Rich Israeli, Poor Israeli

For all the recent hubbub over the worsening lot of Israel’s poor, and the growing criticism of Prime Minister Ehud Barak’s born-again Reaganite economic policies, it should be understood that in many key misery indices, Israel isn’t doing too badly.

Compared to the world’s other 25 or so industrialized countries, Israel almost certainly has proportionately less hunger than all or most of them. Its unemployment rate of 9.1 percent is roughly double that of the U.S., but that’s still not as bad as in Germany and a number of other Western European countries. Israel has poverty, but then so do the world’s richest countries.

There is one category, however, in which Israel stands out: the income gap between rich and poor. For the last decade, it has been widely reported that Israel has the second widest division between rich and poor in the industrialized world, after America’s.

But the country’s leading expert on economic inequality, Hebrew University Prof. Shlomo Yitzhaki, said Israel might not be the number two, but rather the number one country whose citizens are more economically unequal even than America’s.

“The statistics on income distribution in Israel only look at salaries; they do not include income from capital, and they do not include the income of the self-employed, who tend towards the extremes of the economic spectrum. If these two factors, income from capital and the income of the self-employed, were included in Israel’s statistics, the gap between rich and poor would reveal itself to be even greater than the statistics show,” said Yitzhaki.

Considering that Israel always had a reputation of being a “socialist” country, the finding that its income disparity is even greater than America’s is quite a jolt. “Israel always spoke the rhetoric of socialism, but didn’t necessarily practice it,” Yitzhaki explained.

He said income gaps wider than those found in Israel exist only in Third World locales like Asia, South America and South Africa. Asked if he knew of any industrialized country with a wider income gap than Israel’s, Yitzhaki couldn’t name one.

Personal income, however, is not the only measure of one’s standard of living. While the income gap in Israel may be wider than in the U.S., Yitzhaki noted, “There is much more equality here in education and health care. Israel spends a lot of money on schools in poor areas, and health insurance [whose cost varies with one’s income] is available to all, which certainly isn’t the case in the U.S.”

On the other hand, prices in Israel are so high compared to people’s income — much higher than in the U.S. or Europe — that Israelis’ buying power is much weaker than their incomes would indicate, which also weighs especially heavy on the poor, he said.

Even the dubious numbers provided by Israel’s Central Bureau of Statistics show that income gaps have been growing fairly steadily since 1985, when Israel began its changeover from a state-dominated to private-sector-dominated economy. And in 1997 — the last year for which the CBS has income distribution statistics — the richest tenth of the salaried population was earning a little over 10 times as much as the poorest tenth.

What the figures show is that since the mid-80s in Israel, the rich have gotten richer while the poor have gotten poorer. But this is an oversimplification; more precisely, what’s happened is that the poor have gotten slightly poorer, while the rich have gotten a whole lot richer.

There are a variety of reasons for this. “The massive influx of foreign workers into Israel this decade, both Palestinians from the territories and guest workers from Romania, China, Africa and other countries, have driven down wages for menial labor. Foreign workers are always cheap and easily exploitable, so unskilled Israelis can command only very low salaries,” said Dr. Rafi Melnick, an economist with Jerusalem’s Center for Social Policy Studies in Israel, a liberal think tank.

The closure of textile and other labor-intensive industries, and the explosion in knowledge-intensive high-tech industries, has created tens of thousands of well-paid jobs, while at the same time making tens of thousands of minimum-wage jobs extinct. Israel’s regressive tax policy has also contributed to the income gap. “Israel is one of the very few industrialized countries where there is no tax on capital — neither on stocks, inheritance, nor savings,” said Yitzhaki. Israel has no tax on rental income, either. Asked if he could name another developed country with such an enormously capital-friendly tax policy, Yitzhaki again couldn’t come up with one.

The aversion to taxing capital grew out of the conditions of Israel’s infancy in the 1950s, Yitzhaki continued. “There weren’t too many people with money to invest in new businesses, so the government didn’t want to take it away from them.” With time, tax-free capital was seen as a right, not a privilege. In recent years, it even gained “ideological” justification among Israel’s conservative economic establishment.

No change seems to be on the horizon under Barak. His budget priorities are hardly any different from those of his predecessor, Binyamin Netanyahu, who was the most economically conservative prime minister Israel ever had.

As for renewed economic growth — Barak’s hoped-for panacea — Yitzhaki said, “Economic growth affects the haves — the wealthy and, to a lesser extent, the middle-class. The have-nots remain the have-nots.”