The conventional wisdom about Israel’s elections is that Prime Minister Benjamin Netanyahu will lose tomorrow because he has not paid sufficient attention to domestic and economic issues while concentrating almost completely on the need to address security, specifically the nuclear threat from Iran. Considering that he has spent the last few days of campaigning speaking even more assertively about refusing to make concessions to the Palestinians, Netanyahu clearly disagrees with that conclusion. But that’s the point that New York Times columnist Paul Krugman makes in his pre-election column in which the economist and former Enron advisor (as the Wall Street Journal’s James Taranto never tires of calling him) damns Netanyahu’s handling of the economy which he says has bred more inequality. There is some truth to Krugman’s analysis of what is wrong with Israel. But that answer to a very real inequality crisis is the opposite of what he thinks: more capitalism, not more statist economics. And that is why, despite his lack of emphasis on the issue, Netanyahu has a better grip on the problem than Krugman.
Though references to Israel’s economy in the mainstream media often assume it is a mess, Krugman deserves some credit for pointing out that this is simply untrue:
Israel’s economy has performed well by the usual measures. It weathered the financial crisis with minimal damage. Over the longer term, it has grown more rapidly than most other advanced economies, and has developed into a high-technology powerhouse.
But, as Krugman is quick to point out, many Israelis are deeply disturbed by what they see as rising inequality with the people at the top doing well while poverty increases. But the main source of dissatisfaction is that the middle class is increasingly squeezed by the high cost of living, especially with regard to a shortage of affordable housing in the country’s main population centers.
But, as Krugman rightly notes, the sort of rhetoric that we are used to hearing about inequality from American liberals carrying on about the “one percent” who enjoy riches denied others doesn’t really apply to Israel.
At the other end, while the available data — puzzlingly — don’t show an especially large share of income going to the top 1 percent, there is an extreme concentration of wealth and power among a tiny group of people at the top. And I mean tiny. According to the Bank of Israel, roughly 20 families control companies that account for half the total value of Israel’s stock market. The nature of that control is convoluted and obscure, working through “pyramids” in which a family controls a firm that in turn controls other firms and so on. Although the Bank of Israel is circumspect in its language, it is clearly worried about the potential this concentration of control creates for self-dealing.
Still, why is Israeli inequality a political issue? Because it didn’t have to be this extreme. …
Meanwhile, Israel’s oligarchs owe their position not to innovation and entrepreneurship but to their families’ success in gaining control of businesses that the government privatized in the 1980s — and they arguably retain that position partly by having undue influence over government policy, combined with control of major banks.
Krugman is right about this. When Israel began to privatize its bloated and mismanaged government-run industries after it woke up to the reality that its founders’ belief in socialism was misplaced, what happened bore a resemblance to the aftermath of the collapse of the Soviet Union and with similar consequences: the creation of a very small class of moguls who benefitted from the windfall.
But the implication here is that somehow this is Netanyahu’s fault. He’s been prime minister a long time, but not that long. Most of the blame for the distribution of goodies to the elites belongs to the previous generation of Israeli leaders, especially Shimon Peres and the late Yitzhak Rabin.
But though Krugman complains that Israel doesn’t do enough for the poor, even he has to acknowledge that high poverty rates are mostly the function of the problems of the country’s Arab minority and its ultra-Orthodox Jewish population. Many Arabs remain trapped in a cycle of poverty that is rooted in the conflict over Israel’s existence and cultural problems that are seen in surrounding Arab countries. Many ultra-Orthodox men don’t choose to participate in the work force out of a misplaced belief that it is wrong for them to do so rather than to engage in religious studies.
Yet that doesn’t gainsay the fact that the country has a real problem with a cost of living and the lack of social mobility for the middle class. Angst about this is exacerbated by the country’s long embrace of egalitarian ideals. It is also true, as Krugman says, that there wasn’t much inequality up until the early 1990s. But that was because before that point Israel was operating on a socialist economic model that made it difficult for anyone to make money. If historically capitalism invented an awareness of poverty because before its appearance almost everyone was poor, the same applies to any discussion of income inequality In Israel prior to the reforms that were instituted.
But contrary to Krugman, the cure for this isn’t a retreat from capitalism. Netanyahu was primarily responsible for saving Israel’s economy in the early 2000s when, as finance minister in Ariel Sharon’s first government, he spearheaded reforms that helped make it possible for it to become the “Start-Up Nation” that is the envy of the world’s high-tech centers. As the primary advocate in Israel of what Krugman correctly calls “free market economics,” Netanyahu is competing against a generation of fellow politicians who remain mired in the rhetoric of entitlement and big-government solutions. Their talk pleases those who are nostalgic for the Israel that was egalitarian but was so economically backward that visitors were asked to bring jeans and consumer goods with them. That is a path to more problems, not greater and more widespread prosperity.
If the next Israeli government strays from free market policies, the result won’t do much to make it more egalitarian. But it will be poorer. And that is something that even Netanyahu’s critics won’t applaud.
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