Freedom and poverty

Unemployment plunged to 7.7 percent for the fourth quarter of 2006, the Central Bureau of Statistics reported this week.

unemployment generic 88 (photo credit: )
unemployment generic 88
(photo credit: )
Unemployment plunged to 7.7 percent for the fourth quarter of 2006, the Central Bureau of Statistics reported this week. This is the lowest level since 1997, and a significant drop from the 8.3% of the previous quarter. In annual terms as well, unemployment dropped to 8.4% in 2006, compared to 9% for 2005. The cause of all this remarkably good news is obvious and undisputed: The economy has been growing at a healthy clip. On February 5, Bank of Israel Governor Stanley Fischer said that if the Bank were to revise its growth forecast for 2007 now, it would be "closer to 5%." The official 2007 forecast from a few months ago was 4.6%. The seasonally adjusted quarterly growth figures for 2006 show a brisk economy that stumbled briefly during the war, and then took off again at an even faster pace. In 2006, the GDP grew 5.7% in the first quarter, 6.3% in the second, dropped 0.7% in the third quarter (which included the war), then jumped 8% in the fourth quarter. Behind all these dry statistics stand real people who have left the jobless rolls and joined the workforce. The economy has once again proven the existence of a basic causal chain that must not be forgotten: Economic growth produces jobs, and more jobs mean less poverty. This is not to say that all is rosy and could not become better. There are still too many unemployed. We can and should be bringing down the unemployment rate to below 5%. The ranks of the working poor are still very large, so we should not be satisfied with reducing unemployment, either. Yet those who point out all these real flies in the ointment should accept that the best way to get rid of them is for economic growth to increase, and for that growth to be enjoyed more broadly. Our economy remains highly concentrated. Though growth among our largest companies also creates jobs, it is very important to increase competition and to make life easier for the small business sector. As opposition leader Binyamin Netanyahu said at Bar-Ilan University on February 18: "If we want to achieve sustainable economic growth levels of 7 to 8%, we need to implement aggressive tax cuts and speed up reform processes to remove the obstacles to boosting competition. The lack of competition in the economy and the concentration of power in the public sector lead to corruption in the Israeli bureaucratic apparatus." While certainly an economic reformist, Netanyahu as prime minister and finance minister did not implement the "aggressive tax cuts" he calls for now. Now that unexpected tax revenues are pouring in, due to economic growth, there is nothing stopping the current government from stealing Netanyahu's thunder by taking his advice. Though many commentators pretend that our economy already reflects an extreme version of market economics, this is not the case. The 2007 Index of Economic Freedom, issued by the Washington-based Heritage Foundation, ranked Israel 37 among 157 nations - less economically free than Sweden, Finland, Germany and Denmark, let alone the US, UK, Australia and Ireland. Among the 10 factors used to determine the rating, Israel ranked significantly below the global average on the two that measured the tax burden and the size of government as a proportion of the economy. The lesson here is that our economy needs more economic reform, not to rest on its laurels, or to lurch back in the other direction. Moreover there is a connection between the focus of the moment - corruption - and the concentration of the economy. A smaller government that lives off lower taxes means that you don't have to come from one of a few well-connected families to compete in business, and that the average person does not have to avoid taxes to make a decent living. Heavy regulation, big government and high taxes each on their own, and certainly together, form a breeding ground for corruption - an economy based on connections more than on quality, great ideas and gumption. A freer economy will not only reduce poverty at a greater pace, but will increase fairness and reduce corruption in the bargain.