The courage to eradicate inequality

The National Insurance Institute's recently issued report on poverty in Israel in 2000 indicates that there has been a very slight decline in poverty in this country in 2000 in comparison with 1999.

Those who did not read the report itself but instead relied on the headlines in some of the newspapers and on the descriptions offered by some of the politicians might have reached the conclusion that poverty in 2000 was considerably more widespread than it was a year earlier. How regrettable it is that the public debate on this issue is saturated with empty slogans but very meager when it comes to cold, hard facts.

The present shallow public debate on poverty in Israel makes life very easy for the country's decision-makers. In contrast, a proper understanding of the fundamental problems relating to inequality in Israeli society would necessitate policies that would demand a large measure of public courage.

Since the late 1970s, there has been a steady widening of the inequality in economic income (that is, income from salary and capital). Among Western nations, Israel ranks high in terms of inequality in economic income. On the other hand, there has not been significant widening in Israel of the inequality in net income or available income (that is, what is left after taxes and after the receipt of NII allowances). According to the index of inequality in net income, Israel occupies a middle rung on the ladder in comparison with other Western nations.

From the standpoint of subsistence, net income inequality is more relevant than economic income inequality. Few people are aware that the increase in economic income inequality has been accompanied by a very slight increase in inequality in private consumption, which is an accepted indicator of the standard of living.

In terms of the average household consumption basket, the upper decile spends three times as much as does the lower decile. Such gaps are significantly narrower than the gaps between gross income levels. The empty family refrigerators photographed by the media express the distress of those specific families but do not reflect the widening of the gaps in private consumption because there has been almost no widening of those gaps.

Israeli society's central goal must be the narrowing of economic income inequality. There are two reasons why a reduction in this category of income inequality is so important. First, the coexistence of a considerable inequality in economic income with a smaller degree of inequality in available income points to a widespread phenomenon: needy families whose chief source of income is public financial support. No one likes the idea of being a needy person. Bread that has been given as charity can never be a real substitute for the feeling that you have when you know that your income is the fruit of your own labor. However, not everyone is able to attain economic independence.

Public financial support plays a key role in creating a safety net for the weak members of society and no attempts should be made to unravel the social security safety net, which is one of the foundations of a properly functioning society. At the same time, however, efforts must be made to enhance policy tools and to thereby reduce the size of the population that is not part of the job market - that is, those members of society who are capable of working and earning their own livelihood. Confinement to the margins of society for any protracted period of time deals a mortal blow not only to the families involved but also to society as a whole.

The second reason why the focus of attention should shift to a narrowing of economic income inequality is closely connected to the resources required to offset the increase in that inequality. The government's redistribution of income is not a zero-sum game: The confiscation of resources from one population group through taxation and their transfer to another population group through the NII undermines any incentives designed to encourage citizens to rejoin the job market and thus reduces the size of the "national pie."

NII allowances have significantly grown over the years: Between 1980 and 1999, they increased at an average annual rate of 6.4 percent, which was higher than the average annual rate (of 4 percent) at which the economy grew during that same period. The increase in public financial support offset the widening of economic income gaps and thus prevented an increase in available income inequality.

The significant growth in transfer payments during the past two decades was made possible without any need for an increase in the tax burden because there was a reduction in defense spending and in interest payments. The continued and rapid growth in public financial support cannot be maintained in future without an increase in the tax burden on the working members of the population who already find their tax burden extremely hard to manage.

A narrowing of economic income inequality could keep available income inequality relatively low without any need for an increase in public financial support or in the tax burden. The narrowing of this inequality must be based on the provision of tools that can increase both the citizen's potential for gainful employment and the incentive for tapping that potential.

Such policy measures must include a narrowing of the gaps in the quality of education, a macro-economic policy that fights unemployment effectively, the integration of the ultra-Orthodox Jewish community in the national job market, increased enforcement of the minimum wage law, a reduction of the incentive for hiring foreign labor, the integration of some recipients of guaranteed minimum income allowances in the job market and a restructuring of the child allowance.

The author is a lecturer in economics at the Hebrew University of Jerusalem and at the Herzliya Interdisciplinary Center and served as an adviser to the Finance Ministry between 1991 and 2001.