Take it to the Tents

A revolution against soaring prices in Israel – the cost of housing foremost among them – has taken a government, which likes touting its economic successes, by surprise.

By ZIV HELLMAN
Protesting soaring coast of living and social inequalities. (photo credit: Miriam Alster/Flash 90)
Protesting soaring coast of living and social inequalities.
(photo credit: Miriam Alster/Flash 90)
Is it the best of times, or the worst of times? Which tale is one to believe – the macroeconomic view of an export-driven and growing economy getting ever wealthier? Or the view from the tent demonstrations of Tel Aviv’s Rothschild Avenue, of a country whose middle-class feels constantly squeezed, working ever harder just to feel it is falling behind?
 Look only at the macroeconomic figures of Israel, and you will see a prosperous nation in excellent economic shape. Among OECD countries, only Sweden’s recent GDP growth rates have outpaced Israel’s 4.6 percent in 2010. The Bank of Israel’s growth forecast of a galloping 5.2 percent in 2011 sounds impressive, until one considers that the OECD itself is forecasting even stronger Israeli growth, 5.4 percent. Unemployment is expected to fall to 5.8 percent, an all-time low. (In contrast, the unemployment rate in the US is 9.2 percent.) While countries such as Greece and Ireland face the wrath of bond markets questioning their debt commitments, and even the United States has upped its debtto- GDP ratio to 100 percent, Israel has been paying down its debt, with its debt-to-GDP ratio currently only 75 percent.
Private consumption is expected to continue to grow at 4 percent a year, at least through the end of 2011, while investment in fixed assets is forecast to hit a growth rate of 15.4 percent this year. Even the stubbornly high poverty-rate issue begins looking more tractable when one considers the extent to which poverty is concentrated in two subpopulations, the ultra-Orthodox sector and the Arab minority; the percentage of non-Haredi Jews living under the poverty line is about 11 percent, unremarkable in global terms.
But then listen to the complaints of middle- class working Israelis, amplified in recent weeks by the loud and spreading demonstrations. A different picture emerges. While the nominal average salary (currently 8,900 shekels per month) has risen by 17 percent over the past five years, that increase has been more than eroded by the growing cost of living. Over that time period, gas bills have gone up by 33 percent, the price at the fuel pump is up by 23 percent, water bills have grown by at least 40 percent, and electricity prices may soon rise as much as 19 percent. And, as the main message of the demonstrations stresses, housing prices are out of control, with apartment purchase prices up by 55 percent and rents zooming up by 27 percent.
Many have also noted that prices in Israel are frequently comparatively higher than in many other countries. The price of food in Israel has risen 31 percent in the past five years, while in the European Union it rose by only 20 percent in the same period. Buying an apartment costs an Israeli an average of 114 monthly salaries, compared to 71 in Britain, 60 in the United States and only 30 in Sweden. Buying an average new car costs 14.2 monthly salaries in Israel, compared to 5.9 in France and only 3.8 in the United States. Even Bank of Israel governor Stanley Fischer has expressed concern about price levels, telling the press in early August that he recommends the establishment of a committee to investigate the disparity in prices between Israel and the rest of the world and stating that he assumes “the problem is a lack of competition.”
Given that what counts is real growth – what a salary can buy given prices – in real terms, the average salary in the nation has barely ticked up in ten years, while at the same time the profit rates of publicly traded Israeli corporations has grown by hundreds of percents and they have showered much of that largesse on their executives in salaries and bonuses.
Perhaps this is what ties together the two divergent tales, and expresses the real sub-text of the demonstrations sweeping through the country in recent weeks: If we are living in such a rich country, why do we feel like we can barely make ends meet?
The massive demonstrations represent no less than a fullfledged clash of ideologies, according to Arie Arnon, economics professor at Ben-Gurion University and head of the Economics and Society Program at the Van Leer Institute. The demonstrations represent a backlash against the free market privatization and tax reduction policies that Benjamin Netanyahu has systematically applied in two terms as prime minister (in 1996-1999, and over the last two and a half years), and as Finance minister in Ariel Sharon’s government (2003-2005).
Explains Arnon, “The economic growth of the past few years has been focused on the top income decile and top percentile. Those in the middle deciles have a justifiable sense that the government is looking after the interests of the wealthiest. The tax reductions have primarily related to high incomes and corporate profits, and the beneficiaries have been the wealthy. Meanwhile public services are slashed and real incomes are frozen. That is what is behind the calls for social justice.”
Fischer confirms that tax changes have, on the balance, been regressive; in a recent press conference he states that over the past decade, direct tax rates were reduced by about 26 percent while indirect taxes were lowered by less than 5 percent. Since indirect taxes are regressive, paid at equal rates by everyone, while direct taxes take a larger percentage from high-income individuals, the increased relative reliance on indirect taxes as a source of revenues amounts to shifting tax burdens from wealthier individuals to those lower on the income scale.
“Bibi [Netanyahu] may be working hard now to try and make us forget, but several years ago he was openly taking credit for applying the ideology of cutting the public sector and favoring the private sector,” says Arnon. “When he was Finance minister, he compared the public sector to a fat man weighing down on a thin man [representing the private sector]. He proclaimed that he had sought political power primarily in order to bring about this change in Israel’s economy.”
Daniel Doron, in contrast, is outraged at calls for greater government intervention in markets as the cure for the complaints of the demonstrators. Doron, founder and director of the pro-market think tank, the Israel Center for Social and Economic Progress and a former member of an economic advisory group for Netanyahu, expresses concern that the energies of the demonstrations will result in harmful statist economic intervention instead of addressing what he regards as the root of the problems: over-concentration of economic clout in the hands of a small group of elite, wealthy individuals. “The high prices paid by the middle class are caused by monopolies controlled by powerful business tycoons. What people are angry about is the undeserved wealth the tycoons are making,” he argues.
Quoting passages composed by James Madison in the Federalist Papers, Doron tells The Report that some measure of income gap is necessary to form an incentive for private initiative. It is the Netanyahu government, he contends, that is fighting for the middle class by doing what it can to contain the ever-growing concentration of wealth in the hands of the tycoons. “To say that this government is guarding the interests of the rich is outrageous,” says Doron. “It was Netanyahu who fought for taking higher natural gas royalties [against the opposition of the energy companies]. He broke monopolies held by Bank Leumi and Bank Hapoalim.”
In a broader perspective, Israel is far from being alone in grappling with the difficult question of identifying the optimal point on the spectrum between the extremes of an economy entirely run by government decree and capitalist anarchy devoid of any regulation at all. Especially in recent years, partly due to globalization and a nasty international financial downturn, countries from eastern Europe to North America have struggled to find the right economic footing that will enable them to simultaneously maintain growth, provide the health, infrastructure, education and social services that their populations demand, and not slip too heavily into the debt that will expose them to the wrath of the bond markets.
With major Israeli demonstrations occurring in the same week that the US Congress nearly failed to lift that country’s debt ceiling amid acrimonious partisan debate over tax revenues and the size of government expenditures, Arnon sees some elements of similarity in the fundamental issues at stake in both nations. “The question is one of adopting something in between the American Tea Party position [of extremely limited government] and the Old Labor in Britain,” which expanded the role of government so broadly that it was accused of strangling private initiative. Continues Arnon, “Or perhaps taking instead the Scandinavian model, which guarantees social justice without sacrificing economic growth.”
If the economic policies against which so many demonstrators have been railing have been in place for years and years, what was the immediate trigger for the sudden outburst? Arnon admits that, like many, he was taken by surprise by the emergence of the demonstrations. “It was like thunder on a clear day. Even the demonstration organizers had no idea it would grow to such proportions” he says. “It is still not clear what happened. Several things probably came together. Public disgust at what tycoons can get away with, with the support of the government, reached new peaks. The example set by demonstrators in neighboring countries, such as Egypt, where we heard similar refrains about what ‘the people want,’ may have played a role. And we need to remember that this is being led by a younger generation that may not have bought into free-market orthodoxy. This is a generation that has only known employment conditions with no security, hard work without high salaries, and little advancement.”
The focus of the demonstrations has expanded to broad, economy-wide issues such as the balance of direct to indirect taxation, education reform, and the doctors’ strike, among others. So many disparate interest groups have taken to flocking to the epicenter of the demonstrations, along Tel Aviv’s Rothschild Avenue, from West Bank settlement advocates to groups calling for increased child custody for divorced fathers, that tensions have formed between groups concerned about the dilution of their messages.
But the original spark of the demonstrations was a sense of grievance at a runaway housing market and for many it is housing that remains the main focus. “The rising rental costs in recent years left me feeling helpless,” says Efrat Gigi, a Jerusalem resident who recently completed a degree in occupational therapy at Hebrew University, while supporting herself working as a security guard. “Wages remained the same, while rents increased by huge percentages. People from abroad buy apartments that they don’t live in, the supply of available apartments is small, and landlords take advantage of that.”
What is the source of the housing price surge of recent years? Emily Silverman, who lectures at the Technion in Haifa on housing policy, points to an obvious culprit: supply and demand figures. “There are 20,000 more households [added to the population] annually than homes being built,” says Silverman. Among the reasons for the shortfall, she lists long lags in the granting of land planning authorizations and permissions for the import of construction workers from abroad.
Silverman also mentions construction in Judea and Samaria as coming at the expense of needed housing inside the Green Line. “Fifty percent of publicly initiated housing takes place in the West Bank, where the Housing Ministry is heavily involved in infrastructure building,” says Silverman. To put that in perspective, consider that the estimated 350,000 Israelis living in the West Bank comprise about five percent of the population. Most of the rest of publicly initiated housing is concentrated in ultra-Orthodox populated areas, according to Silverman, with the major exceptions of housing in the cities of Modi’in and Lod.
At the same time, she continues, significant numbers of individuals from abroad are buying investment homes in Israel, pushing up demand. Nor can one ignore the migrant workers and refugees from abroad who enter Israel every year and constitute a “hidden demand” element in housing because they are not included in official statistics on household growth in the country. “Refugees and migrant workers are willing to live ten to a room,” points out Silverman. “That drives up low-rent prices, squeezing the market.”
In Silverman’s estimation, the market has not responded to the true housing needs of the populace, as contractors and developers build ever larger homes and apartments. The average new apartment constructed in Israel in the 1990s was a tiny 40 square meters. Over time, the average area in the major cities grew, to 60 square meters, then 100 square meters. The average new apartment under construction today in Tel Aviv comprises an area of 180 square meters. “And this in a city in which 38 percent of households are comprised of a single individual and 32 percent are two-person households,” points out Silverman. “That means 70 percent are one- or two-person households.”
Yet out of 1,500 new apartments built annually in Tel Aviv, only about 50 contain two bedrooms or less. “There is a major mismatch between what the market is supplying and the needs of households,” she says.
Rassem Khamaisi, professor of urban planning at the University of Haifa, laments the current distribution of homes relative to the location of places of work. “There is an ample supply of housing on the peripheries and a shortage in the city centers,” says Khamaisi. “But the jobs are not found on the periphery.”
Along with complaints about the price of buying housing, making home ownership increasingly seem out of reach of many households, the tent demonstrators have also put the issue of controlling spiraling rental prices at the forefront of their demands. The Israeli housing rental market is characterized by a dearth of a market of apartment blocks constructed expressly for the rental market. The supply of rental housing comes almost exclusively from privately owned apartments that were obtained for investment purposes or inherited, and are let out on the rental market. This puts tenants at a disadvantage, at “the whim of landlords,” as Silverman puts it. Conditions and apartment maintenance often depend on the generosity of the landlords and tenants have little year-to-year security as landlords are free to decide to sell their apartments or seek new tenants as soon as contracts end.
Home ownership has for decades been a goal that Israeli households were expected to attain, with renting culturally disdained. There are several reasons behind this cultural attitude, according to Silverman. Hyperinflation in the past led people to invest their money in real estate as a solid, inflation-proof asset that maintained its value from one generation to the next. In addition, the rental market never really recovered from the effects of a law imposed by the British administration in the 1930s which, for the sake of protecting tenants, imposed stringent rent control that forbade rent increases even in the face of inflation, and granted long-term tenants purchase rights to the homes they inhabited.
Although the British laws have long been moot, that law all but wiped out the institutional rental market, which has never recovered. The lack of an institutional rental market is increasingly anomalous given the increasing numbers of renters. As recently as 2006, national home ownership stood at 72 percent. It has since then dropped to 66 percent. In Tel Aviv, about 50 percent of residents now rent.
The main response of the Netanyahu government to complaints about the price of housing has been to accelerate moves it had long been planning in any event to remove what it regards as barriers to the market functioning to correct supply and demand imbalances. For the sake of increasing the supply of new housing, it has proposed removing bureaucratic layers impeding the issuance of building permits, reducing planning times, and taking away the Israel Lands Authority’s role as a middle-man in land sales – over 90 percent of land is owned by the state – a role it has held since the establishment of the state.
Silverman, who came to Israel from New York in 1984, advocates a more active state role for attaining the goal of an immediate and sustainable improvement in the housing situation. She would restore public housing construction in the country to levels more similar to those seen in the past. “There are currently only one or two public housing projects, constructing about 40 houses a year” points out Silverman. “There was recently agreement to increase that to 80 houses, but the Treasury still hasn’t released the budget for that. In contrast, in the 1980s, there were 140,000 public housing units [that had been constructed over the years].”
Rental assistance to low-income earners would also be overhauled, if it were up to Silverman. The current rental assistance program gives those eligible a flat grant of between 500 to 1,200 shekels per month, depending on locale, and ignores other differences between recipients. “The elderly, single mothers, those with two children or ten children – all get the same grant,” says Silverman. “That money is considered discretionary [by budgeters] and vulnerable to budget cuts.”
Finally, Silverman notes that although there are national plans for forests, railways and seafronts, there is no national plan for housing, which would aim to improve existing housing in cities, add floors to existing buildings, and ensure that affordable housing is constructed alongside more expensive new homes.
Khamaisi seconds the call for a national plan. He would even welcome direct state involvement in the construction of public housing, as in the 1960s, instead of relying on contractors, and restructuring of property taxes to encourage the construction of smaller homes. He also recommends relying less on importing construction workers from countries as far away as China and instead opening up the borders with the Palestinian Authority and hiring Palestinian construction workers. “That would lower housing costs [in Israel]”, he says, “while providing work for Palestinian workers, for the benefit of all involved.”
Gigi, who is in transition from being a student to beginning her career as an occupational therapist, just hopes that some solution can be found. “A few years ago, the university gave students living in certain locations in Jerusalem grants of $100 a month to help them pay their rents,” she recalls. “When the landlords found out, they raised monthly rents by that amount so that they got the money. But when the university ended it [the rental subsidy program], the rents did not go down.”
Behind the slogans and the marches remain many questions regarding how much it would cost to meet all the various demands of the demonstrators, and who would ultimately foot the bill. In early August, representatives from the 40 tent cities across the country and the heads of the National Student Union reached an agreement on an initial list of demands. The list is varied in the scopes, costs and institutional changes required to implement the different demands.
Among the items mentioned are a reduction in indirect taxes (in particular VAT), the investment of surplus tax revenues in social programs by way of the state budget, the disbanding of a commission aimed at speeding up construction, but which protesters believe would only enrich building companies, an increase in the budget for the Ministry of Construction and Housing’s mortgage and rental assistance programs, free universal education to every child from the age of three months, an increase in medical supplies and infrastructure at health facilities, a halt to the privatization of welfare and mental health facilities, and a gradual cancellation of private contractor-run construction projects in the public sector.
“I don’t envy Netanyahu,” says Daniel Doron. “He is working on a mission that is nearly impossible. On one hand are vested interests, the tycoons and their like, who benefit from the current situation and will resist reforms. They make enormous money from land speculation – from which the banks and land assessors are also benefiting – and they will protect their interests ferociously. On the other hand, Netanyahu is being pushed by the left and the Greens, who seek to kill Israel Land Authority reforms, in order to save the newts while seeking wealth redistribution. If the good guys, meaning those who want to stop the tycoons from fleecing us, succeed, it will be a sea change in our economics and politics, teaching politicians the meaning of the word accountability.”
Arnon questions the extent to which Netanyahu, who has been committed to tax and spending reductions his entire political career, can take significant steps towards fundamental change in the priorities that have set the economic agenda of recent years. “And it is not just Netanyahu,” says Arnon. “The idea that government is the problem and the market is the solution was also adopted, to various extents, by prominent Labor politicians such as [current Defense Minister and former prime minister] Ehud Barak and [former Finance minister Avraham (Beige) Shochat. It took years to get to where we are now and it will take years to redirect [the ship of state] back to where we were.”
Estimates regarding the total cost of implementing all the demands of demonstrators, which may be as high as 60 billion shekels a year, a full quarter of the state’s total budget, gives even an advocate of Scandinavian-style social democracy as Arnon pause. One need not peer too far beyond the borders of Israel to see countries in Europe that have overspent without raising adequate tax revenues and are now paying for doing so in years of economic misery.
“These demonstrations are not the end [of a national debate on economic priorities] but only the beginning of a long process and dialogue,” sums up Arnon. “It will go on for some time. I trust the Israeli people. They are intelligent enough to understand the issues, and to find the right way to both social justice and economic growth.”