation’; although this golden age is rather more glittering for some than others. The report notes that the top 1% holds 20% of the wealth, the top 2% holds 30% and the top 5% holds 40%. When housing is excluded the top 1% accounts for an even larger part of total wealth – 34%. It is forecast that the wealth of the top 1%, excluding residential property, will increase by 50% from 2005 to 2010 and a further 67% by 2015.
As we have noted this golden age has been very heavily skewed towards growth in the value of residential property, which constitutes 74.3% of total assets, significantly above the European average of 57.37%. The report notes that ‘the current rate of house price appreciation is unsustainable’ and indeed since these lines were written this has been dramatically confirmed.
Press reports did not state the obvious fact which everyone knows – that although the value of many houses has increased, this wealth is in many ways notional. You cannot get your hands on it unless you sell, and unless you are trading down to something smaller the absolute gap between your present house and something bigger or better is greater and more difficult to bridge. A roof over one’s head might be an investment for some but for most, for the working class, a roof over one’s head is precisely that. Re-mortgaging simply increases debt and involves no net increase in wealth unless you devote a bigger part of your income to paying it off, which for most people robs the exercise of its value. Some working class people will have bought additional property and done so at a level that has not resulted in potential losses. They will therefore be significantly wealthier in their own terms and this, as we have pointed out before, will be reflected in social and political consciousness, even if these workers will essentially still be dependent on a wage or a pension for their livelihood. In other words they will still be working class in the real sense.
The report acknowledges however, as press reports didn’t, that paper wealth due to increased property values involves many in significant levels of debt, which ‘reduces the extent to which a “millionaire lifestyle” is in any way realistic for most.’ This is a private bank talking and they know their services are not for anyone who thinks that because their house is worth a small fortune it is of any serious interest to those who advise on how to dispose of real money. Big house values sometimes mean big debt and debt repayment usually flows to those who have the money to lend. In other words growing debt not only puts into perspective the increased wealth of some workers but also signifies a transfer of income and wealth from workers to capitalists.
The report tries to estimate the number of millionaires in the country although nowhere acknowledges that the wealth of the very rich is notoriously kept hidden. It notes that ‘in most countries, a more meaningful, if still imperfect, measure (of millionaire wealth) is total assets less principal private residence. . . Our estimate of millionaires focuses on this as a measure of individuals with a true net worth at, or in excess of, the million euro level. . . this would imply that there are somewhere in the region of 30,000 millionaires in the country.’
The forecast that the share of wealth held in residential property will fall from 66% in 2010 to 61% in 2015, while household debt will increase by 50% from 2005 to 2010l, and that investment in commercial property is rapidly expanding from €1.1 billion in 2000 to €7 billion, indicates that inequality will continue to increase. It is ironic, for example, that while gushing about the fabulous increase in ‘Irish’ wealth it passes in a footnote without comment the fact that the pension deficit for the 10 biggest companies in Ireland stood at €3.3 billion. Pensions are viewed as a target for investment not a saviour from poverty in old age.
In many ways it is staggering that a society so rich not only has elderly people lying on trolleys waiting for a bed in accident and emergency departments but that sometimes there are not even enough trolleys for them to do this! It is a scandal that over one third of drinking water supplies are in danger of being a threat to public health – an infrastructure problem that in other countries has been solved in the century before last. The Irish State has the second highest pupil teacher ratio in the EU. So why is this?
Michael McDowell was the second most senior politician in the State when he said that ‘a dynamic liberal economy like ours demands flexibility and inequality in some respects to function.’ It ‘provides incentives’ he said. He was roundly attacked but he was right. A capitalist economy does require inequality and the more unequal the more successful it is in its own terms. Of course we can argue that incentives to be poor achieve nothing and that incentives to be rich cause vapid and avaricious consumerism, stress and exploitation for most, but this isn’t really the real incentives McDowell was on about. His incentives were for the rich to stay and become even richer, which is what this report is all about. Far from damning his statement, or the contents of this report, we should see them for what they are – confirmations that this is what capitalism is all about.
McDowell caused a stir because this is
seldom acknowledged: to do so openly and repeatedly would undermine the
legitimacy of the capitalist system. So we still get arguments that
minimise inequality or hide it behind arguments taught in schools and universities,
ones that this report implicitly explodes. In the second part of
this article we will look at a recent argument that the type of inequality
demonstrated in the report is much exaggerated. We will examine a
second argument dovetailing with it that such inequality is not what the
system is about.