Whither Israel: Welfarism or growth?

The productivity of Israeli workers is only two-thirds that of Americans, and their salaries are much lower.

Money cash Shekels currency 521 (photo credit: Reuters)
Money cash Shekels currency 521
(photo credit: Reuters)
The Taub Center’s “2013 State of the Nation Report – Society, Economy and Policy in Israel” reveals, albeit unwittingly, why despite years of pouring billions into transfer and welfare payments (about NIS 55 billion out of the 400b. that was last year’s budget), the grave problems of poverty and income inequality in Israel are not only unresolved, but seem to have grown worse.
The Taub report illustrates how ideological presuppositions, ostensibly supported by “research” based mostly on questionable premises and faulty data, have generated government policies that pursue ephemeral goals via impossible-to-implement means at an extremely high cost to hard-pressed Israeli taxpayers.
Despite the repeated failures of these policies, some of the economists who exposed them still insist that by pouring more money into such failed policies, we will somehow manage to get better results.
If Israeli welfare policies fail to tackle the country’s intractable social problems successfully, it is in part due to a refusal to learn from the many years of their failure, and to a reluctance to take a fresh look at the challenges facing Israel’s society and economy, which could help us adopt more serious and effective policies for stimulating rapid economic growth.
Only rapid growth could create a “rising tide that can lift all boats” as US president John F. Kennedy famously hoped.
Although it arguably possesses the best human capital in the world – as George Gilder persuasively argued in his The Israel Test – and although it benefited from over $300b. in foreign investments, the Israeli economy still cannot fulfill its enormous potential.
The productivity of Israeli workers is only two-thirds that of Americans, and their salaries are much lower.
The Israeli economy is highly politicized and concentrated.
The public sector is the largest employer and buyer in the economy. Extensive government interference and heavy bureaucratic regulation kill competition, reduce efficiency and breed nepotism and corruption.
Israeli politicians have encouraged the formation of huge monopolies, most of them dangerously leveraged.
They have erected insurmountable entry barriers.
Small businesses, the engines of growth in any economy, are choked by taxes and regulations and starved for credit (which is the chief reason the Negev and the Galilee remain economically backward). Politically connected big businesses use their monopolistic clout to hike prices of most consumer goods and services by 100 to 300 percent, making it nearly impossible for most families to make ends meet.
Our tycoons, and their tens of thousands of enablers – politicians, big-shot lawyers and accountants, PR and media persons, academicians, and the many who keep them all in clover – shamelessly demand astronomical salaries and bonuses, even when they fail and destroy wealth – mostly people’s pensions – in the billions. The Hebrew language has no word for “accountability.”
This has created in Israel perhaps the greatest income gap in the Western world. This unconscionable gap has inflamed a destructive politics of envy.
It pits interest groups against each other in a permanent struggle to gain government favors. It has launched an obsessive drive for a putative equality that has been used as an excuse to further extend welfare handouts.
Dependence on welfare, which never seems enough to its advocates, even though transfer payments and welfare policies consume about 14% of the government budget, was perhaps an unavoidable necessity in the first years of the state when Israel had to absorb masses of impoverished immigrants.
While perhaps helping the poor to keep their heads temporarily above the waters of inflated prices, it also spawned armies of well-heeled bureaucracies and a costly “welfare lobby” with many advocates in academia, research institutes and the media.
THIS WELFARE culture, with its incessant drumbeat of “equality” and annual anti-poverty festivals exacts a punishing cost from the poor. It has helped fashion a distorted, laggard economic system of the kind that government-run welfare systems inevitably spawn (extensive welfare cannot be managed without heavy bureaucratization and high taxes that shift resources from productive to anti-productive uses). It has been denying the poor the opportunities offered by a thriving economy, the opportunity and dignity of earning their own livelihoods. It has condemned them to perpetual penury and dependence for three generations now, and is still doing so, with all the attendant social pathologies this implies.
Worse, welfarism, which succeeded decades of even more disabling socialism and the nationalization of almost everything (including land, water and electricity), has perpetuated an economic culture where people prosper and become millionaires, even billionaires, not by serving people’s needs, as in a competitive market economy, but by using political connections to get unlimited unsecured credit and to build rapacious monopolies that rob consumers. It has turned Israel’s financial sector into a great destroyer of wealth, and Israeli industry – with the exception of its hi-tech sector – inefficient and non-competitive (hi-tech prospered within a sort of competitive market bubble by getting most of its financing from abroad and selling its products there, while enjoying the privilege of not being unionized).
Labor markets have been extremely politicized by monopolistic public service unions that dominate the Histadrut Labor Federation. They extort very high salaries and benefits at the expense of all other workers. As for housing, with government controlling 93% of land and the building industry dominated by monopolies and cartels, a few real-estate wheeler-dealers became billionaires and most contractors millionaires, while young Israelis have to spend 130 months of salary to buy a modest apartment.
YOU WILL find none of the above – not a word about these grave problems – in the Taub Center report, though it claims to “provide a big-picture perspective of Israel’s society and economy.” This, despite the fact that for the last few years, the policy community and the media have been shaken by studies that exposed the great perils of excessive concentration in the Israeli economy and its dangerous ramifications. Perhaps the Taub Center report should have been renamed “The State of the Welfare State Report.”
Since the Taub Center is supported by the Joint Distribution Committee – a welfare-dedicated institution – it is perhaps not surprising that its report opens its macro picture section with a 68-page discussion of “Poverty and Inequality Over Time: In Israel and the OECD” (it is a mystery why Israeli policy makers would want to emulate the OECD, as they so eagerly do, considering the less-than-stellar performance of most of its constituent economies – Spain, Italy, France, Greece, Ireland, etc.). It then follows with a 15-page macro perspective that focuses almost exclusively on “developments in the government budget,” as if government is the only significant player in the economy.
It then immediately reverts to what runs like a red thread throughout the report: its single-minded preoccupation with inequality among various groups, and in education and health. It considers these as “primary socio-economic issues,” but totally ignores their etiology in the economic distortions and handicaps we enumerated.
AFTER MANY years of ignoring the low productivity of Israeli workers while incessantly harping on a distorted picture of unemployment in the haredi and Arab sector (the statistics on these two sectors are totally unreliable, since much of their economic activity goes unreported), the Taub researchers at long last discovered that low Israeli labor productivity crucially affects Israeli prosperity. But they got the reasons all wrong by totally ignoring the anti-competitive and inefficient structure of the country’s economy, plus the politicization of the workplace, ascribing low productivity to mostly one factor: lack of equality in education.
Poor education does indeed impact employment negatively, but not mostly for lack of equality; rather it is because a “national” – namely government – system, run by a huge bureaucracy and dominated by monopoly teachers’ unions, has destroyed the excellent semi-private (and therefore competitive) high-school system that made Israel a leader in science and technology. Meanwhile, the social sciences and humanities departments in universities, which have been captured by stale neo-Marxists and postmodernist dogmatists, have produced hundreds of thousands of worthless (employment-wise) diplomas, acquired at great cost to the students and the taxpayer (who subsidizes education).
The obsession of welfarists like the Taub researchers with the false ideal of income equality, by which they measure social advancement, is what skews the Taub Report so badly. It causes them to recommend policies that have badly hurt the economy and its people. Income equality is an impossible-to-realize, false ideal. There is no way a complex economy that wishes to encourage creativity and excellence can avoid rewarding people with different skills and productivity differently. Nor is income equality the major factor in securing equality among people. Luck, innate talents and evolving abilities, where a person was born and when, often play a much greater role.
Yet the pursuit of a pie-in-the-sky equality makes the Taub researchers promote policies that damage economic growth, thus depriving the poor of their best hope – a growing share in a prosperous economy, even if it is not an equal share.
More must be said on the devastating results of this unfortunate conceit, this misleading ideology. More must be said on the role played by our good American brethren who have contributed since the beginning of Zionism to the transformation of the Zionist enterprise, meant to make Jews a productive people, into predominately a welfare project. But this is another opera and must wait for another occasion.
The writer is founder and director of The Israel Center for Social and Economic Progress, an independent economic think tank. www.icsep.org.il.