4 - 2003

Reforming the welfare state

A gap is wideningin our society

The rich are getting richer and the poor, poorer ...

by Wolfgang Kessler

The rich are getting richer and the poor, poorer, in Germany and world-wide. But instead of open discussion about it, there is eloquent silence. – The author summarises the results of a study on Wealth and poverty as a call to church action. This 300-page book offers precise information on the social welfare situation in Germany and world-wide, along with theological reflections. The study was published by "Werkstatt Ökonomie” (Workshop on the Economy), sponsored by "Diakonisches Werk” (Social Welfare Agency of Hesse and Nassau), the Church Development Service (EED), the Centre for Social Responsibility and the Ecumenical Centre of the Evangelical Church in Hesse and Nassau.

It is a fact, though it’s not polite to talk about it: Germans are getting richer and richer, while poverty is spreading. Yet many deny that poverty exists; no one mentions wealth, and to call for its redistribution is considered heresy. The market is supposed to sort that out. Proof that the market is not a source of social justice, however, is found in the recently published study  "Wealth and poverty as a call to church action”.

Vast fortunes – unevenly distributed

Germans are immensely rich. Their gross assets amounted to 17,320 billion German marks in 1999, according to the German Federal Bank, including businesses, houses, insurance entitlements and cash assets. Even if you take away what is owned on credit (by homeowners, for example), the net worth of the population as a whole still amounts to 14,600 billion marks. There has been especially strong growth in cash assets: from 1992 to 1999 they grew by 60%, to around 6700 billion marks.

However, this vast fortune is far from evenly distributed. According to a random sample of incomes and spending in 1998, the lower-income half of private households owned just 4.5% of all net assets. The top ten per cent of households, however, together owned 42.3% of the total. Data provided by private bank Merrill Lynch and management consultants Cap Gemini Ernst & Young for the year 2001 show that 365,000 persons in Germany each disposed of a cash fortune of more than a million euros. And the disparity grows more acute from year to year, for almost half the earnings from this fortune (profits, dividends, interest and rents) flow to the richest 20% of households.

In addition there is a considerable disparity between western and eastern Germany. Households in the east are, on average, only 35% as wealthy as those in the west. And the share of those with lower incomes continues to decrease. The church study stated its finding baldly that it is "principally investors from the west who derive major benefits from measures to promote investment, subsidised interest rates, matching investment funds and special tax exemptions.” It also said: "Of all the former communist assets privatised by the federal government trusteeship after reunification, only five per cent are now in east German hands, while 80% are owned by west German businesses.”

More poor people, getting poorer

The other side of the coin of vast fortunes is the overindebtedness of other citizens. In 1999 some 2.77 million Germans sought remedies for debt problems. Seven per cent of all households were living on excess credit – a third of these had debts of over 50,000 marks. These overindebted households reflect only a part of the poverty which is spreading ever further through wealthy Germany. But poverty in a rich country is hard to define. Where does it begin and end? Social scientists define a household as poor if its net income is, at most, half the average household income of comparably-sized households.

On this basis, a growing gap must be noted in German society. For 70% of all households, there was no great change in income from 1973 to 1998. Those with higher earnings gained more than the others, though the latter saw scarcely any loss of income. But the lowest-income households suffered dramatic losses during those 25 years, with the bottom ten per cent giving up 13% of their share of national income, the next lowest ten per cent losing six per cent of theirs. This means that the gap between rich and poor in Germany is wider than ever, and the 20% of households with the lowest incomes are drifting farther and farther away from the national average. In 1998, about 10.9% of all West Germans were living in poverty – about seven million people. This amounted to 67.7% more than in the 1970s.

The labour market is blind to social welfare

The most important cause for this growing gap between rich and poor is increasing mass unemployment. From a rate of 1.3% in 1973, unemployment has risen to 11% in 2003. Unemployment exerts a strong downward pressure on wages at the lowest levels. In 1975, about 10.5% of all employed persons in western Germany earned less than half of average gross wages; by 1997 this figure rose to 11.5%. During the same period, the figure for full-time employees earning more than 130% of average wages rose from 10.9 to 14.7%.

An increasing erosion of so-called normal employment conditions also has heavy consequences. In 2000 only 62.8% of all employees in western Germany were protected by general wage contracts (covering their entire sector) – in eastern Germany, 45.5%. In 1996 the figures had still been 69.2% in the west and 56.3% in the east. In addition, increasing numbers of those employed work only part-time (27.1% in 2001, compared to 18.4% in 1992 in western Germany) – and those part-time jobs amounted to fewer and fewer hours. This trend toward insecure working conditions is the cause of the polarisation of income in the labour market. The division created in the society by the distribution of work and income threatens the future viability of Germany’s social welfare system, and with it the future viability of the country itself.

Private wealth and public poverty

Anyone who expects politicians to be resolutely opposed to this division in our society will be disappointed. Quite the opposite is true; for decades, taxes on income from profits and assets have been reduced, while being raised for wage and salary earners. The degree to which taxes have been lowered on capital incomes is illustrated by the way the state is financed. In 1960, wage earners were still carrying only 11.8% of the overall tax burden, while 31.1% came from taxes assessed on income from profits and assets. By the year 2000, wage earners’ share of income taxes had risen to 35.4%, while taxes on capital incomes had almost vanished – down to 2.7%.

The great majority of the population is also burdened by massive increases in excise taxes, while the wealth tax was abolished by the Federal Constitutional Court in 1995 and has not been restored by policies since then. When one adds to all this the fact that large corporations have continually improving chances to avoid taxes through globalisation, the social reality in Germany is clear. While many cities are almost bankrupt, and along with the federal government and the Bundesländer (the states of the German federation) are continually having to cut expenses, more and more money flows into the financial market from large corporations and the wealthy.

Is the One World breaking apart?

Even more brutal than the social divisions in the rich industrial countries is the one that exists  world-wide. According to the UN, the income of the richest one per cent of the world’s population in the year 2000 equalled that of the poorer 57%.

The countries which succeed in the world free market are those which can compete at world level in exporting their goods and services. This is true for most industrialised nations, and also for the nascent economic powers in Asia or Latin America with their strong exports. These were able to narrow the gap between themselves and the industrialised nations. However, the poor countries in Africa and Latin America, which have little to offer on the world market, are simply written off. Here, violence mushrooms often enough into civil wars that threaten entire regions.

Justice or envy?

The division of our society is also the result of an economic ideological offensive. For decades, so-called neo-liberal economists have favoured the maximising of profits and private wealth, on the basis that only the highest possible profits can bring investment and jobs. They claim that social inequality guarantees economic dynamism, since only those who produce more earn more. Those calling for social justice are dismissed as egalitarians or simply envious wimps. This is the ideology followed by more and more governments, and it has now taken over the minds of those who used it to come to power.

We have now seen neo-liberal ideology refuted by economic crises. Enterprises invest only when demand increases – the rest of the time their profits simply flow into the financial market. Social inequality aggravates crises, because the poor cannot buy very much and the rich already have enough and save their money. These negative consequences of inequality show that the discussion of justice makes sense economically as well, and has nothing to do with envy. Setting limits on inequality demands courageous policies – and the participation of marginalised people in making these policies.

W. Kessler is editor-in-chief of Publik Forum, Oberursel – "a journal for critical Christians”. This article appeared in Vol. 9, No. 3, of 9 May 2003.