The super-rich menace

THE YEAR 2013 was again a tough one for the working people of Israel and the world. Israelis struggled with stagnant wages, high cost of living, astronomical housing prices, mortgage debt, and a slowing economy. This is reflected in the sharp slowdown in consumer spending in the first half of 2014. Abroad, Europe was still in recession and living standards in the West were still below those in pre-crisis 2007. But, for the rich, 2013 was another banner year. According to the Boston Consulting Group's Global Wealth 2014 report, global private-financial wealth grew almost 15 percent last year and now totals $152 trillion, more than double the world Gross Domestic Product. And, according to the business daily The Marker, Israel's 500 richest people did even better than their counterparts abroad – their wealth grew more than 18 percent in 2013 to $110 billion. Despite social protests, legislation and heightened awareness of the rich-poor gap, the gap continues to grow in Israel and abroad. Why is this so? I found some answers in a new and controversial 696-page book, “Capital in the Twenty- First Century,” by French economist Prof. Thomas Piketty (pronounced, pick-a-tea) of the Paris School of Economics (he is also director of the School for Advanced Studies in the Social Sciences in Paris). Piketty has written as boring an economics book as Karl Marx's “Capital,” perhaps more so because, unlike Piketty, Marx eschewed Greek-letter math. Despite this, it is an unlikely eighth on the Amazon best-seller list, not far behind such iconic works as J.J. Smith's “10-Day Green Smoothie Cleanse: Lose Up to 15 Pounds in 10 Days” (No. 2). The original version of Piketty's book was published in French and was issued in English by Harvard's Belknap Press. Never in history has Belknap had a bigger or more improbable bestseller. Piketty's book has been widely reported in the Israeli press even before the Hebrew translation is available. There is nothing new in Piketty's core message. “The rich get richer and the poor get poorer” is a line from a popular 1921 song, “Ain't We Got Fun.” But, Piketty and a colleague Gabriel Zucman, a London School of Economics professor, have painstakingly collected and processed a massive database on global wealth, showing that soon, or already, a handful of billionaires will own just about everything. It is the weight of the evidence on wealth concentration in Piketty's book that packs a powerful punch. And it is credible evidence because it is based mainly on firm income-tax records. Many of those who bought Piketty's book have likely not actually read it. Otherwise, it is hard to explain the wild distortions attributed to him. Here, in brief, is what Piketty really said and meant and why it is extremely relevant to Israel and the growing gap here between rich and poor. The following dialogue is a simulation, but reflects what I think Piketty would have said if it were real. Prof. Piketty, what is your main claim in your rewrite of Marx's “Capital”? Piketty: What I call “beta,” the ratio of capital to income, for nations, initially fell from 1914 to 1950 but in the past 60 years has risen sharply. Why has capital grown faster than income? Because the average rate of return on capital invested, about 8 percent, is much higher than the growth of world output and income. Capital has boomed because of urbanization and rising real-estate prices, increasing share prices, vast amounts of new money printed by central banks everywhere and loaned at low interest, and new capital markets in emerging nations that are creating assets where none existed before. Global private wealth boomed last year because investors put money into the stock market and equities rose sharply. Wall Street broke all records and closed the year 23.8 percent higher. So why is this a problem? Because saving is mainly done by the rich, while the middle class and the poor spend almost all their incomes. Therefore, under capitalism, wealth concentrates increasingly in fewer and fewer hands, as Marx predicted. There are two “flywheels” at work. The flywheel of the rich doubles their wealth every decade or less. The flywheel of the middle class and the poor works in the opposite direction. As American economics professors Atif Mian and Amir Sufi show in their new book “House of Debt,” the poor and middle- class owe, rather than own, and sink deeper and deeper into debt rather than save and accumulate wealth. Huge bank loans are accessible mainly by the wealthy, who borrow at 1 or 2 percent and invest at 10 percent. So wealth multiplies with ease, even when the rich do not actively work at it. Microsoft founder Bill Gates, 58, is the world's wealthiest person, with net worth of $78 billion, even though he has spent most of the past few years giving his money away. His Microsoft shares continue to generate more and more billions in wealth for him, even though he resigned as chair of the Microsoft Board in February. Prof. Piketty, why should this wealth concentration worry us? Democracy will take care of it. If enough people are upset, they will vote politicians into power who will tax the rich, as you advocate! Like Francois Hollande in France. [At this point, we leave the photogenic Piketty, who is dashing off for a photo shoot, and shift to my own views. What follows does not appear in his book.] People with great wealth gain control of the democratic system to perpetuate their wealth through tax breaks. The growing concentration of wealth in fewer and fewer hands cannot be corrected by the democratic system because the super-rich use their wealth to manipulate the democratic system. Often, this enables them to pay lower tax rates than you and I. In Israel, companies are selling bonds today in enormous amounts because the interest rates those bonds bear are incredibly cheap. Pension funds have little choice but to buy them because they need to invest the money paid in by working people. With alarming frequency, the tycoons who sell the bonds use them to acquire wealth, but at times mismanage their companies and then ask for “haircuts” (debt write-offs). We may be headed for more haircut episodes in the near future. The growing global concentration of wealth is ruining democracy. Two US political scientists, Martin Gilens, Princeton University, and Benjamin Page, Northwestern University, claim in a forthcoming article in “Perspectives in Politics”: “Our analyses suggest that majorities of the American public actually have little influence over the policies our government adopts.” And what is true of American democracy seems to hold in other more fragile democracies, as well, including Israel. Americans do enjoy many features central to democratic governance, such as regular elections, freedom of speech and association, the two authors admit, and a widespread (if still contested) franchise. But, Gilens and Page observe, “In the United States, our findings indicate, the majority does not rule – at least not in the causal sense of actually determining policy outcomes. When a majority of citizens disagrees with economic elites and/ or with organized interests, they generally lose. Moreover …even when fairly large majorities of Americans favor policy change, they generally do not get it.” ON MANY issues, say the authors, the rich exercise an effective veto. If they are against something, it is unlikely to happen. And they definitely are against anything that threatens that incredible flywheel that doubles their wealth every seven or eight years. Their lobbyists and funding for politicians tip the scale. If the democratic system cannot repair itself – what other solution is there? The French Revolution, 1788-1804, used the guillotine, but that did not work out too well for anyone and ultimately brought a dictator-emperor named Napoleon, who destroyed Europe. The rich are different. They have money, and when they invest it, it multiplies rapidly. At 8 percent compound interest, wealth doubles every nine years. There is nothing wrong with being rich. But when extreme wealth perpetuates itself in the manner now occurring worldwide, poverty perpetuates itself too. The reason the very rich earn 8 percent on their money is because the shares and assets they own rise in value. This happens because the companies behind those shares are profitable and because there is a fairly stable link between the price of common stock and earnings (profits) per share. Companies are profitable because they keep wages down while productivity rises. They can keep wages low because labor markets are weak and jobs are increasingly scarce. Intense advertising and marketing campaigns persuade us working people to spend, spend, spend; to buy things we don't really need so we can keep jobs we don't really like and which don't pay very well so the companies selling us all that stuff can make ever-greater profits. So, in a very real sense, the rich get richer because the poor get poorer. The wealthy have capital and so quickly accumulate more of it – the poor do not. The capital of the rich grows exponentially; the income of the poor stagnates. This is inherently unfair. But, can't the poor rise to wealth by hard work and saving? The American “Horatio Alger” rags-toriches myth is just that, according to the Equality of Opportunity Project, led by Harvard and Berkeley economists. This study found that an American child born in 1971 to parents in the poorest fifth of the income distribution had an 8.4 percent chance of making it to the top quintile. For a child born in 1986 the odds were 9 percent, basically the same. In other words, in the US you have less than a 1 in 10 chance of rising from poverty to wealth and it's been that way for nearly two generations. You need to be fairly rich to go to good schools and to be accepted to good universities. In contrast, in Denmark, the probability of climbing from the bottom quintile to the top one is double that of America. If you want rags-to-riches, you'd better be born in Scandinavia. I did not find a comparable study in Israel, but I doubt the odds of rags-to-riches social mobility are any better in Israel than in America. How much of Piketty's analysis truly applies to Israel? Unhappily, virtually all of it. Israel has almost as high a concentration of rich and super-rich as the US – one Israeli household in every 22 has net assets exceed-ing $1 million, compared with one in 17 in the US, and 3.7 households of every 100,000 in Israel have net assets exceeding $100 million (3.9 in the US and UK). There are more than 90 super-rich ($100 million-plus) Israelis and, according to Forbes magazine, a minyan (10) of Israeli dollar billionaires. This is remarkable for a country, which had a Labor (Socialist) government for its first 30 years and a tough union, Histadrut, which fought to create jobs even at the expense of efficiency and profit. One can argue that the high concentration of wealth is unpleasant for other countries but is an existential threat for Israel. With growing chaos erupting on its borders, and the rise of jihadi extremism in Syria, Iraq and elsewhere, Israel will face growing external threats in the coming decade. Meeting those threats will require strong social cohesion within, but the growing rich-poor gap feeds internal frictions and tears apart the delicate social fabric so vital for Israel's survival. I firmly believe, and many agree, that the rich-poor gap is far more threatening to the state than Hamas or al-Qaida. Piketty's proposed solution is to impose a wealth tax on the rich. It won't work. What are the odds that political systems manipulated by high-paid lobbyists will soak the rich? Just about zero. Today, if a country taxes wealth, wealth flees to the Cayman Islands or some other tax haven. What, then, should we do about the rich? They bear no blame; they simply use the system, mostly legally, to leverage the vast opportunities we as a society have given them. “Let me tell you about the very rich,” the American author F. Scott Fitzgerald wrote, in 1925. “They are different from you and me.” The rich are different. They have money and they use it to make a whole lot more with ease. That process does not seem to help working people much and elections or parliaments are no solution, either. Unless people of good will everywhere – rich, middle-class and poor – get together to resolve this dilemma, society is simply going to fracture, perhaps violently. And that won't be good for anyone, rich or poor.  The writer is a senior research fellow at the S. Neaman Institute, Technion

The super-rich menace

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