An European Vision of Poverty and Polarization

[Tietäjä]

The recent general discussions post by a bitter teacher calling on his lack of big enough salary increases (and Robert Peston's recent blog on the subject) certainly baffled me enough to post my thoughts on the subject. I've been looking at it for quite a while now, and recently it seems the subject has surfaced on a larger scale (read: Stephen D. King's Losing Control). What I'm discussing is the sustainability of decifit, government spending, and the successively the future of western wealth and wellfare societies.

The red herring of the history goes as follows: up until the mid to late 20th century, western societies as we know them dominated the world through military superiority and colonization. From the Roman Empire to the IMF, the rock of the wealth we've built hasn't been founded on superior economics but superior control. Technically speaking, this still happens: austerity programs and raw material extraction from less developed countries is yet another method of modern warfare. Up until recent times, colonization was done by force of arms, now it's done by force of economics. Oblivious to the factual foundations of our western wealth, many people seem to be under the illusion that they deserve more than they're currently paid.

That the Norwegian teacher yields so much superior results to his Chinese counterpart that he's supposed to be earning (in real terms) fifteen times the salary. Counter-arguing this with the "but everyone in Norway" part only really underpins my point. A colleague of mine recently put the innovation discussion and the new Nokia debate in Finland like this: "There's multiple times the Chinese people studying in Universities than there are in Finland, and they're all double the determined to dig themselves out of the hole they've fallen for birth. Quality education and resources are more or less available to everyone. It can't really be argued that talent and ability would somehow be inbuilt to be a less scarce a resource in a certain society. Given this, what do you think are the odds of the next Nokia being Chinese, and what do you think are the odds of the next Nokia being Finnish?". I'd argue the odds of a western multi-billion innovation are lower than the odds of one from the rising nations.

To add injury to the insult of the people calling for a new rise of real economics and manufacturing industry in western countries comes Perlos, a Finnish tech company that first collected government subsidies to research and develop a product and a business, and then swiftly transfered all the actual production abroad. The paper industry is on the doorsteps en route to taking the first big enough a plane to South America. While innovation can, and may happen in western countries, it's highly unlikely concentrated production will: if the product is simple enough to produce to be produced anywhere else, it's also ten times cheaper to be produced somewhere else, and in the era of global economy, this is reality. It's highly unlikely the vast majority of the profits will be reaped by the middle class and the worker westerns.

Yet you all deserve more: you're not prepared to work as hard as the people in the less developed countries (whether by free will or by necessity makes little difference), and your current level of high consumption is being funded by the last dying grasps of western industry and innovation, and what remains is government debt. Which essentially comes down to your debt. Not to add the fact that you'll be paying pensions for the past generations for quite a while to come, and often, due to the same "we deserve" debate, generous pensions. At some point, everyone's going to have to put a thought into what could be the convergence mechanism that digs you out of the dip you're in.

Since Ricardo, some of the basic truths of more or less free global markets goes like this: real income is inevitably used to balance between absolute advantages. Given absolute advantage in producing anything, real income will be higher. However, only so much higher as the absolute advantage states: if you can produce double what the Chinese can, you're supposed to real up at twice his level. Arguably you're not producing much more, even if your standard of teaching is really high and your work days short. This says, that on the long run, either the Chinese (et cetera) will need to start earning considerably more in real terms in compared to you, or you'll need to be taking a beating on your real income. The latter can happen through inflation or devaluation of currency (say, 25% off the Euro would do wonders, since inflation is nigh impossible to blow out in an era of inflation targeting monetary policies), and the former can never happen since you all deserve more ignoring the fact that you're not really that precious.

What you wind up with on the short run is soaring unemployment (see: Finland, Spain, UK), soaring debt due to the need to sustain unemployment benefits and the wellfare state (at this point it's worth to notice that China et cetera have no wellfare states: they're not burdened by such, thus they in effect have an advantage of production here until they choose to sink money into wellfare), and escaping industry. What perhaps will be left, is the executive board of Perlos, all of whom will be very rich due to a well funded business plan, but none or dramatically little of this income will ever spill over to the local working class: polarization of the population is inevitable, and the rich will be richer, and the poor will be poorer in Europe. At this point you can utter gibberish about national competitivity and indexes used to measure such, but before you do, take a look at how the indexes are measured. You'll be surprised.

What the end of the line is, is that Europeans are living over their standards: they've been living over for decades, and it's visibile in the trade balance. The insistence on keeping on living over the standards and sticking up to high pensions, high social wellfare systems, and high amounts of leisure will be the toxins that will eventually deliver the last blows to the era of western superiority, since military's no longer a possibility. We're essentially out of useful convergence mechanisms to dodge the pitfall, and we're too much in denial in terms of our real value to accept a hit there to avoid a bigger hit in the future, which all puts the future of the setup in a very, very questionable a situation.

Some will claim we have assets. Sadly, the banking sector's not an asset - it's a liability. Some will claim we have liquidity and infrastructure. The latter is questionable, and the former is escaping already. Next time you bemoan about your pay levels, consider how much do you actually feel you should be earning. Give it a decade or two, and you'll have much more interesting things to cry about than your "pot" of 0,9% or 1,3% pay rises on top of something that's already 60% extravagant. In the future you'll be forced to share a piece of your cake with the others. Maybe you'll go on a strike against the eastern industrialization then, god knows.

[Tietäjä]

I'd like to add this:

a teacher's salary isn't nearly enough to support a family and decent housing.

It probably induces into something like: 40% of the population's salaries in western societies are not nearly enough to support a family and decent housing. Assuming driving a 2008 BMW qualifies as a stanrdard of "decent".

[Kjeldoran]

Lol. Good read, nicely written aswell. I do not agree with everything in there as you simple ignore the wellfare and economical standards when you compare the income of a chinese person with a EU person.

Building a house in China does cost about 5-10 times less as it does in the EU (in general), buying food in China is also several times more cheap then in Europe. You can't simply compare wages of completely different countries without taking into account how "expensive" live is. You can't even compare EU countries individually. E.g. London is the most expensive city in Europe. The prices you pay for a flat in London are extremely high. However, if you work in London you will earn significantly more then when you work in Belgium (for example).

Personally I get payed way too much compared to other branches. Aside from the fact that I'm good at it, the reason for this is that my sector has high salaries. In exchange they expect high flexibility.

E.g in Belgium they're debating to raize the 38h week to 40h week of work. Well, I've been working 40h. week since I started working. I'm talking about official hours aye, I'm not even talking about extra hours that you work ...

I do believe we're perhaps living slightly above our standards, but I wouldn't put it that drastically as you described it.

Regardless, that's your opinion ofcourse.

[Kjeldoran]

Originally Posted by Tietäjä

I'd like to add this:



It probably induces into something like: 40% of the population's salaries in western societies are not nearly enough to support a family and decent housing. Assuming driving a 2008 BMW qualifies as a stanrdard of "decent".

Old, you should drive the latest update, from end of 2009. Like I'm driving right now !!!

[Tietäjä]

Originally Posted by Kjeldoran

Lol. Good read, nicely written aswell. I do not agree with everything in there as you simple ignore the wellfare and economical standards when you compare the income of a chinese person with a EU person.

I'd like to remind you of a crucial pair of words you seem to have neglected. "That the Norwegian teacher yields so much superior results to his Chinese counterpart that he's supposed to be earning (in real terms) fifteen times the salary". In economic jargon, when we're discussing real terms, we refer to a miscellanelous dream currency that involves purchasing power parity cleaned money: that is, it takes into account the price index. It's not difficult to compute, and you can probably just hit OECD, check average PPP indexed wages, and see.

Personally I get payed way too much compared to other branches. Aside from the fact that I'm good at it, the reason for this is that my sector has high salaries. In exchange they expect high flexibility.

High flexibility is hardly something that's a western asset. Around here, we call high flexibility the ability to work off hours (of course it involves much more). We perceive something that's a standard in many places something of a special perk here. I don'tknow what you mean exactly, though, since I'm not familiar with your work.

I do believe we're perhaps living slightly above our standards, but I wouldn't put it that drastically as you described it.

It is of course difficult to measure: but a quick look at say UK's, Finland's, Norway's, China's, and India's trade balances will give you a quick idea, as will a check on the production figures. The vast majority of an average European countries' GDP in fact involves services, most of which are self-produced to self-serve. Here: GDP by sector: agriculture (1.2%), industry (23.8%), services (75%) (UK, 2009, picked off Wikipedia quickly). The corresponding numbers for China are industry (48.6%), services (40.5%)
agriculture (10.9%). Slightly, maybe.

E.g. London is the most expensive city in Europe. The prices you pay for a flat in London are extremely high. However, if you work in London you will earn significantly more then when you work in Belgium

Just to specify. This is a good example. When discussing nominal wages, you get a flat number you earn say yearly. When discussing real wages, your yearly wage is attached to an index that consists of things like housing, food, energy, and so forth: hence you obtain a number that's somewhat more compareable accross nations. The next line after the one of mine's that addresses real numbers is the key to your very reply.

Counter-arguing this with the "but everyone in Norway" part only really underpins my point.

the wellfare and economical standards when you compare

[Kjeldoran]

With high flexibility, I compare myself to what the average citizen of my country has to work. In that aspect, I do have high flexibility. Not only in terms of length, also in terms of days (for a Go Live, it is required to work during the weekend or during holidays for instance) and distance.

I did not know the meaning of "In real terms", but now I do so plz ignore the first part of my reply.

[Elevator]

Nicely put.

I simply see what is happening, and has happened over the last decade or so, as the inevitable shift of power which always happens when a superpower has grown fat and lazy.
It happened before, and it will happen again.

For those of us who enjoy our far, far, far too high salary in comparison to our level of production; we simply have to enjoy the "last" days we have of such un-deserved wealth. It will be over soon enough.

As for me, I do work like a maniac on speed and I do "earn" my money in a semi-decent (and ethical) way. But I have to admit I feel overpaid... I just do not feel it is my place to ask management to cut my salary so the hard working Indian who produces "for" me can enjoy a level closer to my standard of living.

And for the unemployed, teachers and municipal workers who strike. I simply do not feel with you. I pay close to 42% of my income in taxes...so start picking up my f****** garbage again!

[Tietäjä]

Originally Posted by Kjeldoran

With high flexibility, I compare myself to what the average citizen of my country has to work. In that aspect, I do have high flexibility. Not only in terms of length, also in terms of days (for a Go Live, it is required to work during the weekend or during holidays for instance) and distance.

This again exactly what I said: if you feel you're working very flexibly and arguing that your real wages should be higher because you're flexible, you might want to check out how flexible the Chinese are in compared to you: they'll do 70 hour work weeks, and they don't necessarily have holidays. Now, this all accounts to productivity, which will on the long run account to real wages. I understand you perceive yourself as very flexible if you're off to work on a holiday, but you're one of the minority that actually does have holidays (and a substantial social wellfare network).

What I meant by f.ex China not being burdened by large wellfare network is, that they don't have paid holidays, paid sick leaves, large pensions, and so forth in the amount western societies tend to have: paid holidays and pensions are only alternative words for being paid without producing anything. Calling circumventing it a perk or asset of somekind in terms of global convergence is just a bad joke.

[Tietäjä]

Originally Posted by Elevator

But I have to admit I feel overpaid... I just do not feel it is my place to ask management to cut my salary so the hard working Indian who produces "for" me can enjoy a level closer to my standard of living.

Sadly, you're right - it's not something you can personally do, it's something that would have to happen over board, hence currency devaluation would be a quick way to it: how you have to view it is, that every time a corp moves it's production abroad (Stora Enso, M-real in Finland - both large wood/paper companies), you have to ask if the inevitably hit in employment could have been avoided if every worker was paid 25% less and the company would had had no need to transfer abroad. Someone will argue that the only lead this will have is that the company will earn more, but staying local does have spillover effects (and the problem related to rich becoming rich has to do with inheritage rather than accumulation).

[Kjeldoran]

Originally Posted by Tietäjä

This again exactly what I said: if you feel you're working very flexibly and arguing that your real wages should be higher because you're flexible, you might want to check out how flexible the Chinese are in compared to you: they'll do 70 hour work weeks, and they don't necessarily have holidays. Now, this all accounts to productivity, which will on the long run account to real wages. I understand you perceive yourself as very flexible if you're off to work on a holiday, but you're one of the minority that actually does have holidays (and a substantial social wellfare network).

What I meant by f.ex China not being burdened by large wellfare network is, that they don't have paid holidays, paid sick leaves, large pensions, and so forth in the amount western societies tend to have: paid holidays and pensions are only alternative words for being paid without producing anything. Calling circumventing it a perk or asset of somekind in terms of global convergence is just a bad joke.

55% of my wage goes to social securities (e.g. pension, paid sick leaves) ... I pay more then what I get back from it atm (but that's how a social system works).

Again, I merely compared my status with the status in the rest of my country. Infact I switched work 2 weeks ago (will start at my new job in 3 months) mainly because they will pay me even more. Is it fair? Nope, because I'm already well overpaid. But I would be a moron to refuse it (given that the work is the same and other factors are rather similar ifnot better).

I've also at no point complained about it aye, I praise myself lucky to be given this much.

I am indeed a minority compared to the world, because I do have alot more holiday and i do not pull in 70 hours a week. Nor are you.

I'm also a minority compared to my own country, but in the opposite way as there are little pple in my country that have to work extra hours becides their official 38 hours a week.

[Elevator]

Originally Posted by Tietäjä

hence currency devaluation would be a quick way to it

It would be beautiful. I wonder if the nordic nations would hit the streets with a violent streak like the greek did? It would be quite a sight... (even though they just had to cut spending to get loans to avoid a euro-exit and devaluation).

Originally Posted by Tietäjä

staying local does have spillover effects (and the problem related to rich becoming rich has to do with inheritage rather than accumulation).

If someone finds a system where the rich does not get richer, and the wealthy rules all, it would be a new system of economics.
The Romans did test this by simply killing off part of the rich to give a small percentage to the poor, and give the large percentage to the richest.
Stalin had his way of dealing with the rich...
Titanic was probably the most efficient way of creating room to climb the latter into the world of the wealthy

All in all human greed is not a force we can deny exists. It rules a lot of places it should not, and regardless of how hard one tries to avoid it, someone who is greedy will come and exploit those who dare not to be.

[Tietäjä]

Originally Posted by Kjeldoran

55% of my wage goes to social securities (e.g. pension, paid sick leaves) ... I pay more then what I get back from it atm (but that's how a social system works).

All in all the social system is essentially (not speaking of it's amount as a wellfare network here) a means of paying for no-production. The more you pay for no-production, or the more expensive you pay for vanity-production (ie. services like barber shop), the more effective your actual production has to put out to sustain it. (therein lies the connection). Say, in China, children are expected to tend after their parents when they become too old to work: there's no pension system. One could bring this unto a discussion of what's right and what's wrong, but sadly, right costs money, and wrong is cheaper.

Is it fair? Nope, because I'm already well overpaid. But I would be a moron to refuse it (given that the work is the same and other factors are rather similar ifnot better).

The thing you keep missing is, that in times of relatively open economies, comparing yourself to your closest peers tells nothing of your actual situation, since odds are your nearest peers are in a similar situation to you. The Indian factory workers put more hours in and probably produce more, yet are paid a fraction: but of course between Indian factory workers Indian factory workers are average. The purpose is to contemplate on how this fits to long run global equilibrium (it doesn't). Part of the reason to the abrupt climb on wages during the past 30-40 years in western societies is the peer thinking system, and the wage union deals. How much better a haircut is today than it was twenty years I do not know, but I know it costs a lot more (even in real terms). A car, however, I can say your 2009 BMW is probably more cost-effective (gas consumption), safer, faster, more durable, and generally just plain better than a 1969 BMW would be.

I am indeed a minority compared to the world, because I do have alot more holiday and i do not pull in 70 hours a week. Nor are you.

This isn't meant to be a discussion of who works hardest or blowing it: it's simply an economic view to how things can be seen.

[Tietäjä]

If someone finds a system where the rich does not get richer, and the wealthy rules all, it would be a new system of economics.

With the risk of getting sidetracked, I wanted to comment on this: while someone getting very rich is in my opinion acceptable (say, Bill Gates has participated strongly in an innovation that's changed the world: it's fair he's loaded for that). However, when I say the problem isn't accumulation (that Bill Gates is getting richer), but inheritage, I mean that a random billionaire's son (say Gates' son, I don't know about his legacy arrangements but hypothetically speaking let's assume he has a son who inherits the whole empire) has done nothing to deserve it (see the problem?). This is why I advocate an inheritage tax along the lines of 90%.

[Kjeldoran]

Read an article about Bill Gates 2 years ago in which he said that his children would only receive 2% of his wealth when he dies. Poor poor kids, now they only have a few billions of dollars to spend rather then several hundreds

[Mzyxptlk]

You mentioned pensions, which prompts me to ask: surely the same part of income that goes into pensions in the west goes into looking after one's elders in the far east? How is the one system fundamentally different from the other?

[Tietäjä]

Originally Posted by Mzyxptlk

You mentioned pensions, which prompts me to ask: surely the same part of income that goes into pensions in the west goes into looking after one's elders in the far east? How is the one system fundamentally different from the other?

First because of the fact that not having a pension system necessites you to look after your elderly income through a different means: be that either accumulating enough wealth to sustain or having children. Second, because pensions typically result (however, it's just an empirical instance: the direction of the causality isn't so obvious) in shorter work spans in compared to life span (ie. more idle years; more idle years relative to active years). People can spend half their lives idle here: pension's sort of added leisure, which, you're correct, in this term has to do more with the discussion I've been on with Kjel (leisure-flexibility-work).


The problem with pensions as such (beyond the incentive mechanisms) in compared to funding your own is as follows: the current generation underwrites it's own pension record without much interest in how sustainable it is to actually pay. Paying pensions is also independant of your future planning as such: an invisible government is somehow magically guaranteed to sort it out, but given the fact that despite it all we're on a declining population, and an increasing unemployment, pre-scheduled pensions mean that less people with less jobs will be paying for more people and more people's pensions and subs. Were people responsible of their own pensions per se, as having to save money for it, you wouldn't really have such a moral hazard situation.

[Elevator]

Originally Posted by Tietäjä

This is why I advocate an inheritage tax along the lines of 90%.

To avoid going completely off topic this could be a topic on it's own.
I see your point, but strongly disagree (and no; I am not in line to inherit any money).

[Tietäjä]

Also, a bunch of the Spaniards are now in a strike in order to combat the 5% public sector pay cuts that are part of the austerity (and by here no means "rough" austerity) plan to defeat the budget decifit. Heh.