How did we get here?

The Jerusalem Post sat down with Ayal Kimhi, deputy director of the Taub Center for Social Policy Studies, to better understand the country's uproar over rising prices.

By LARRY DERFNER
Protesters in Jerusalem (photo credit: Marc Israel Sellem)
Protesters in Jerusalem
(photo credit: Marc Israel Sellem)
With the country suddenly breaking out in economic protests, with tens of thousands of mainly young people taking over the streets of downtown Tel Aviv, Jerusalem, Beersheba and spreading to all points nationwide, with protesters warning Prime Minister Binyamin Netanyahu that if something doesn’t change, he’ll go the way of Egypt’s Hosni Mubarak, it seems a good idea to try to figure out what’s going on.
Not with the protesters, but with the economy – how bad is it (or is it bad at all), for whom, how did we get here, what’s the prognosis?
To try to get as objective a view as possible of the situation – not what the protesters say, not what the government says, and not what the real-estate contractors say – the Magazine turned to Hebrew University agricultural economics professor Ayal Kimhi. He is also deputy director of Jerusalem’s Taub Center for Social Policy Studies, probably the country’s leading think tank on socioeconomic issues, and one with a centrist outlook – an advocate of policies that generally involve measured government involvement, that try to balance the often conflicting needs of societal equality and individual freedom.
Kimhi, 52, a resident of Kfar Warburg, got his degree in economics from the University of Chicago and has held visiting teaching positions at Yale, Pennsylvania and Maryland universities. The interview was conducted on Sunday in his mercifully airconditioned office in the Taub Center, a stunning, refurbished old Rehavia building.
With college students and other young adults putting the government’s feet to the fire with their demands for lower rents, with doctors striking for better wages, with the cottage cheese strike just having won the day, with people hollering over the rising price of gasoline, water, electricity and more to come, it seems the economy’s in terrible shape. Yet we’ve been told for the last couple of years that the economy’s doing great – growth is strong and steady, unemployment is way down, inflation is low – and this when other advanced economies, notably the United States and Europe, are in deep trouble. So there seems to be a dissonance here, and the public perception seems to be that the Israeli economy may be doing great, but the average Israeli is falling behind. Is this perception correct?
It’s half correct. The second half, that the middle class is falling behind, is true. The first half, that the economy is doing so brilliantly, isn’t really true. It’s an exaggeration.
For growth, yes, the economy is growing, but it’s mainly just catching up with the losses of the years of recession at the beginning of the 2000s. We’re basically returning to the level we had in the 1990s and 1980s. It looks good compared to how the Western countries are doing now, but they will come out of their recession and then we will go back to lagging behind them. So our growth is good compared to where we were several years ago and compared to the Western world, but in reality we’re not really moving ahead, we’re just making up lost ground.
As for unemployment, yes, it’s very low, but the unemployment rate, which is under 6 percent, doesn’t take into account the people who’ve stopped looking for work, either because they can’t find decent jobs, or because our welfare system is fairly generous, or because they simply don’t want to work, which unfortunately is not taboo in this country. Furthermore, the low unemployment rate does not reflect the fact that Israel has a very low percentage of people in the labor force – especially among haredim and Arabs, but even if you take them out of the picture, the proportion of people in the labor market is low compared to all economically advanced countries. So the world of work in Israel is not as rosy as it seems.
Ironically the low inflation is the one item you mentioned that’s genuinely good. Bank of Israel Governor Stanley Fischer is doing a great job keeping inflation down by moderating interest rates. The ironic part is that this is what most of the protests are about – rising prices. But people don’t look at the prices that are going down, or aren’t going up. Overall, inflation has been kept down.
Yet the real problem with the economy, the problem that people are reacting to now, is that the benefits of the economy, the growth in the economy, are not being distributed fairly... A disproportionately large amount of the growth has gone to the wealthy, while a disproportionately small amount has gone to the middle class. Middle- class wages have risen a little bit in recent years – but not as much as the overall growth rate. So what this means is, the gaps are growing. In Israel, the gaps between the wealthy and the middle class are higher than in any other economically advanced country. Meanwhile, the gap between the middle class and the lower class is not so great. The middle class is shrinking, it’s being squeezed, it’s being pushed down the economic ladder.
Why is this happening?
Well, in a way it goes back to 1977, the “upheaval” when the Likud took over from Labor, and the country began changing from a centrally controlled economy to a free, capitalistic one. Over time, this meant opening the economy to global forces, and now Israel is subject to forces it was protected from in the past. Now if the dollar or the euro is in trouble, Israeli industrialists are going to feel it, and then their employees feel it, and then their consumers feel it. I’m not saying that we should go back to a centrally controlled economy, definitely not, but while Israelis’ economic lives offer much more opportunity, they’re not as safe and stable as they used to be. It’s unavoidable.
There have been other long-term processes that have affected the middle class as well. The tax structure favors the wealthy at the expense of the middle and lower classes. While income tax is progressive – with higher rates for higher earners – most taxes are regressive, flat taxes, and they tend to be very high – value added tax, car taxes, of course, licensing fees.
Why do you think it’s happening now? Is it because of a sudden downturn in the economic fortunes in the middle class?
No, it’s an accumulation of economic pressures on this class over the last few years. Also, people in this country see that this government can be pressured, successfully. There were plans to raise taxes on fuel, there was a huge outcry, and the government retreated. Remember the plan to raise VAT on fruits and vegetables? Again, a public outcry, and the government retreated. And of course, there’s Facebook, which wasn’t here in the past.
How hard is it for the Israeli middle class compared to that class in other Western countries? It seems that it’s worse in America and Europe, such as Greece and Ireland. In America you’ve had masses of people losing their homes, and in the US and Europe you’ve got joblessness, and you get the feeling that their whole national economies are in danger, which you don’t get in Israel – or at least, that’s not what we’re told here.
No, Israel’s overall economy is in better shape right now than in the US and Europe, which are in crisis. And the main reason for that is the banking regulations that have been in effect here for quite some time, and which prevented Israeli banks from running wild like they did in the West, and which prevented the kind of economic boomerang that we’ve seen abroad. Israeli governments can make wise policy, too, it turns out.
But like I said, eventually Western economies will get out of this slump and go back to normal, and at that point our growth rates and unemployment rates and stability will not look so shiny in comparison with theirs, and it will not be possible to tell the Israeli middle class anymore that they’ve got it so good, that they’ve got it so much better than the Americans and Europeans.
And it’s true – the Israeli middle class is not experiencing the kind of disastrous effects of losing their home or having no hope of finding a job that you see abroad. The problems for the middle class in much of the West are more severe than here. The characteristically Israeli middle-class problem, one that is worse than in other Western countries, is the gap between people with incomes in the middle ranges and those in the upper ranges.
This is not by any means a uniquely Israeli problem, but it is worse here than in other advanced economies. Income gaps are widening all over the Western world, the middle class is shrinking everywhere, but in Israel this has been happening faster than it has elsewhere.
You’ve talked mainly about evolutionary changes, global and national, to explain how the Israeli middle class got to where it is today. But what about Israeli government policy – what effect did this have, good or bad? For instance, the changes that Netanyahu instituted when he was finance minister in the early 2000s, cutting child allowances and welfare and unemployment benefits. Did these help or hurt?
The Netanyahu reforms were good, the economy was in deep recession and changes had to be made. But there have been other policies, by several governments, that did contribute to the current situation.
Netanyahu is talking now about the need to free up the bureaucratic process involved in selling off state land for private development; he’s been talking about this for a good 20 years.
Yes, the problems are known and the remedies have been suggested, but they haven’t been implemented.
It’s said that for all the promises and plans to build low-income housing for students and average- income families, whenever it’s put into practice, it’s only the haredim who actually get those apartments because the government criteria give them to the people who are the most needy – those with the lowest income and the most dependent children.
Exactly, that’s the way it works – government aid goes to the poor, which is fine, but the middle class gets overlooked, it get squeezed more and more. But there are other issues the government hasn’t dealt with that have a direct effect on the kinds of protests you’re seeing now. The monopolies have not been broken up – the utilities, the energy sector, the ports, for instance – and so you see prices for basic goods and services going up and up because the monopolies are too powerful to control and there’s not enough competition to keep their prices down.
What else do you think the government should do to give the Israeli middle class a fairer deal?
The most important thing is education, to invest much more in education, because the system as it is now is not doing a good job in training a skilled, knowledgeable workforce, which is almost synonymous with the middle class. The greatest income gap that exists is between the well educated and the notso- well educated.
So you’re saying that Israel has to raise the skills of the workforce, which make their companies more productive – you’re talking about increased productivity, about generating more wealth, about “making the pie larger.” But will that make the distribution of the pie fairer? Will the middle class get a better share of it?
By increasing the size of the pie, the middle class will automatically get a larger slice. That doesn’t necessarily mean that the upper class won’t get an even larger slice, but objectively, the wealth of the middle class will grow.
What do you think of these housing protests, the social democratic revolution? One of the criticisms has been that it’s mainly spoiled college kids who want to be able to rent apartments in Tel Aviv, the most expensive city in the country. Do you agree?
They wouldn’t have to live in Tel Aviv if the government built a decent railway system so they could live outside the city. The railway system has certainly improved, but it’s nowhere near the standard in the Western world, which has a thick web of commuter trains and trains or subways that run inside the big cities. Students want to live in Tel Aviv because it takes so long to drive or take a bus into the city – but even inside the city it’s hard to get from one place to the other. They’ve talked about building a subway in Tel Aviv for decades; is it happening?
What effect do you think these protests will have on government economic policy toward the middle class?
In the long term, I can’t say; politics is not my field of expertise. And it does come down to politics. But in the immediate term, I think it’s pretty clear that the politicians are responding to these protests, that they’re under pressure from the public to do something, and I think they will. They have to. So in that sense, at least in the short term, I think these protests will have an effect. But short-term responses can lead to unexpected consequences in the longer run, so it is not at all clear that government actions will take us to a better place.