Social protests yelling 521.
(photo credit: Marc Israel Sellem)
It seems like 2008 all over again. True, the cast of characters and the scenery
have changed. Instead of an imploding mortgage market, an evaporating Lehman
Brothers and huge bank bailouts, we have an imploding Italy, an evaporating
Greek economy and huge country bailouts.
Act I, Scene 2008 was played
against the backdrop of empty homes, an end to eight years of Republican rule
and a panicked Wall Street; Act II, Scene 2011 is being performed in front of
the Greek parliament building, the collapse of multiple European governments,
and Occupy Wall Street.
But the fundamental problems of indebtedness,
dysfunctional financial markets and more bailouts are distressingly similar to
those of three years ago.
Another constant is that Israel is in nearly as
good a position to sit out the financial crisis in 2011 as it was in 2008. Our
economy has been growing smartly through the intervening years while the US and
Europe have struggled to climb out of recession. Israel started running a
current account deficit this year for the first time since 2003, but it has
approached nothing like red-light levels. Most importantly, we have less debt
relative to the size of our economy than any of the big Western economies
One reason is that last time around, the Israeli banking system
didn’t need to be bailed out, nor did the economy need costly stimulus measures
to keep it afloat.
While developed economies were taking on more
liabilities, Israel was one of the few countries that actually reduced its
relative debt load over the past three years.
Nevertheless, there is one
critical difference between 2011 and 2008: Today, the very policies that enabled
our economy to weather this period are under attack from the protest movement
that started with cottage cheese and morphed into a generalized critique of the
country’s socioeconomic policy direction.
The protesters correctly
identified the ailments – growing inequality and persistently high rates of
poverty, the high cost of living, and a tax system that favors capital over
labor. But the diagnosis was faulty, and the medicine Daphni Leef and other
protest leaders are prescribing – go after the tycoons, increase government
spending and entitlements and increase the role of government in the economy –
could hurt the patient more.
IRONICALLY, GIVEN the situation developing
in Europe as the tent protests were gaining momentum, the inspiration for the
social justice protests has been the socalled European Model. Given the
situation developing in Greece, Italy and now France, it is a bit ironic that
the inspiration for the social justice protests has been the so-called European
Model of social-economic policy. But the tent protesters are looking longingly
at an era that seems to be rapidly fading away, of generous social, unemployment
and pension benefits and free tuition through university. Economic pressures
have whittled away at the model for years: Government-owned enterprises were
privatized, labor unions declawed, social benefits pared back and retirement
ages raised. Europeans still enjoy more government largesse than Israelis, but
their unemployment rates are higher.
So far, the financial crisis of 2011
has not extinguished all the lights across Europe.
Germany and the North
are still solvent and economically competitive. Some of the ways they have been
able to ensure that is through high rates of productivity growth and because a
large portion of the population is in the active workforce. And if you’re going
to run a budget deficit year in and year out, you have a pretty rapid rate of
economic expansion to grow your way out of ever-expanding debt.
has recorded impressive rates of economic growth in recent years, but by other
measures we look more like a Mediterranean country than one of the more
admirable economies of Europe’s North. Germany has a GDP per capita of about
$40,000, the Netherlands $47,000 and Switzerland more than $67,000. At $29,000,
Israel’s is more in line with Europe’s poorer south. Greece’s is about $27,000,
Spain’s is just over $30,000 and Italy’s is $34,000. Although it is getting
better, we also have a relatively low 60.2 percent of the working-age population
actually holding jobs. That’s not much better than Greece (59%), Italy (56.9%)
or Portugal (59.4%). By comparison, 71.2% of all working-age Germans are
employed, as are 72.7% of all Swedes and 74.7% of those in the
The under-working, overspending South of Europe is already
in deep trouble. The North will have trouble avoiding the same fate. That’s
because there is a great leveling out of the world economy right now, which
means that not only are China, India and a host of other countries growing
richer, they are doing so at the expense of the wealthy West.
as two decades ago, the West had a near-monopoly on the technologies and
management systems of a modern, industrialized economy. That monopoly enriched
it and enabled it to spread wealth around through higher wages and an
ever-increasing array of social benefits. Now if China can’t make a car as good
as Germany’s, it can certainly make one as good as Italy’s, and much more
cheaply. And if Indians aren’t producing software on the same sophistication
level as Israel, they can certainly write a lot more code and are moving up the
The bottom line is, an Italian auto worker or a
Spanish machinist can’t compete with his Chinese or Vietnamese counterparts when
his wages and social benefits, as well as the government’s take in taxes, are
many times higher. Eventually those Asian workers will see their compensation
improve, but before that happens, the Europeans and Americans are seeing theirs
decline or disappear.
Economically speaking, these are dangerous times.
Israel does have serious social inequalities, and the Trajtenberg Committee did
a good job of trying to square the need to address them with the fiscal and
other constraints we face. The medicine Israel should be taking is pushing more
people into the workforce, attacking the most inefficient sectors of the economy
(starting with the ports and the Electric Corporation) and overhauling the
educational system. If we do, we might just get through yet another global