The News Behind The News
March 7, 2001
Intifada in the Bank of Israel?The office of the governor of the Bank of Israel, David Klein, is located on the seventh floor of the Bank. It has a nice view of the surrounding hills, the Ministry of Finance, and the Prime Minister’s Office. In early March, while Klein was sitting peacefully in his office hard at work—perhaps trying to get Israel removed from the international blacklist of money laundering countries, or fending off complaints from the Israel Manufacturers Association about high interest rates, or thinking how nice his signature might look on a new series of shekel bank notes—he was stormed by several angry employees who staged a riot. According to Globes’ reporter Zeev Klein, there were a series of tumultuous demonstrations on the seventh floor. To insure his safety, Klein is now surrounded by bodyguards and security staff are permanently deployed at his office. The man who is responsible for Israel’s currency and financial system is not safe in his own office.
What did Klein do to deserve this inhumane, undignified treatment from his employees? Had he fired any of them without justification? Had he falsely accused any of them of embezzlement? Had he sworn at any of them?
Do you suppose that these riotous employees were trying to steal bank notes from his vault? Or steal secret financial documents?
No. None of the above. The answer is much simpler.
As we have repeatedly pointed out, Israel is not a country with normal labor markets. In Western market economies, supply and demand for labor determines wage rates. Employers are free to hire and fire, and employees are free to change jobs.
But, alas, Israel is not a Western market economy. Either the government or the Histadrut dominate most labor markets. They are engaged in a never-ending struggle with each other over the allocation of public funds. The only way for most employees to get a raise is to stage labor disruptions or strike. Since the better part of everyone’s income is taxed away by the government, frequent raises are the only way to get some of it back. High taxes and big government mean that there is never enough money to go around. The harsh realities of trying to earn a living in Israel has resulted in a culture of disrupting or shutting down the economy every Monday and Thursday.
Since early February, the workers’ committee (note the explicit Marxist language) at the Bank has been engaged in a labor dispute with the governor. The workers want a 10% wage raise and, in what is a truly astonishing demand, automatic promotion for 40% of the Bank’s employees every year.
Thus far Klein is offering to promote 25-30% of the Bank’s employees, but opposes automatic promotion. His wage offer of 2.2% falls below the workers committee’s demand for 10%.Now, Dr. Klein is a well-educated economist. He, like his predecessor, could easily find lucrative employment at an international bank or investment house. It’s not necessary for him to live surrounded by bodyguards and cope with disgruntled, unproductive employees. To get away from this madness, he should propose that the government adopt the dollar as legal tender, close the Bank of Israel’s monetary policy and currency departments, and replace its regulatory functions with a modest regulatory agency, perhaps staffed by U.S. banking regulators, that imposes standard international banking regulations on Israeli banks.
The benefits would be enormous. Israel would no longer have to worry about devaluation or revaluation of its currency. Israeli interest and inflation rates would quickly align with those in the United States. All currency controls would immediately disappear. The Federal Reserve Board would conduct Israeli monetary policy. Finally, Klein would no longer have to worry about Israeli government employees carrying on tumultuous demonstrations and storming his office.
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