“Inequality is the plague of the 21st century.” These are not my words, although I totally agree. They come from a wealthy Israeli named Zvi Stepak, founder of a leading investment management company, Metav Dash.
He was interviewed in Haaretz on July 25 by Hagai Amit and Assa Sasson to mark the release of his Hebrew memoir, My Investment World.
It is ironic, he writes, that while the world is emerging from a real plague – corona – that aspires to become endemic, inequality appears to top it.
Israel: A wealthy country but one of the most unequal
Stepak is right. Israel is a wealthy country. Its GDP per capita is more than twice the global average. Yet according to the World Inequality Report (WIR) 2022, “Israel is among the most unequal countries in the world.”
Israel and the world are emerging from the two-year nightmare of the global pandemic. The BA-5 variant of Omicron has been sweeping Israel and the world since July, causing many infections but relatively few deaths. Slowly the world is learning to live with this insidious foe.
But inequality? The privileged rich and very rich have continued to manipulate democratic institutions to solidify their privilege.
Precisely how did the world get into this inequality pickle?
Here is an overview.
Globalization – the free global flow of goods, services, capital and labor – can be dated from November 9, 1989, the fall of the Berlin Wall and the reunification of Germany.
From 1995 through 2021, the WIR report documents the shocking disparity in wealth accumulation by wealth groups. The poorest half of the world captured only 2% of global wealth growth during this 26-year period. The richest 1% captured fully 38% of global wealth growth. Meanwhile, the middle class, everywhere, has been severely squeezed.
Globally, the very rich are both able to achieve high returns on their wealth, doubling it every seven to eight years, and at the same time are able to shelter their wealth from taxation by shifting it rapidly to nations that compete to offer low tax rates.
US Treasury Secretary Janet Yellen has put together a coalition of nations agreeing to a minimum tax rate of 15% on the wealthy. But it now appears the US itself will not ratify the agreement, as a crucial Democratic Senator from West Virginia who holds the key vote opposes it.
Where do we stand today? An exhaustive study by three University of California (Berkeley) economists – Blanchet, Saez and Zucman – showed that “wealth concentration in the US is at its highest level in the post-World War II era.” Their study showed that low-income groups are hit far harder by a recession than other groups – the bottom half of the US income distribution took nearly 12 years to recover from the 2008-2009 recession.
This finding is important, and may well apply to low income groups in other nations as well. As the US Federal Reserve belatedly raises interest rates steeply and is followed by other national Central Banks, including the Bank of Israel, global recession looms. This will undoubtedly exacerbate the excessive inequality afflicting the world’s poor.
“It does not matter whether some people have less than others. What matters is that some people do not have enough.”
Harry Frankfurt
An important essay by moral philosopher Harry Frankfurt (1987) turns a laser-like focus of philosophy on the issue of inequality. Frankfurt suggests that “it does not matter whether some people have less than others. What matters is that some people do not have enough.” They lack adequate income, have little or no wealth, and do not have proper housing, education or health care.
Philosopher John Rawls made a strong case over three decades ago that a truly liberal society should shape a fair system of cooperation among “free and equal people.” His three principles that our justice system ought to reflect are equality, fairness and access.
But since then society has become increasingly less fair, less stable and less just. It is indeed appalling, unjust and unacceptable that so many people in the world do not have the basic resources for a healthy, stable life, and worse, lack such resources for their children. Nor, given the disturbing shift to the right of politics in many countries, does it appear this will change soon.
The US comprises a cautionary lesson in what happens when the very rich gain power and rule. In his 2021 book The 9.9 Percent, Matthew Stewart lays bare “the merit myth” – the belief that the “new aristocracy,” those with over a million dollars in assets, the wealthiest 1/10 of Americans – are rich due to talent and intelligence.
This privileged group, he observes, segregates itself in gated communities, uses privilege to gain entry for children to top colleges (so-called “legacy” candidates), and in general uses wealth to entrench their position. And while doing this, they are “blithely unaware of their role in perpetuating” inequality. There is even research showing those who drive expensive cars are far less considerate of other drivers on the roads. They feel “privileged,” and act that way. I encounter this myself regularly on our roads.
The wealthy use their wealth to tilt the scales of democracy. Last year total lobbying spending in the United States amounted to $3.73 billion. And this sum is on the rise. Virtually all this spending is aimed at retaining legislative privileges, including tax privileges. And it barely dents the wealth such privilege conveys. Indeed, lobbying expands it. Lobbyists about in Israel, too.
Poverty is the obverse of wealth. All too many Israelis are poor. In 2020 Israel’s poverty line was NIS 2,811 ($904) a month. Nearly two million people, or over a fifth of the population, lived in poverty. The average monthly salary in Israel in February 2021 was NIS 12,148 ($3,735). In hi-tech, the average monthly salary was 28,837 shekels ($8,869), or 2.4 times the national average.
As a counterpoint to rampant poverty, Forbes counts 71 Israeli billionaires (though many hold citizenship but do not reside in Israel). This amounts to 6.7 billionaires per million, one of the highest ratios in the world.
Worldwide, the wealth of the wealthy expands. According to the World Inequality Report 2022, the poorest half of the world in 2021 captured 8.5% of total income (measured in purchasing power parity, or true exchange rates), and only 2% of total wealth. The top 10% secured 52% of total income and 76% of total wealth. This rather dry statistic finds expression in the migration of the poor seeking a living wage, and the resulting destabilizing consequences to society, economy and polity.
Is this inequality simply because some nations do well and others do poorly?
The answer is no. The WIR shows the division of global income inequality between “within-country” and “between-country” dating from 1820!
For 160 years, from 1820 through 1980, within-country inequality declined steeply, from 88% of total income inequality to only 43%. Since 1980, within-country inequality has done a U-turn, rising to 70% of total inequality. No longer can we attribute unfair income distribution to failing nations. There are systemic forces driving inequality within nations, including Israel. There is a policy vacuum or worse, a dismal policy failure
So what is wrong with having many super-rich people?
F. Scott Fitzgerald once famously said to his friend Ernest Hemingway, “The rich are different from you and me, Ernest.”
Hemingway replied, sardonically, “Yes, they have more money.”
Hemingway was right. Money creates more money, almost effortlessly. The wealthy have access to high rates of return on their investments. Money that earns 8% compound interest doubles every nine years. In one generation, that wealth becomes eight times larger. Those without money earn 0% annually, and double zero is still zero.
Yes, the wealthy are different. They have money. And they use it to make a whole lot more. Especially when they pay minimal taxes.
It troubles me greatly that there is a major Torah precept that is simply ignored. It is the concept of the Jubilee (Yovel) year – the 50th year, when debts are erased and land ownership reverts to its original state. Scholars claim it was never implemented, even when the kingdoms of Judea and Israel existed.
Impractical? Infeasible? Sure. But the rabbis always found ways to implement many radical social ideas. Taxing the wealthy would be a good way to partially reflect the Jubilee concept.
“Inequality is going to be the plague of the 21st century. If this continues, it will cause harsh protests. It can’t be anything else.”
Wealthy Israeli Zvi Stepak
“Inequality is going to be the plague of the 21st century,” Stepak warns, in his Haaretz interview. “If this continues, it will cause harsh protests. It can’t be anything else.“
Scholars confirm Stepak’s fears. In 2018, The Economist ran a disturbing article about wealth and privilege.
“In an age of widening inequality,” the business weekly reported, “[Stanford Professor] Walter Scheidel believes he has cracked the code on how to overcome it. In his book The Great Leveler, he posits that throughout history, economic inequality has only been rectified by one of the “Four Horsemen of Leveling”: Warfare, revolution, state collapse and plague.”
Are liberal democracies doomed to repeat the pattern that saw the gilded age give way to a breakdown of society? Or can they legislate a way out of the ominous cycle of brutal inequality and potential violence?
For more substantial leveling to occur, the established order needs to be shaken up, says Scheidel: “The greater the shock to the system, the easier it becomes to reduce privilege at the top.”
Some cite data that inequality in Israel has declined. Stepak does not accept this.
“Some argue that inequality in Israel has decreased in the last decade because our position on the Gini index has improved,” he says, referring to the coefficient where 0 stands for total equality and 1 stands for total inequality. Israel’s Gini coefficient is 0.38.
“But as I see it, the Gini index, which is affected mainly by income levels, is not a useful tool for the current situation because the cause is in the markets themselves, which deepen inequality. The wide disparity between people is not the result of an income difference: the main gap is in financial wealth. Imagine, for example, two people. After the 2008 financial crisis, one had no money left in the markets and hasn’t made any since. The other, though, had $1 million – which has since increased to $4 million. It is way more than the actual salary income the first person would have gained during these 14 years. The disparity between these two only deepens.”
“I’m really concerned,” says Stepak. “Inequality must be reduced. Israeli society is divided enough between right and left, between the haredim and the secular. We don’t need to add to this.”
His solution? “Wealth has to be taxed.”
Asked how we should achieve this – Capital gains taxes? Property sales taxes? – he argues that if “you focus on capital gains, you will destroy the stock market. Also, you need to be careful with property sales. We don’t want landowners to hold on to properties for years to avoid taxation. But we do need to tax high-value property. Someone whose assets are worth a billion shekels ($302 million), for example, must pay 1% to 2% of it every year.
“When it comes to assets held in shares, it’s desirable that the longer a person retains them, the lower the tax is. That way, we encourage long-term investment.” The US long-term capital gains tax rate (on profits from stocks held for more than a year) is 0%, 15% or 20%, depending on the owner’s income.
Stepak believes Israel’s next social uprising will be much bigger than the one that swept the country in 2011.
“There’s a fine line between silent protest and a violent one,” he says. “Remember, protesters broke the glass doors of several bank branches in Tel Aviv in 2011. I warned about this as early as 2004. When it happened in 2011, I thought it would be much more violent. The inequality is too deep, it’s out of proportion. All it takes now is for a charismatic and populist leader to ride the current wave and a social uprising could get out of hand.”
We have been warned, by one who knows. Is anybody listening? ■
The writer heads the Zvi Griliches Research Data Center at S. Neaman Institute, Technion, and blogs at www.timnovate.wordpress.com