Die Meinung

Let’s talk about the hottest topic: poverty

We all love to chat about cool innovation trends and the latest stock market records. But poverty is rising in the developed world and needs priority attention. Otherwise growth and the stock market party will come to a screeching halt.

Myret Zaki

Deutsche Version

Myret Zaki

Myret Zaki started in 1997 as a junior analyst in a Geneva private bank where she learnt the basics of equity research, before joining the daily newspaper «Le Temps» in 2001, where she was in charge of the finance section for 9 years. When the financial crisis broke in 2008, she wrote the investigative book «UBS, am Rande des Abgrunds» (originally published in French as «UBS, les dessous d'un scandale»), for which she received the Schweizer Journalist prize. She joined «Bilan» magazine in 2010 where she became Chief Editor from 2014 to 2019. Between 2010 and 2016, she wrote three other bestselling books, about Swiss banking secrecy, the end of the Dollar reserve status, and the rise of the shadow banking system. She has a Political Science Bachelor from the American University in Cairo and an MBA from the Business School of Lausanne. She is now a freelance columnist and a consultant in influencer and opinion leader strategies.
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Poverty is completely uncool. It’s never a good time to have this conversation. Be it at work or at your evening dinner, the poor are never a topic. Unlike those cool techies and lifestylers, who inspire business trends and fashion every day. Rest assured, though, there are a few «cool» problems for advocacy trendsetters: they include climate change, gender equality issues or the scare of artificial intelligence.

Poverty, however, is boring and we don’t see why we should care. On bloomberg.com, for instance, we recently could read «Here’s what it takes to be in the 1% around the world» and admire a splendid 1936 collectible BMW Roadster. By now there isn’t a thing we do not know about the habits and lifestyle of the 1%.

Poverty is on the rise

But here is the problem: poverty should be our number one issue. It is on the rise in developed economies including Switzerland, Germany, France, Britain and Spain. Ignoring this trend can lead growth to a screeching halt, when the impoverished, who are the pillars of «the real economy», stop spending, consuming and investing. Last year we already faced the slowest global growth since the 2008 crisis because of lower purchasing power of the middle and working classes. We need to make poverty a cool prime topic worthy of serious attention – because ending it is the condition for lasting growth and sustainable economies.

Poverty is advancing in OECD countries. We are seeing the rise of the «working poor», who are employed, but who are forced to juggle several part-time jobs and still don't make a decent living. One third of Europeans, working or retired, face growing economic insecurity. Low salaries have been progressing in Germany, paving the way for mass poverty. Across the Rhine, more than one retiree out of five will live below the poverty line within twenty years.

Poverty has been contained in the US, but it had reached a peak after 2008 and there are still 38 million poor Americans. The outlook is bleak as income inequality keeps rising very fast in the US and the Trump administration is taking action to reduce government support for poor households. This happens while all the talk, especially in a US election year, is about stock market records. As if a stock market boom had ever been the basis of shared prosperity – let alone when the boom is bought on credit.

The real economy is the blind spot of most mainstream economists, some of which are even suggesting the Fed should buy equities to boost the market. Yet others remain grounded.

Profits are stagnating, while asset prices boom

The February «Global Bubble Report» published by ETH Zurich and Zurich-based Systematic Investment Management (SIMAG) has analyzed the problem: «Profits in the real economy are not growing at all, whereas financial markets are booming». To the authors, «debt inflation just leads to asset inflation, which is a transfer of wealth from working people to asset holders and landlords. The middle class is already facing recession-like pressures. The majority of people continue to become poorer as the cost of living outpaces any real wage growth. Most people are already living in recession even though stocks are going up, as their medical and education costs and taxes are also rising».

In Saxo Bank’s «Outrageous predictions for 2020», Chief Investment Officer Steen Jakobsen writes that negative yields «are now used to discriminate access to mortgages for low-income households, the elderly and students». So they have to rent at twice the price of owning, «which is a tax on the poor, and a driver of inequality». An entire generation is at risk of being left without the savings needed to own their house, which is often the only major asset that modest households will ever own.

Despite high rents and the difficulty of acquiring a home, the Swiss population voted against the initiative for «affordable rents» on February 9, 2020. Rents have risen seven times faster than their «fair price» for the last 40 years in Switzerland, according to a 2016 study by the technical university EPFL (and rents rarely adjust to the downside).

Swiss wages are no longer increasing

Many Swiss voters in rural areas were not concerned about the February 9 vote or didn’t want to attract poor people and immigrants to their canton. They may underestimate their own exposure to deteriorating economic conditions. Almost 8% of Swiss are considered poor (data are for the year 2018), a high level compared to the country’s recent history.

Despite positive GDP growth over the last decade, in real terms Swiss salaries have decreased on average during the last 3 years, because of a rise in inflation coupled with a wage freeze. In fact, with yearly advances of less than 1%, salaries have effectively stagnated for the last 10 years.

The low unemployment rate in Switzerland is not boosting wages. Since Swiss salaries are competing with salaries in other countries and since Swiss companies and multinationals always have the possibility to relocate, the downside pressure on wages in Switzerland is strong; hence the «Ice Age» decade for Swiss wages.

Health insurance premiums have more than tripled in 20 years, which isn’t reflected in the Swiss consumer price index, and consequently not in wages either. With more subsidies needed to pay insurance premiums, social aid beneficiaries have grown in numbers in the last 10 years. The spiral leads to more people not paying taxes, which in return weighs heavily on middle-class taxpayers. In addition, savings are no longer earning interest income.

The drivers of inequality

And lastly, work doesn’t pay in some cases: the lower-income category suffers from «threshold effects», where working more makes you earn less. If you increase the number of hours worked, you will have to pay more taxes, and you will lose your claim to several social benefits, so you may end up with less disposable income despite working more. Clearly, purchasing power is declining in Switzerland.

On the other hand, shareholders have been reaping the lion's share of the companies’ growth: the amount of dividends distributed by companies in the Swiss Market Index has surged by more than 50% between 2009 and 2017. This is due to the competitive pressure for Swiss companies to pay shareholders hefty dividends to keep them happy. This is how inequality creeps in, even in Switzerland. It is all counterproductive and contains the seeds of a future recession.

A true and sustainable capitalist system will make sure to put money in the hands of the the working classes, for them to consume, and it will ensure that they gain, and do not lose, purchasing power. And this should in no way be achieved by increasing their debt burden, as in the US.

Higher salaries are an economic opportunity

Low salaries have to be adjusted upward, and defending a stable or rising disposable income has to be the number one priority. Companies must consider it a social responsibility and an economic opportunity to offer above-inflation wages. In France, president Macron got it all wrong: his fiscal policies have redistributed purchasing power upward, towards the better-off, according to a report by the Observatoire français des conjonctures économiques (OFCE), while his pension and unemployment insurance reforms will impoverish the unemployed and retirees.

In contrast, the Spanish government increased the minimum wage in January. In the UK as well, one of the first decisions of freshly elected prime minister Boris Johnson was to increase the minimum wage. Some will get it, some won’t, and it will show in GDP figures and in social (dis)harmony.

So please make sure to have a chat about poverty at your next dinner party. Talking about what really matters can also be super cool.