You don’t need to be a political scientist to recognise that there are currently shifts within society underway across Europe. Those shifts have their different reasons in different locations, for example, the problems caused by austerity and unemployment in countries like Greece are different to the uprising of people wishing to leave the EU in the UK.
Since I mostly write about the eurozone and finance, I thought that today I would write about one of these other shifts and present what I believe is a major cause of problems in some locations.
In their 1995 book, The Winner-Take-All Society, Robert H Frank and Philip J Cook explore many of the reasons why those people at the top, in the 1% of talented, skilled and wealthy, are able to attract a disproportionate share of a society’s economic gains towards themselves. Since then, of course, the debate surrounding inequality has grown and morphed. But it is a slightly different aspect that I would like to look at today.
Frank and Cook look at relative income and wealth levels as a way in which people in a town or city might be able to set themselves apart. For example, the best school(s) might be in a certain area, which means that if parents wish for their children to have the best education, then they need to earn a little above average for the locality so that they can afford to live in that area. Those good schools probably mean that house prices are a little higher there as well. Higher wages can afford higher house prices which leads to access to the better school for their children. Therefore, if you want your children to have access to those schools, you need to do something that will enable you to earn more than average. You might not need to earn a lot more than the average, but over the years, a small difference ought to be enough.
So far, this is all very sensible.
Absolute Wealth In The UK And Malta
However, what is happening in some locations – and I can see it with my own eyes in both the UK and Malta – is the impact that absolute wealth has on society.
It might be that for my children to get into a better, or the best school, that I need to earn perhaps twenty percent above average to be able to afford that house in a good location. But what happens if there is a long-term influx of people from outside the area who are substantially wealthier? They aren’t the sort of people that have a salary that is twenty percent higher than my above average wage, no, they are multi-millionaires. Their spending power is not a little greater, it is many multiples greater. I might be reliant on my income whereas they can take an existing asset and sell it for cash. What then…?
I might have been willing to bid up the price of a house by an extra ten percent so that my children can get to that good school, but no matter how much I can offer, they can always offer more. Over time, this will mean that a house price in this desired area will be two or three or more times higher than I can afford with my above average salary. What then…?
So far, this is all quite theoretical. However, some countries, such as the United Kingdom and Malta, actively pursue government policies that are aimed at bringing foreign wealth and it’s owners in. Both countries have been actively looking for Russian oligarchs, Middle Eastern oil barons and Chinese businessmen to bring into their sphere for many years (I wrote about Malta here and here).
How a Brexit may impact this, I do not know, but it has been well known for many years that real estate in central London is a de facto reserve currency for the world’s super rich.
The same has been happening for the last few years in Malta. The only real difference is that Malta is so small that the situation is incredibly visible and that many Maltese will be squeezed out. Most Maltese do not earn the kind of salary that will enable them to live to in the nicest areas – such as Sliema or St Julians Malta – but the island is so small that essentially everything is within a relatively short commute. This means that those with the money can outspend the majority of Maltese in every area. Soon there will be nowhere affordable left, the only option will be for children to live at home with their parents for decades! For some reference, there are now many, many, many properties for sale in the multiple millions of euros range, which only a few years ago would have been quite rare.
Who Really Has Freedom Of Movement?
The neoliberal agenda that took hold under Reagan and Thatcher has much merit and it is admirable that free movement of capital, goods and people are as important to the EU as they are. However, the harsh reality is that:
– goods are mobile and can be transported to other locations for sale by corporations with relative ease
– capital is mobile and can move from bank account to bank account around the world with relative ease
– people are mobile as long as they have spare capital or in demand skills that can be transported elsewhere. Without these things, most people are not mobile. They have homes with mortgages, children attending schools and jobs in a location. It really is not easy for them to just pick up their belongings and move elsewhere. Not from city to city and especially not from country to country.
The people that will suffer when an economy changes are those that are unable to leave. These changes might be an economic slowdown, or they might be an economic expansion where their own wages and fortunes do not improve markedly. This would then leave them relatively less well off compared to their previous situation.
Let’s be honest about it here. While I don’t know many Greeks and have never even been to Greece myself, it seems reasonable to presume that anyone with the desire, talent, skills or financial ability to leave will have done so, rather than suffer through the terrible economic shock that the country has seen in recent years.
Therefore, the people that genuinely have freedom of movement are the very wealthy, who often have spare capital that has been generated by their business(es), have travelled more widely because they have been able to afford to, so have a wider perspective of the world and a desire to see their children study at Oxford, Harvard or the Sorbonne. They might live nearby, but they do not live in the same world as most of the rest of us.
In Fear Of Everything
In an environment like this, I can understand why many people are not happy to see more foreigners arrive. My argument is that the locals do not only fear the low skilled immigrants that need assistance, but instead that they also fear the wealthy who will price them out of their own towns and cities. They are, essentially, being squeezed at both ends of the economic spectrum.
The low paid immigrants are willing to do the horrible jobs that nobody else wants, and for low rates of pay. This makes it less likely that locals will be able to receive a nice annual pay increase, because there is a glut of lower cost labour looking for work.
Whilst those with real wealth are bidding up the price of local assets. This makes any pay increase almost irrelevant because it will still not be enough for locals to afford the next rung up on the ladder. In fact, it is already ever more difficult for the working and middle classes to maintain their lifestyles.
When you then throw into the mix the gradual reduction of available jobs, jobs that will not be coming back, taken by automation or companies moving to lower priced locations around the world, things are pretty tough for a lot of people.
Social mobility might only have been a dream for most people, but these days that dream is essentially dead.
What this means politically can already be seen. The British public voted for a Brexit which even the most die-hard supporter must admit was not well thought through. The fact that having won there was literally no plan speaks volumes about the problems the UK now faces.
However, this is not a situation that is going to improve. Just this week, Uber announced that it is going to start rolling out it’s autonomous cars ahead of schedule. In ten years time, most developed economies will have no need for taxi drivers, bus drivers and lorry drivers, for example. These are people that are going to be very hard to fit back into a workforce where every sector is under similar assault from technology and automation.
Unhappy voters that want to go back to the way things were will be everywhere. By then I might be one of them. The problem is that there will be precious little that politicians or policy makers will be able to do about it.financialguy