Eugene Kandel - Comments on the Evolution of Income Inequality

Comments on

Inequality in Israel

by Prof. Momi Dahan

What happened in 2009?

Gini/Year

2009

2015

Economic Income

0.51

0.47 (1989)

Brutto

0.43

0.41 (1997)

Netto

0.39

0.37 (2002)

Expenditure

0.35

0.33 (2001)

Inequality vs. Poverty • Two different economic arguments (sometimes correlated, but definitely not interchangeable): – Poverty wastes human resources: wasted opportunities. Can also create political pressure, even though the poor are much less politically active, and sometimes do so in surprising ways. – Inequality does not have the waste feature, but can create political pressure as well. In this case by middle class, which makes it even stronger.

Markets and Inequality • Ezra the Prophet: market leads to inequality.

• The dangers of emotional response: Yovel and Shmita as religious prescriptions. Nice ideas, but didn’t work. Old Hillel understood and introduced a solution.

4

How do countries cope with inequality? • Very differently. Various degrees of tolerance: Singapore (18) vs. Sweden (6). • Despite the differences above, strong similarities in attitudes: trust, collaboration and long-term view. • Since 1990 Sweden became closer to Singapore, but still big differences.

5

GDP per Capita (PPP) 1990-2105 1960 – No PPP numbers: Sweden was $2,000, Singapore was $475.

6

Globalization • As long as there is no rate harmonization for capital and labor taxation, competition on taxes is inevitable. BEPS, but no rate harmonization even in Europe. • Tax arbitrage gives a strong advantage to capital and skilled labor.

7

Poverty • Arabs and Haredi are much more prone to poverty 48.4%/50.3%, than Jews overall: 14.3%.

• Head of the family does not work: 72% under poverty; one earner 24%, single parent – 21%, and two earners – 5.3%.

• Families with up to 3 children – 15.7%; 4 and more 46.6%. 70% of Arab, and even higher % of Haredi families have more than 4 children. This is a cultural norm. A choice.

•

Strong negative correlation between family size and income.

Dilemma (not new) • What do the standardized person statistics tell us?

Are they suitable for policy?

• Social safety net is justified on the grounds of efficiency and morality in case of poverty due to exogenous events: disability, death of the main wage earner, harsh economic conditions…

• Is it justified in case of poverty by choice?

– Person choosing not to participate in the labor force.

Reasons may vary.

– Person choosing to have more children than they can provide for. Classroom example.

Summary • Were there other options in 2003?

• Poverty is a problem, and needs to be dealt with.

• Inequality is a different problem, but also needs to be dealt with.

• Solutions: better HC preparation, allocation into the fast-growing sectors, higher productivity, change in labor relations, and a more efficient safety net.

• We cannot emulate Singapore, so let’s try emulating Sweden rather than Spain.