Not a level playing field

In Germany, as in other countries, wealth evidently knows few limits. Taken together, the assets of the ten richest Germans add up to more than 200 billion dollars. In international comparison, however, this positions them as little more than mini-Musks: The Tesla boss, who has now surpassed Amazon’s Jeff Bezos in the global rankings, is worth more than 400 billion on his own. Is such growth a global trend? And is there no upper limit to the scale?

Fabian Pfeffer: We once produced a short video that tried to explain how exorbitant today’s wealth inequalities are. If you stacked up Mr. Musk’s assets as a pile of one-dollar coins, it would reach from the Earth way beyond the moon – an astronomical sum in the truest sense of the word. Such extremes are a little less pronounced in Germany, where the piles amassed by the wealthiest would “only” reach beyond the International Space Station. But the number of multi-billionaires and the volume of their assets is increasing. Regardless of the very top edge of the charts, however, wealth is distributed very unevenly across the entire spectrum. I call this the ‘wealth inequality of the bottom 99 percent’.

What does that look like?

Pfeffer: It is often said that, thanks to its efforts to keep a cap on inequality through the welfare state, Germany is still in a relatively good place in international comparison. But that is true only of the country’s income distribution. Here too, inequality has increased in recent years but is less pronounced than in other countries. You could say that Germany is in the middle rank in terms of income inequality among comparable countries. In terms of wealth, though, we are not so far behind the USA. We often measure inequality using what is called the Gini coefficient, which ranges from 0 to 1. Zero would mean that all households had exactly the same amount of wealth. At the other extreme, 1 would indicate that one individual owned everything. Germany’s coefficient is around 0.80.

Where is wealth spread fairly equitably?

Pfeffer: We often look at the Scandinavian countries. Yet here again, we find that while the income distribution is comparatively egalitarian, wealth inequality in Sweden and Norway is roughly on a par with that of Germany. One interesting example is Slovakia, as we discovered in our international comparison. Here, wealth is far more equally distributed.

How did that come about?

Pfeffer: In most countries, wealth inequality is linked to the unequal distribution of home ownership. The issue is not only the ownership rate, i.e. how many families can afford a house: It is also about the distribution of home equity, i.e. the wealth held in homes. Slovakia is an outlier because residential property was redistributed into private hands when socialism collapsed. In effect, almost everyone was made a homeowner and – unlike in East Germany – was also able to keep their home.

Money can buy you access to opportunities

Wealth yields benefits that go far beyond the chance to enjoy a high standard of living. What are the real benefits of wealth?

Pfeffer: We draw distinctions between multiple functions of wealth. One of these is the purchasing function: If I have money to invest, I can buy access to opportunities. I can send my children to private schools. I can pay for extra tuition. I can enable my children to participate in activities that are of educational value to them. I can send them to expensive universities abroad.

But the benefits of wealth in terms of social position go still further.

Pfeffer: Exactly. What interests me particularly in my research is the insurance function of wealth. Family assets create a private safety net that, to some extent, works in a similar way to our public safety nets – in terms of investing in the future or starting a company, for example, or even investing in your children’s education and career success. Or the question of what your children study. Risks exist everywhere, but they can be cushioned by parental wealth. Even just knowing that you can fall back on your parents’ money in an emergency is likely to influence your decisions. This insurance function is fundamental.

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How does it work in practice?

Pfeffer: We have been able to show a clear correlation between parental wealth and the success of children – not only in the USA, with its dominant private schools and universities, but also in Germany and even in Sweden. Wealth inequalities are thus passed on to the next generation. You can also see the insurance effect in other ways: In collaboration with a colleague at the Berlin Social Science Center (WZB), we can demonstrate that wealth is also often used to bridge periods of unemployment. And in many cases, there is an intergenerational component: Sometimes, it is parental money that eases the “scarring effects” of being unemployed and prevents people from falling into a financial hole. This is, for example, illustrated by our ongoing work in Sweden.

We could add other aspects of life such as health and cultural capital. Ultimately, it all boils down to greater security and more opportunities. Would that be a fair summary?

Pfeffer: Absolutely. And the German language also shows its richness in this regard, because the word Vermögen, which means capital or assets, also intrinsically speaks of the ability to do things, i.e. the opportunities that this capital opens up.

So, there is much more at stake than the issue of envy and that someone else has much more than I do? Is it not also about structural issues that have to do with the unfair distribution of wealth?

Pfeffer: Yes indeed, although ‘unfair’ is obviously a normative category. I think there is a good case for the argument that a society which passes on inequality from generation to generation is both a less just society and an economically less efficient society. We squander opportunities for growth if some options are open only to those who have a private safety net.

When positions of power converge

Wealth also opens up the possibility of political influence...

Pfeffer: In the USA, this influence is there for all to see, beginning with the way the parties are funded. Different rules apply in Germany, but influence is obviously exercised here as well. For example, there are rules governing how companies can be bequeathed and how much capital can be held in these companies for them to be be passen on without being taxed. And there are exceptions to these rules. So, we might ask how these exceptions find their way into the country’s tax code, and whom they are made for? Likely not for the 95 percent of family-owned companies – the small farms or skilled craft businesses – that most Germans would instinctively think of when they hear the term.

Around the globe, there are numerous examples of very rich individuals or companies buying up media firms and publishers that, in some cases, have nothing to do with their core business. How much power does that give to these owners?

Pfeffer: That reminds me of US sociologist Charles Wright Mills, who, back in the 1950s, wrote about how the economic, political, and military elites coordinate to form a power elite. Mills was harshly attacked for saying this. Yet today we have reached a point where we no longer speak of coordination, but of personal union. When a major business magnate acquires an influential daily newspaper and then prevents the newspaper from making an election endorsement, as it traditionally does, this means that positions of power converge into one.

A bit dodgy, perhaps?

Pfeffer: I imagine what will be written in the history books 250 years from now. They might, for example, say that a tech billionaire, who was subsequently also a close advisor to the US president with a lot of room for manoeuvre, had the power to decide whether satellites are switched on or off in a war zone. Looking back, dystopian will probably be the only adjective to describe that. I guess that people will look back with astonishment at what may seem normal to many today – astonishment that such extreme inequalities of wealth were allowed and that the concentration of power was accepted.

A threat to democracy, then? Is society in danger of continuing to drift further apart?

Pfeffer: That is a danger I see, although I also have to give you the conventional scientist’s disclaimer: We need more research on this specific question. We are investigating whether the unequal distribution of wealth and the fact that whole swathes of the population are left far behind an upper portion that sets itself apart – whether precisely this development poses a threat to social cohesion. I recently drove to Hof [a German town near the Czech border] with a TV editor, the idea for this show was along the lines of “big-city professor meets poor town”. He walked through the town with me, and we talked to people who devote themselves to football clubs and social work. The question we were asking was: Is something falling apart here?

The warning signal when public infrastructure begins to

And?

Pfeffer: In the USA, a famous book by Robert D. Putnam called Bowling Alone was published in 2000. In it, the political scientist draws on examples such as bowling clubs to show how institutions that foster community are gradually disappearing from American life. In my 19 years in the USA, I hardly saw anything else: There are less and less places of encounter where social cohesion is lived out. In Germany, we still have many institutions and organizations that promote cohesion. We have a public infrastructure, we have clubs – a rich tradition that must be preserved.

Would the disappearance of such systems be an early warning signal?

Pfeffer: Absolutely. I would see it as a definite warning signal if our public infrastructure began to crumble, be it swimming baths and sports halls, clubhouses and social centers, nurseries, schools or universities. In my research I draw a distinction between private and public assets. And for me, everything I have just described, these institutions that drive integration, is subsumed under public assets. We can ask ourselves how many assets we allow to be accumulated in private hands and how many we want to keep as public assets in this country. That weighting is partly achieved through fiscal redistribution.

Much money from the super-rich also goes to good causes, in many areas: medical research, development aid, educational projects. You yourself are using money from the Stone Foundation to build an Institute of Social Inequality in Munich.

Pfeffer Having wealthy people invest in charitable causes is clearly a good thing. But it is also reasonable to ask whether there are not many projects where decision-making power should not be left in the hands of wealthy individuals. Why should they not be exposed to the democratic process in order to build up public assets and shape the social welfare state?

Estimates suggest that wealth or the transfer of wealth is effectively taxed at a rate of three percent, but work at a rate of 30 percent.

Pfeffer: This unequal fiscal treatment does exist, yes. To take an example: In Germany, the tax assessment threshold when bequeathing companies, for example, is 26 million euros. Up to this figure, a company may, under certain circumstances, be passed on to the next generation completely tax-free. Twenty-six million. We are not talking here about a small farm or the bakery next door, nor about a specialist craft business. And if your mother dies and leaves you a house and you move in, you get to keep the house – with no inheritance tax and no regard for the many advantages that you already had from this asset. Interestingly, the general public has a different perception and often curses inheritance tax as a “death tax”.

When the baby boomers retire

In Germany, we are poised to see a remarkable generational change. The baby boom generation is retiring and will at some point bequeath its wealth. What does that mean for the distribution of property in the future?

Pfeffer: We are about to experience a transfer of wealth the likes of which we have never seen. It is, of course, also the dividend on the long period of peace during which families were able to accumulate wealth. As the baby boomer generation dies off, this wealth will now be passed on. That said, the wealth inequality gets passed on long before the parents pass away. In Germany, people inherit wealth on average at the age of 50. At 50, you have already built up a large proportion of your own wealth. And precisely this wealth creation has, of course, already been facilitated if you come from a well-to-do family. So, conversely, if a large chunk of the parental assets has already taken effect long before the point of succession, inheritance taxation itself will only be able to counteract this intergenerational persistence to a minor extent. Earlier taxation – if we were to reintroduce wealth tax, for example – would do something to remedy this situation. That said, it should be noted that the direct distributional effect even of wealth taxes would be decidedly modest, at least if we were to do it on a similar scale to what we have done in the past. On the other hand, it would bring in more tax revenue, which could be used to develop public assets.

Let’s get back to home ownership. The market has changed dramatically.

Pfeffer: How people live is one of the pivotal dimensions of social inequality. That is a trend in many countries. In the USA, for example, the property market is experiencing a major shift towards concentration; and both during and in the wake of what was called the Great Recession of 2008, there was a further large increase in inequality, including in terms of property assets.

Playing Monopoly with residential property

In cities such as Munich, Frankfurt, Hamburg and Berlin, where the property market is bubbling over, are we approaching the kind of conditions we see in London, where the oligarchs of this world have long since played Monopoly with residential property?

Pfeffer: Today, international financial capital is often invested in cities. There is data for Canadian cities – such as Vancouver – showing that in the attractive downtown area, many apartments are no longer hooked up to the power grid. They have been bought up by the global super-rich who park their money there. The electricity has been cut off because no one lives there anyway. These might be particularly extreme cases. But similar problems could also lie ahead for a number of large cities in Germany.

Bleak prospects?

Pfeffer: Germany at least has one idiosyncrasy: A large proportion of tenants live in cooperative housing. If you told that to an American, they would think it is impossible. Seen in the international context, cooperative housing is regarded as very radical. As with German clubs and associations, we therefore have models that could combat market concentration to some extent. As long as we still grow up with this kind of socialization, with inclusive structures and institutions that are in some way cordoned off from capital markets, then we have models on which we can build.

Let us turn to utopian conceptions: What form of wealth distribution would you see as genuinely equitable?

Pfeffer: That’s a hot topic. Inequality researchers often have very accurate data about inequality but not necessarily well-thought-through attitudes towards equality. In my mind, successful societies will be the ones that manage to concentrate wealth in the form of public assets – in institutions that are accessible to everyone. Unequal property ownership exists in all societies. I would like to see a society that uses a generous public infrastructure to care for people in such a way that everyone has the same opportunities to lead a flourishing life and realize their individual potential. Ideally, it would no longer be so critical if someone had a few euros more in this kind of society.

Professor Fabian Pfeffer holds the Chair of Social Inequality and Social Structures at LMU and is the Founding Director of the Munich International Stone Center for Inequality Research (ISI). Born in 1979, Pfeffer studied sociology at the University of Cologne and the University of Wisconsin-Madison (USA), where he also earned his PhD. He went on to conduct research and teach at the University of Michigan in Ann Arbor (USA), where he established the Stone Center for Inequality Dynamics before coming to LMU in 2023.

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