All That Glitters / Inequality Is a Threat to the Rich, Too

Talk about social justice isn't just politics; it is a real economic concern.

Israel's medium-range socioeconomic policy will be determined over the next few months, but the people won't be taking part. That's how it works in Israel. Except in times of crisis or social protest, socioeconomic policy is almost entirely determined within one framework: the state budget.

The budget will be prepared by a handful of bureaucrats in the Finance Ministry's budget department. It will be based on the current budget, automatic adjustments, cutbacks and tax hikes that aren't the product of economic vision but of an urgent need to hold back the soaring deficit.

The budget will be submitted to the cabinet, which will sign off on it. After a series of discussions and posturing, mainly to impress voters, MKs will approve it, too.

The people won't have the privilege of taking part in the debate on socioeconomic policy; they won't even be able to watch from the sidelines - whether directly or through ministers and MKs. The prime minister will keep repeating the word "growth" and the finance minister will keep repeating the phrase "global crisis." That's as far as the charade will go.

This is a great missed opportunity; it's also dangerous. Anyone examining the reasons behind the four-year-old global economic crisis and the main issue absorbing economists around the world will discover that the debate has drifted from growth to rising income disparity and its effect on economic growth and stability.

Nobody questions this problem's existence anymore. Over the past 20 years there has been a widening of the income gap between the top 10% and everyone else.

This phenomenon is characteristic of all developed countries, especially Israel. We're among the worst on the inequality scale - outdone only by Mexico, Turkey and the United States. And the trend is widening. Even people in the top one-thousandth agree. Warren Buffett admitted: "There's class warfare, all right, but it's my class, the rich class, that's making war, and we're winning."

Of course, there are those who try to exploit the data and argue for justice and morality to make political capital. But economists don't get mixed up in all this. They're concerned with another question: the extent income disparity damages the economy - and whether it's to blame for the crisis.

Not just a bunch of leftists

Anyone trying to evade the discussion by saying it's all the election prattle of social activists and leftists is doing himself an injustice. History is replete with evidence. Inequality in the United States soared before the Great Depression of the 1930s and before the current crisis. Such a connection has been found in other countries and in other crises. But the explanations are more important.

Joseph Stiglitz, a winner of the Nobel Prize for economics, wrote an article in Vanity Fair on the eve of the publication of his book "The Price of Inequality." In the article, Stiglitz gave reasons why a rise in inequality hurts the economy.

1. The consumption problem

When ever more income from economic activity flows into the pockets of the few, there is less for everyone else - and consumption goes down. The reason: Rich people, who already have it all, save much of their money because they can't spend it all. Among poor people and the middle class, however, every dollar of income is turned into consumption and stimulates the economy.

2. The rent problem

The rich's mechanism to widen the income gap is based on "rent": Their privileged market status lets them generate excessive profits with barely any risk. Examples include monopolies, oligopolies, government franchises, preferential taxation and preferential access to financing.

The capital market is pure rent, according to Stiglitz, through concentrated control over means of payment, credit and speculation.