France Is Catching Up to Japan, but Not in a Good Way
Inequality and social mobility are hotly debated issues. One important indicator of social mobility are wealth-to-income ratios. If a country’s wealth-to-income ratio is high, the country is not necessarily wealthy. It merely implies that the monetary value of all assets in that country is relatively high compared to the incomes earned. The higher the wealth-to-income ratio, the harder it gets to climb the social ladder, if one starts from the bottom. It takes more years of work and income to reach any given position in the wealth distribution of society. France and Japan are today among the developed countries with the highest wealth-to-income ratios.
Since the introduction of the euro in 1999, the wealth-to-income ratio in France has been on the same trajectory as it had been in Japan fifteen years earlier during the country’s massive asset price bubble of the 1980s. In France, there was an even weaker price correction after the Great Recession as the European Central Bank stepped in quickly to keep asset prices artificially afloat through unconventional monetary policy measures. Even though France’s wealth-to-income ratio at its peak never reached Japan’s peak of 808 percent in 1990, today they nearly match at 634 percent in Japan and 620 percent in France.1
Overall net wealth in France is thus more than 6 times as big as net annual income. This is a relatively high value compared to other developed countries. In the United States, the wealth-to-income ratio stands at 532 percent, slightly above that of Germany (520 percent) and below that of the UK (576 percent). In all of these countries the trend is positive over the past decades, but France is the most striking case. In 1998, the year before the euro was introduced, the French wealth-to-income ratio was only 363 percent. In less than ten years, on the brink of the Great Recession in 2007, it reached 604 percent. This development is largely driven by monetary policy. The implementation of a common currency area combined with more than a doubling the M1 money stock within that area in only nine years,2 has mobilized a lot of financial capital that flooded the southern European asset markets, including those of France.
Monetary policy around the world targets a positive rate of price inflation. This has systematic effects on how people save. Even with moderate rates of price inflation, the opportunity costs of holding savings on deposit accounts increase. As the purchasing power of money is continuously reduced, people face an added incentive to direct a higher proportion of their savings into financial and non-financial assets that might serve as a hedge against this loss. Inflationary monetary policy thus generates an added demand for all kinds of assets that goes beyond the effects of the mere increase in the stock of money. This added demand pushes up asset prices disproportionately. Very visible incidences of this tendency are overproportionate rates of price inflation in stock and real estate markets.
With the coronavirus outbreak, aggressive monetary easing by central banks has continued to become the new normal. Real estate prices in Japan and France are on the rise again. In the Tokyo metropolitan area, last year’s price per square meter (€7.293 per square meter) has exceeded its all-time high set at the peak of the asset-inflated bubble economy three decades ago (€7.280 per square meter). Meanwhile, the price per square meter in Paris has climbed up to €11.885, with the French house price index reaching an all-time high.
Overproportionate asset price inflation has many further implications, one of them being the increase of the wealth-to-income ratio over and above the point at which it would otherwise stand. This is important in many respects, not least from the vantage point of social policy, because a rising wealth-to-income ratio tends to undermine upward social mobility, in particular when the wealth distribution is very unequal. And this is the case in most countries with a large proportion of households owning practically nothing.
Let us apply a back-of-the-envelope calculation to illustrate the problem: If the wealth-to-income ratio is 620 percent as in France in 2020, you have an average income and no wealth and start saving 10 percent of your income today, then it would take you sixty-two years to reach the average wealth level of society. In France in 1998, it would have taken only thirty-six years. Back then it was much more realistic to achieve the average level of wealth within a working life starting from zero. In this calculation, we abstract from any heterogeneity in inflation rates and assume that all prices, including all incomes, increase at the same rate over time.
Under these ceteris paribus conditions, our representative French income earner with a 10 percent saving rate would need sixty-two years to build up wealth amounting to the equivalent of €176.803. This would buy a meager fifteen square meters in Paris. In spite of the common perception of being a country of equality and social justice, it becomes clear that it is particularly difficult in France to climb up the social ladder if one comes from a modest background. This is also because net incomes are particularly low due to high taxes and social security payments. In France, more so than in other places, it is better to be born with a silver spoon in one’s mouth. If you own wealth already, you are not afraid of overproportionate asset price inflation. You tend to benefit from it. Your own privileged position in the social hierarchy is strengthened. As it becomes harder for people to make it to the top, it also becomes easier to stay on top for those who are already there.
In Japan, the picture is quite similar. During its high growth period (1954–72) individual economic endeavors were adequately rewarded. Climbing up the social ladder was a real possibility. However, with the lost three decades, this has drastically changed. The inhibited upward social mobility is even couched in the Japanese slang term “oya-gacha,” which has come into such an extensive use that it was a contender for last year’s buzzword of the year. It captures the notion that life is like a lottery—winning or losing, like in France, depends mostly on who your parents are.
The social and economic consequences of an inhibited upward social mobility are profound, especially when the causes are not well understood. It is common to blame the market economy for all kinds of social problems, foremost among them are rising inequality and falling social mobility. But all too often political interventions into the economic system cause these unintended consequences. In the context of social mobility, a lot would be gained if monetary policy would be more restrictive preventing disproportionately high asset price inflation.