Mr Fix-it

Trajtenberg: for real social reform to occur defense spending must come down.

By ZIV HELLMAN
Netanyahu and Trajtenberg 311 (photo credit: Avi Ohion/ GPO)
Netanyahu and Trajtenberg 311
(photo credit: Avi Ohion/ GPO)
From the windows of his modest office in Jerusalem, Prof. Manuel Trajtenberg overlooks some of the finest gardens and most elegant buildings in Israel: the Jerusalem Theater, the Van Leer Institute and the Israel Academy of Sciences and Humanities. The official residence of the President of Israel is at the end of the block.
Trajtenberg has traveled a long way from his native Argentina to the very heart of the Israeli establishment. Born in Cordoba in 1950, Trajtenberg came to Israel at age 16. After completing a PhD in Economics at Harvard University, he began a long and distinguished career as a professor of economics at Tel Aviv University before being appointed chairman of the National Council for Economics in the Prime Minister’s Office.
Today, as chairman of the Planning and Budgeting Committee of the Council for Higher Education, he holds the purse strings of Israel’s universities and is the key decisionmaker about the future of academic research and funding.
Last summer, as tent protest cities mushroomed across the country in a middle-class revolt soon to be echoed in the Occupy Wall St. movement, Prime Minister Benjamin Netanyahu appointed him in August 2011 as chairman of the Committee for Socioeconomic Change, a hastily convened group designed to blunt the impact of the tent protests and answer their grievances. Overnight, Trajtenberg was catapulted into the national spotlight as the nation’s Mr. Fix-it.
The committee was charged with no less a task than proposing sweeping socioeconomic change in answer to popular demands for achieving social justice. Netanyahu at the time was desperately seeking a way to relieve the political pressures he felt as protest marches across the country swelled from week to week, reaching a crescendo on September 3, when an estimated 400,000 Israelis took to the streets.
Although largely unknown to the public at large, Trajtenberg was a natural choice to head the committee of 14 economists, academics and officials. His previous job at the National Council for Economics gave him intimate acquaintance with the intricacies of national budget planning. At the same time, from past publications and comments, he was considered ideologically sympathetic to some of the grievances raised by the protest movement, while being conservative with regards to controlling budget deficits.
Critics wondered if he was up to the task, and whether he would become a pawn in a wider political game.
Only 50 days passed between the commissioning of the Trajtenberg committee and the publication of its policy recommendations on September 26, 2011.
Yet its members managed to compose a 267-page tome covering a large number of subjects in depth, from tax rates, education, and labor laws to housing reform, antitrust regulation, transportation and health spending. Launching the report, Trajtenberg delivered a trenchant analysis of the main socioeconomic difficulties that the committee identified, including declining investment in government services, economic concentration and a feeling of estrangement from government institutions that is widespread in the public.
Almost six months after delivering his report, Trajtenberg looks calm, relaxed and as confident as ever in the prescriptions for broad economic changes that his committee advocated, telling The Jerusalem Report that the document produced by his committee was the single most important result of the massive social justice protests that rocked Israel over the summer of 2011.
He says the report has not been buried by the government, as many critics had feared.
“Of the chapters of recommendations that have been brought to the government, depending on how you weight it, I would say that between two-thirds to three-quarters of the chapters have been adopted,” Trajtenberg relates in his soft Argentinian-tinged accent.
“One has to understand that it takes time.”
Mixed reactions Netanyahu embraced the committee’s recommendations immediately after they were presented to him. The public reaction was decidedly more mixed. Labor Party Chairwoman Shelly Yachimovich termed the committee report “a major disappointment.” Daphne Leef, the 26-yearold who launched the social justice protest movement when she pitched the first protest tent on Tel Aviv’s Rothschild Boulevard in July, issued statements in which she rejected the report as being insufficient to meet the movement’s demands and decried what she regarded as its “cosmetic changes.”
The protest movement instead championed a report issued by a group of economists associated with it, headed by Yossi Yonah, professor of education at Ben-Gurion University, and Avia Spivak, professor of economics at Ben-Gurion University and former deputy governor of the Bank of Israel, which formed an alternative committee to Trajtenberg’s.
The Yonah-Spivak recommendations went further than the government-appointed group, calling for increased social security allowances, expansion of the state health services budget, construction of public housing at a cost of 3.3 billion shekels, and an increase in the education budget by 2 billion shekels, paid for by large tax rises.
The Trajtenberg Committee was very careful not to break a rule that Trajtenberg himself created when he was the chief economic adviser to the government: restricting public expenditure growth to less than the growth of the overall economy. The main justification for that rule was paying down the country’s public debt. Israel has been very successful in reducing its debtto- GDP ratio, especially compared to many other nations that have seen increased debt burdens during the recent economic downturn.
Yossi Zeira, professor of economics at the Hebrew University and a member of the Yonah-Spivak committee tells The Report that this formula represents the main element of the debate between the two committees, because of the strict spending restrictions it imposes.
Trajtenberg, however, now says that the time may soon be ripe for reconsidering his own rule.
“The more you approach your target, the more you can raise expenditures,” he says.
“Am I satisfied with the rule? Yes, but I Between two-thirds to three-quarters of the chapters have been adopted think we will need to revise that in the near future, not today, not this year, but I think that around 2014 we will need to revise that.
The rule is fine for now. We need stability, but it may need to be revised in two years or so.”
Zeira is not convinced. He points out that the debt-to-GDP ratio is determined by the deficit. “Given that,” he says, “the instrument to control in order to reduce the debt should be the deficit, rather than the expenditure. Netanyahu is dedicated to keep reducing the expenditure relative to GDP because of ideological reasons, as he stated many times in the past. I still suggest raising income taxes significantly. That can help reduce the deficit and the debt, and can also create a pool of resources. But, for that, the government must show that it does not play the game dictated by the super-rich.”
Implementation After the late summer drama of the dueling committees, the subjects they covered have largely disappeared from the headlines and public attention. Meanwhile, the government, having adopted the Trajtenberg Committee’s recommendations, has been moving forward with the lengthy legislative process of translating the report’s chapters into implementable law.
“It’s a process,” says Trajtenberg. “The recommendations had to be elaborated and translated into the language of decision making. So they are being brought to the government in bunches, each separate chapter. This has been going on in a continuous way almost since October.”
Some of that legislation is already being felt. Many of the recommended Trajtenberg taxation amendments went into effect in January. These included partial cancellation of a planned excise tax on fuel, increases in corporate taxes to 25% (from 24%), an increase in the top tax bracket to 48% (from 44%), and extra tax allowances for children under three years.
In addition, dairy and egg products will soon come under tighter supervision.
Tenders will be published for new public transportation companies, to increase competition and reduce travel costs. The cement industry, one of the strongest monopolies in the country, will be opened to outside competition. The Antitrust Authority has been granted expanded powers.
One of the centerpieces of the report was a recommendation that free education be extended to all children from age three and up (free education was previously guaranteed only from age five). This will add a quarter of a million children to the statesupported education system and subsidized after-school programs in the autumn.
For many middle-class families the law, which was approved after lengthy wrangling among the members of the governing coalition, will be a welcome source of economic relief. Municipal preschool can cost 900 ($240) to 1,800 shekels per month, depending on the number of hours per day a child is in a preschool program. The money for extending free education to younger ages will largely come from 4% across-theboard cuts in government ministries, except for the defense budget.
Defense cuts Defense budget cuts continue to be a bone of contention. The Trajtenberg committee recommended a permanent contraction of the baseline of the defense budget by 2.5 billion shekels, a major change of priorities in a country in which defense spending has always formed a large bulk of the annual state budget. The defense establishment has been waging a fierce battle against reining in military spending, claiming that political instability in neighboring countries in the throes of the Arab Spring revolutions may pose a defense threat that will require significant military spending to guard against.
Trajtenberg, a member of the Brodet committee that studied flaws in the military budgeting process in 2007, still stands behind his calls for a massive contraction in defense spending.
“Absolutely,” he says, without hesitation.
“I think that the basic trade-off Israel faces is between defense and social services.
Any attempt to look at it differently is deceiving the public. I’m not blind to the military threats to the country. I know them very well. I know the defense budget difficulties because I was a member of the Brodet committee, I set up that committee.
I still believe that that is the trade-off.
Essentially, if one internalizes that the trade-off has consequences for lots of other things, including your attitude towards the strategic alliance with the US and our attitude towards the Palestinian conflict. It is not just 2 billion here and there.”
The chapters in the Trajtenberg report dealing with social issues and housing have not yet been fully deliberated on by the government, nor has legislation based on them been presented before the Knesset. So far, the public perception of his committee is that it did not address the burning social issues that brought it into existence.
Trajtenberg is skeptical that the public can be fully satisfied, given the inflated expectations that the protests engendered.
“Expectations were so high,” he says, shaking his head. ”Many of the recommendations will take effect, or be felt, in a long time and not immediately.
This is something that public perception cannot really relate to, long-term effects.
People were talking about ‘Social Justice’ and ‘Social Change,’ with a capital C. This is not something that can be summarized in a laundry list of recommendations.”
As an example, he points to the high concentration of economic power in the Israeli market, which has been blamed for high consumer prices. “What are we doing about it?” asks Trajtenberg rhetorically.
“We are strengthening the staff and the budget of the antitrust authority. Just doing that will take at least a year – to set up the basic structure we have recommended. It will take another two years to be felt. So for the average Moshe Cohen, that is something that seems like the government is not doing anything about it.”
Looking back, would he change anything that his committee included in its report? “No,” replies Trajtenberg decisively. “I don’t regret not doing something, or doing this or that.” He pauses, and then adds with a laugh, “Well, maybe one thing: I did not sleep enough during 50 days. But that is OK.” •