This article is in response to Miriam Pinski’s piece entitled “Income inequality in Israel: Netanyahu’s neo-conservative policies,” which was published in Ha’Am on Sunday, March 10, 2013. I would like to make it clear that I respect the writer of the original article, and welcome all further discussion of this issue.
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As reelected Prime Minister Benjamin Netanyahu attempts to navigate a complex political landscape and forge a coalition, income inequality among Israelis has become a hotly-contested topic. Since the financial crisis struck the world in 2008, economic concerns have been at the forefront of political and economic discourse in almost all developed countries.
In her article, Pinski claims that “one of the most noticeable consequences of the liberalization of the economy is extreme income inequality.” While this may be true, another consequence of the liberalization of the financial infrastructure is the flourishing Israeli economy and greatly improved quality of life.
According to the World Bank, since the beginning of Netanyahu’s first term as Prime Minster, Israel’s Gross Domestic Product has increased by a whopping 131 percent — from $105.1 billion in 1996 to $242.9 billion in 2011 (data for 2012 is not yet available). In addition, GDP increased by 24.7 percent during the first three years of Netanyahu’s second term (2009 to 2011). Therefore, simply stating that income inequality has gone up does not show the full picture; this statistic must be viewed against the backdrop of an overall increase in income per capita and general quality of life.
Although GDP is widely-accepted among economists as a robust indicator of economic health, it is sometimes criticized as a blunt and occasionally deceptive instrument. A more finely-tuned barometer of economic vitality may be the Human Development Index, a composite index published by the United Nations that combines health, education, and living standards data in order to produce a single numerical value. Even though, as Pinski points out, Israel’s income inequality is greater than in any of the European Union nations, its HDI ranks 17th in the world and is ahead of all but five of the 27 European Union nations, yielding only to the Netherlands (3rd), Ireland (7th), Germany (9th), Sweden (10th), and Denmark (16th).
It is also vital to mention that income inequality numbers are highly skewed by the alarming number of ultra-Orthodox Haredi men and women who do not participate in the labor force and who are completely dependent on government assistance for survival. Countless economists have warned that the current status quo is unsustainable, and measures should be taken to encourage the rapidly expanding Haredi community to contribute to Israel’s workforce, or else bear a substantial part of the responsibility for jeopardizing the economic health of the entire nation. For more information on how the ultra-Orthodox in Israel are affecting income inequality, click here.
In her article, Pinski refers to Taub Center for Social Policy report that isolates the rising income gap between high and low-skilled workers. She also notes that “although there is a demand for workers, this demand lies mostly in high-tech and information-tech areas, which hire fewer less-well-educated workers.” However, this is true in any developed nation — such is the nature of technological progress. It is well-known that technological advancements apply upward pressure to the level of income inequality by rewarding high-skilled workers and replacing low-skilled workers with computerized equivalents. The ethics of the breakneck pace of humanity’s drive to innovate can be debated, but it is the topic of an entirely separate discussion.
Furthermore, due to its world class higher education system, Israel has an unusually large (in per capita terms, of course) supply of high-tech and information-tech workers. As a result, many of the world’s leading technology companies (including Intel, Apple, Google, Cisco Systems, SanDisk, Microsoft and others) continue to open offices in Israel to meet the supply of labor. The influx of large corporations has resulted in higher salaries for the high-tech workers, and thus, continues to increase demand even further. Therefore, it is not a surprise that the income of highly-educated workers is growing much faster than the income of less-educated laborers. However, to reiterate, this is not a mystifying phenomenon that is unique to Israel. It is a simple case of supply and demand — countries that provide highly-educated workers attract highly-paying employers.
According to Pinski, the cuts to spending on social welfare programs are another factor that aggravates the income inequality landscape. Israel is not the only country to experience uncomfortable and painful cutbacks — the economic crisis of the past five years has hit hard and has hit globally. Very few countries have been able to escape with their social spending budgets unscathed — if a government is spending more than it takes in, it requires a (contentious) fusion of spending cuts and revenue (tax) increases before it can even hope to reverse the negative trend. As Pinski says, in July 2012, Netanyahu “increased corporate taxes and taxes on the wealthy.” If taxes have gone up, complaining that social programs are also getting cut is illogical and counterproductive. In fact, economist Dan Ben-David, executive director of the very same Taub Center that Pinski mentions in her article, has issued a strong warning that the already-bloated welfare system is “going to break the bank” and cautions that “we’re on trajectories that are not sustainable.”
There is no doubt that people deserving of healthcare and other social benefits are not receiving them, but the claim that “such cuts hinder socioeconomic upward mobility” is inaccurate and self-contradictory. The cuts affecting welfare systems are not hindering socioeconomic upward mobility, simply because it is not welfare’s job to facilitate upward mobility. Welfare is an artificial construct that functions as a large-scale cash transfer mechanism. That is not to say that welfare is an unnecessary component of society — it is vital (to a degree), but when someone receives a welfare check that comes from tax dollars contributed by the wealthy, that person is not engaged in upward mobility by any stretch of the imagination. In fact, to illustrate this point, one only has to imagine a socialist system — maximum welfare, so to speak. In such a system, income inequality is extremely low and social mobility is nonexistent (there is simply nowhere to go, income-wise).
Omer, the social activist quoted in Pinski’s article, claims that he “is not against capitalism” but also notes that “there’s not enough money going into the educational and welfare systems.” Not only does Omer claim to know the arbitrary definition of “enough,” he (and many other Occupy-esque crusaders) seems to misunderstand that capitalism is what allows money to go toward educational and welfare programs. If the country is prosperous and private industry is booming, the government automatically collects more revenue and wealthy individuals donate more money to charities. If the rich are prevented from making a profit, there will be less money to allocate to welfare, and even less money flowing into charities.
Pinski notes that a large contingent of protestors appeared in Tel Aviv to decry the “exorbitantly priced housing” and to demand rent control. Since the housing market largely operates on a laissez-faire basis (for now), high prices incontrovertibly mean that there is a high demand. Rent control sounds like a good and moral idea, but a plethora of examples (San Francisco and New York City are the most prominent instances of rent-controlled cities with major housing shortages) show that it only leads to more problems. Rent control discourages the construction of new properties (since they will no longer be as lucrative), will hamper supply from catching up with sky-high demand, and will negatively affect employment in the construction industry. Rent control will allow more people to afford existing housing, but it can create a large-scale housing shortage that is highly detrimental to the economy. For a more detailed explanation, see “How Rent Control Drives Out Affordable Housing” by William Tucker of the Cato Institute.
Later in her article, Pinski mentions that the one percent increase in the Value-Added Tax initiated by Netanyahu “is an across the board cut, affecting the lower and middle classes.” While it is true that the VAT increase will affect everyone, it affects the wealthy much more than it affects the poor, simply because the wealthy make many more purchases, and therefore, pay more in VAT (even in relative terms).
While Netanyahu’s insistence on preserving a capitalist framework in Israel is an easy scapegoat for perceived fiscal injustices, it is in no way directly responsible for an increase in Israel’s level of income inequality. Capitalism has been the cornerstone of every successful nation in the world, while socialist policies have failed everywhere except in countries replete with nationalized oil industries (or similar sources of sustainable income). Liberalization of Israel’s economy and privatization have led to the Jewish state’s position as one of the world leaders in technological and medical innovation, in scholarship, and in culture. While there is a delicate balance to be found between government spending and taxation, capitalism is the only economic scheme that will ensure Israel’s sustained progress and success in the future.
