All That Glitters

It’s the Economic Inequality, Stupid

When will Israelis stop accepting the canard that the country is too busy fighting for survival to dismantle the mechanisms of the 1%?

DAVOS, Switzerland – Any list of the risks facing Israel and Israeli society over the coming years is sure to be a long one. No matter who compiles it, you can be sure that security concerns will be at the top, along with the high fertility rates of the country’s Arab and ultra-Orthodox Jewish communities, which have low rates of workforce participation. The cost of maintaining the settlements, the relatively low educational standards, high housing costs, pension difficulties, the high level of market concentration and the lack of competition in the financial sector would all be on the list. As would corruption, challenges in the labor market, dysfunction across much of the public sector, low productivity in both the private and public sectors, crony capitalism that extends beyond business and government to include the media and the defense establishment and many more issues.

Missing from the Israeli list is income inequality, the gap between rich and poor, although the issue is slowly gaining ground in public discourse.

In the rest of the world, there’s a very different picture. This month the World Economic Forum, whose annual summit is being held this week in Davos, Switzerland, surveyed more than 700 leading figures on 31 global risks. Their top pick? The widening gap between rich and poor is the risk most likely to cause serious harm around the world in the coming decade.

Other risks were also found, of course, including extreme weather events, unemployment, climate change, cyber attacks on computer systems, debt crisis (which was ranked No. 1 in its damage potential) and the collapse of technology resources such as the Internet. But when the risks were parsed between long-term threats and others, such as technology-related risks, one-time risks or those that human beings could not control, the researchers found one main economic issue: inequality—and concern over unemployment and underemployment, particularly among young people, which will only exacerbate the problem.

This reflects new thinking, or at least new insights among experts and leaders, especially those attending Davos. The World Economic Forum has been conducting this survey for many years. Before 2011, income inequality was not even on the risk list. From 2007 to 2010, for example, the main concerns were disease, particularly epidemics, oil prices, the collapse of market prices and Chinese economic slowdown. But over the past three years, income disparity has risen to the top spot and seems likely to stay there for awhile.

What happened in 2011 to change the views of the world’s leaders so sharply? Widespread social protests, for one, including Occupy Wall Street in New York and Israel’s “tent protests” in the summer. The demonstrations, which many think ended without tangible gains, turned a switch in the minds of millions in the democratic West and were etched in the awareness of their leaders.

While the protests have waned, the issue of inequality has only grown in prominence. One book that has a lot of people talking is “Capital in the Twenty-First Century,” by the French economist Thomas Piketty. He warns that income and wealth disparities have returned to their levels at the end of the 19th century, recalling a world of servants and aristocracy. And it appears that the situation is only getting worse.

In their book, “The Second Machine Age : Work, Progress, and Prosperity in a Time of Brilliant Technologies,” Eric Brynjolfsson and Andrew McAfee address the impact of the Internet revolution on the workplace. They say millions of white-collar workers stand to be replaced by advanced computers over the next several years, and if they do find new jobs, they will be low-paying ones.

If this scenario comes to pass, it will further shift wealth from a large pool of workers to a small group of investors and highly skilled professionals.

Other economists, including Nobel Prize laureates, have in recent weeks published articles in their own areas of expertise about the dysfunction that made it possible for most of the growth of the past two decades to be funneled to the top 10% (or less) of the population, while everyone else remained in place, at best.

Even U.S. President Barack Obama, who is not in Davos this week, recently said he would devote the rest of his term to closing income gaps and broadening opportunities for the poor. That’s a major commitment from a president who cannot be elected to a third term and therefore has no need to spout populist rhetoric he doesn’t believe.

Presumably, because Israel seems to have more pressing problems income inequality has not been taken to heart here as in other Western countries. Obama spoke about issues that Israelis can relate to – trying to make ends meet, paying the mortgage, ensuring livable pensions, being able to help one’s children. All that was lacking in Obama’s speech was talk of the cost of living, but in America almost everything is much cheaper than in Israel – even the hummus from Israeli companies.

Nearly all the problems and risks that concern the average Israeli are pocketbook issues that go beyond the individual. High housing prices, for example, funnels capital to those who own land and properties, at the expense of everyone else. Food is expensive here because of the lack of competition and the endless barriers to cheaper imports, all of which increases the profits of the handful of big players.

The issue of inequality raises a number of socioeconomic questions in principle. At what stage will the public no longer tolerate these widening disparities? Will the public demand a cap on wealth accumulation, for example through higher income and inheritance taxes? Will the public demand that a distinction be made between individuals whose wealth was the product of their own talents and those who amassed it through monopolistic control and the other tricks involved in feeding at the public trough?

Will public frustration in Israel over inequality burst forth again with greater force, requiring politicians to institute reforms instead of giving in to interest groups and party central committees, as in the past? Will Israelis come to recognize that the “club” that controls broad segments of the economy, in both the private and public sectors, is profiting from a system that it built rather than from any added value it has created?

For those who are profiting from the current arrangement, the most effective way to deal with critics is to divert the discussion away from practicalities and into economic philosophy. “Do we want to punish success and chase away talent?” they will ask. “Do we want to encourage dependence and laziness?” The response is “Of course not.” And if that’s true, the corollary is that the existing order should not be changed.

Such an approach works fairly well on the Israeli public, as does the argument that we are currently preoccupied with matters of survival and defense and don’t have the luxury to carry out social experiments. In the rest of the democratic world, people now recognize that the current system is excluding too many people from the cycle of growth; that too large a piece of the economic pie is going to too few individuals; and that the system needs to be revised. Even the world’s leaders and those in the top 1% recognize the current trend, which is something that still cannot be said about the Israeli public and most of the politicians in this country.

Reuters