Economists and business experts unimpressed by party platforms

Say national strategy for socioeconomic policymaking is missing.

By SHARON WROBEL
March 21, 2006 06:50
3 stooges 88 298

3 stooges 88 298. (photo credit: Courtesy Photo)

 
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With the March 28 elections just one week away, the socioeconomic platforms presented across the political spectrum have done little to impress the economic community. Economists and business representatives agree, however, that proposals presented by the major parties lack substance. "In Israel we have a political culture of economic policymaking. These elections have shown that voters don't like promises for policies that cannot be kept," said Israel Institute for Economic Social Research Chairman Roby Nathanson. In presenting their economic platforms, each major party accused the other of "much talk but no action." Likud said Kadima was making empty promises, while Labor accused Likud leaders of failing to have taken the steps necessary to end poverty during Binyamin Netanyahu's tenure as finance minister. Kadima attacked Likud head Netanyahu and Labor Party Chairman Amir Peretz, claiming they were speaking out of desperation and that, because they had nothing to lose, they could promise whatever they wanted. One promise out there has been that of raising the minimum wage. "Giving people more money by raising the minimum wage is no more than an imaginary solution. In economics you cannot perform magic," said Dr. Omer Moav, of Hebrew University's economics department and a senior fellow at the Shalem Center. All of the parties have made an issue of socioeconomic inequality and only differ in how they plan to attack the problem. "There is not much difference in the economic platforms among the parties. In comparison with Europe or the US, there is no distinctive Right or Left policy in Israel. Here the difference is how far you are willing to make promises on the Right or on the Left," said Prof. Ben-Zion Zilberfarb, a former director general of the Finance Ministry, and currently professor of economics and chairman of the A. Meir Center for banking at Bar-Ilan University. The popularity of poverty as a campaign issue, initially raised by the Labor Party, has led to the rise in the number of suggested anti-poverty measures, such as increasing entitlements, raising the minimum wage and recognizing daycare costs for tax purposes. In the long-run, economists and business experts say, if socioeconomic policymaking is to to be effective in tackling poverty not just as a slogan, three main areas must be addressed: education, a flexible and active labor market and economic growth. "Education is a human capital factor for aggregate growth," said Moav. "The central problem of the education system ... is that it does not measure achievement. The Dovrat report was one step in the right direction, but there is consensus - apart from the Likud - to remove the education reform." One of the few goals common to the main parties is the endorsement of defense budget cuts so resources can be released to close social gaps and promote education programs. Kadima proposes a flexible defense budget cut policy, whereas Likud and Labor would cut the defense budget by NIS 2 billion. "One of the central anti-poverty measures must be a change of priorities from the defense budget to education and investment in vocational training to increase labor force participation," said Nathanson. "Vocational education lacks standards in Israel. The Wisconsin Plan is only a very partial pilot plan, which is not enough to bring the poor out of the poverty trap." Bar Ilan's Zilberfarb demands that the budget expenditure be increased by 2 percent and not by 1% as suggested. "The additional 1% needs to be invested in infrastructure and public-private partnerships, one area that has been neglected," he said. The popularity of socioeconomic slogans suggests a contest among the parties of who best benefits the poor. Take Peretz's leading proposal to raise the minimum wage or the institution of a negative income tax, as suggested by the Likud and Kadima. Fundamentally, experts say, both are sound proposals that are easy to identify with emotionally and morally at the outset, but that there are problems with each. The main question, they say, lies in economic justification. Raising the minimum wage could have two negative ramifications. One is that salaries in the industry could actually recede as exporters lose the race to low-labor cost Asia and close down. Israel's recent history is replete with examples of local textile plants closing down, or migrating to Jordan, Egypt, China and India. Secondly, they say, as minimum wages rise, employers could make greater use of technology, substituting machines for workers. Raising the minimum wage could thus make low-skilled workers unemployable, forcing them to apply for unemployment benefits or income support. This view is shared by Manufacturers Association President Shraga Brosh who argues that raising the minimum wage would increase layoffs of low-income wage-earners and encourage the transfer of production lines overseas. "There is no logic in Peretz's proposal to give people more money. It's a solution that only transfers responsibility to employers," Moav said. Moav added that a reasonable negative income tax policy should endorse a negative average income tax instead of the proposed negative marginal income tax. The problem with a marginal negative tax policy, he said, is that for each shekel more earned you receive less from the government, which discourages work and economic mobility, in particular for low-income earners. Brosh also favors instituting a negative income tax rather than raising the minimum wage. The Manufacturers Association argues that the cost to the economy of a negative income tax is 54% of the cost of raising the minimum wage to NIS 4,500 a month, as proposed by Labor. In addition, a negative income tax, according to Brosh, definitely would reach the low-income wage-earners that the government wants to help. However, a negative income tax policy has stirred debate among economic and business experts. Such a policy would require citizens to file truthful income tax returns reporting an income below a certain level and the irregularity of income sources and shifting family arrangements have been mentioned as practical stumbling stones in the implementation. "There would always be a problem of verifying full information on incomes. Negative income tax is not a real stimulant for work force entry," said Uriel Lynn, president of the Federation of the Israeli Chambers of Commerce and a former director at the Inland Revenue. Instead, Lynn is in favor of gradually increasing the minimum wage rather than drastically, while abolishing, for example, National Insurance and health taxes for low-income earners. Zilberfarb also argues that negative income tax might be a good idea, but the implementation is too difficult and bureaucratic. He believes in a gradual increase of the minimum wage, but adds that differentiation should be made between sectors. Similarly, Nathanson, notes that raising the minimum wage would not be an appropriate measure for every sector. He is in favor of a negotiated minimum wage policy that is not determined by law. The solution, he believes, is not to turn back economic growth by raising taxes and imposing more regulations on employers, but to encourage hiring and faster income mobility through improving the education and vocational system and more flexible labor markets. "At the outset of socioeconomic policymaking, what is needed is a national strategy with the political will and the ability to implement policies," Nathanson said. "We have not seen such a strategy. Over the past years the government has not spent one hour on a socioeconomic issue." Professional recommendations for socieconomic reform Ben-Zion Zilberfarb, Professor of Economics, Bar-Ilan University * Gradual increase of minimum wage * Restoring deep cuts in social benefits * Increase budget expenditure by 2% * Education reform Roby Nathanson, Chairman of the Israel Institute for Economic Social Research * Negotiated minimum wage - not by law * Active labor market policy (i.e. vocational programs) * Change of priority from defense to education * Correction of allowances Uriel Lynn, President of the Federation of the Israeli Chambers of Commerce * Gradual increase of minimum wage * Cutting red tape and bureaucracy * Opening up to competition * Breaking down monopolies

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