The
Director’s Column
By Dr. Alvin Rabushka
Director, Division for Economic Policy Research
On May 17, 1999, General Ehud Barak inflicted a stunning
defeat on Prime Minister Benjamin Netanyahu. Before we examine the implications
of Barak's victory for Israeli economic policy, let's back up to an editorial
entitled “Divisive Politics in Israel,” which ran a week earlier in the May 11,
1999, issue of The New York Times, and some post—election commentaries
in the U.S. and Israel.
The New York Times
The Times observed that the election would help
determine the course of the peace negotiations with Palestinians and Israel's
Arab neighbors. Perhaps more important was the election's likely impact on
achieving peace among Israelis themselves. The Times remarked that
Israel is more fragmented than ever on ethnic and sectarian lines and that “Israelis
can use the campaign to reinforce the values of tolerance and inclusion.”
To continue: “It is dismaying to think that American
consultants to both parties may be encouraging Israeli politicians to exploit
their divisions rather than heal them. But on another level, the squabbling
among subgroups represents a certain healthy maturing of Israeli democracy. It
would be impossible and unwise in any representative government to avoid or
suppress debate over the benefits of government.”
The Times concluded its editorial: “Though Israel
is a democracy with an established religion, it can find positive values in its
diversity....An election that understandably underscores the divisions of
society can nonetheless clear the way for a new civic identity of inclusiveness
and respect for pluralism.”
Whoa! Where to start?
Let's unpack the Times' editorial.
The Times says that the campaign should be used to
reinforce the values of “tolerance and diversity” and create “a new civic
identity of inclusiveness and respect for pluralism.” Tolerance, diversity,
inclusiveness, and respect for pluralism are code words of the American left.
They constitute the mantra that has replaced the old explicitly Marxist,
socialist code words of “class conflict.” Led by the American Jewish community,
the left encompasses the elite educational establishment, the dominant media,
Hollywood, politicians, the environmentalists, gays and lesbians, racial and
ethnic minority leaders, and a raft of interest groups that live off government
benefits. The capitalist oppressors in the Marxist world of class struggle have
given way in Israel to “intolerant, exclusive, and disrespectful of pluralism”
religious Jews, who are charged with oppressing the vast majority of secular
Israelis yearning for peace and the full exercise of their “democratic” rights.
The Clinton Team
The chief American consultants in question are the
Clinton team of James Carville, Robert Shrum, and Stanley Greenberg, who make
their living exploiting divisions. They twice succeeded in electing Clinton by
appealing to women, minorities, gays and lesbians, environmentalists, the
elderly, Jews, single—parents, and other special interest groups. They
denounced “family values,” and attacked religious conservatives, accusing them
of wanting to reverse the Supreme Court decision legalizing abortion. James
Carville has been the most vociferous critic of the trio, promising to “get
even” with anyone or organization that dared to criticize Bill Clinton. This is
the stuff of tolerance and inclusiveness? Conservatives and religious persons
need not apply.
But can the Times criticize the trio that twice
elected their man president? Its editorial writers surely hoped that they would
work their magic on behalf of Barak. The way out of this conundrum is to
characterize squabbling among subgroups — the divisions exploited by Carville,
Shrum, and Greenberg — as a sign of healthy maturation in Israel's democracy.
Knights of Pluralism
Most important of all in the editorial is the statement
that it would be unwise to suppress debate over the “benefits of government.”
With this phrase, the Times defines the main purpose of representative
government as the distribution of economic spoils. There is little room in this
view for a reasoned discussion of limits to government and state power and the
merits of individual economic freedom.
Here is a sample of the confirming post—election
commentaries:
Chemi Shalev, a political analyst for the newspaper Ma'ariv,
said that “Last night [the night before the election] we were a clerical right—wing
nation. Today we are social democrats and the knights of pluralism.”
Yossi Klein Halevi, a senior writer for the Jerusalem
Report, wrote in a column for the Los Angeles Times that “Barak was
the first Israeli prime ministerial candidate to openly campaign against ultra—orthodox
power....”
Albert Hunt, in The Wall Street Journal, wrote
that the election victory gave Barak “a mandate to accelerate the peace process
with the Palestinians, stimulate the domestic economy and curb the special
privileges accorded ultra—Orthodox religionists in this Jewish state....If he
reduces the role of the ultra— religionists, it certainly will play well with
many American Jews.”
To top it all off, Stanley Greenberg, Barak's pollster,
wrote in The New York Times that “He [Barak] promoted his plan to shift
state resources from the ultra—Orthodox schools to expanded financing for
mainstream education.”
Can you believe
that the most ssuccessful theme in Barak's campaign, in the world's sole,
explicitly Jewish state, was the vigorous denunciation of religious Jews? Can
you imagine an election in Italy in which a presidential candidate denounces
the Catholic Church as his principal issue? Or a presidential candidate, if
elections were freely held throughout the Arab world, denouncing Islam as the
top issue?
Economic Policy
General Barak promised to implement an economic plan to
create 300,000 jobs (Al Hunt wrote that the specifics of how he will do this
are vague). Barak promised to reduce
funding for ultra—Orthodox schools to increase spending on infrastructure and
mainstream education. Barak also promised to provide free (taxpayer financed)
education for all Israelis from preschool to university.
In the absence of details, it's difficult to evaluate his
economic plan. But there are clues to the measures he will propose based on his
Labor Party background and his statements. Barak will govern with the support
of the most left—wing, anti—religious Knesset ever. The broader his coalition —
he will want to assemble the broadest, largest possible coalition to support
his moves in the peace process — the more he will have to increase government
spending to buy their support.
Here is my forecast of his policies. Barak will ask the
Knesset to appropriate more funds for spending on infrastructure (roads, ports,
schools, utilities, etc.) and less for Orthodox schools. This shift of funds
will finance a few thousand jobs at most.
More Bureaucrats
Barak will then ask for additional funds with which to
subsidize potential foreign investors, a standard Israeli practice, and
subsidize additional domestic investment. He will allocate more funds to
Israel's big monopolies, cartels, and state—owned enterprises, both to repay
his political supporters and because sustaining the socialist economic system
built by his Labor Party is the meaning of his mandate. He will ask for
additional funds to hire more bureaucrats for a multitude of government
ministries — he'll find something for them to do in the name of infrastructure
and other social investments — and hire additional teachers in state schools to
implement his pledge to expand preschool and university education. All of this
amounts to an increase in the size of the Israeli government, which already
spends some 55 percent of the gross domestic product and regulates a good
portion of the rest.
Barak Will Ask
Where will all this extra money come from? Barak will ask
the Knesset to increase the budget deficit to “stimulate the economy.” This
will result in higher, not lower, interest rates, as purchasers of Israeli
government bonds demand an extra inflationary premium. Barak will seek
selective tax increases “on the wealthy” to finance additional government
spending. Higher taxes, in an already highly taxed economy, will contract, not
expand, the economy. Barak will implore the governor of the Bank of Israel to
loosen monetary policy by reducing interest rates in order to increase credits
to Israeli enterprises. Lower interest rates will weaken the shekel, increase
domestic inflation and living costs (thus reducing living standards), and lead
to pres—sures for wage increases that will ultimately make Israeli industry
less competitive. Interest rates will ultimately rise, not fall, as the Bank of
Israel is forced to fight inflation.
And Ask
Above all, Barak will ask the United States and other
world leaders who supported his candidacy for additional foreign aid as the
“price” of progress in the peace process. This additional aid will be siphoned
off in support of higher salaries for government bureaucrats and as subsidies
for the numerous money—losing enterprises that constitute the bulwark of
Israel's socialist economy.
Barak is likely to move Israeli economic policy
backwards, in the direction of its historical socialist roots. His labor
supporters in the Histadrut, a national labor federation, will resist all
efforts at privatization and the dismantling of state—supported private
monopolies and cartels. His subsidized and protected friends in the business
community will fiercely resist efforts at making domestic industry more
competitive. His friends in agriculture will continue to demand, and receive,
subsidized water and other government benefits. And so on, up and down the
length and breadth of the Israeli economy. There is little Barak can do to
assist the one dynamic sector, high—tech, of Israel's economy. Government
bureaucrats do not design fancy semi—conductors or conceive exciting internet
projects.
High—tech is the product of individual creativity. The
only thing government can do to encourage it is to leave it alone. High—tech is
a global enterprise and, as it is, Israeli high—tech firms are increasingly
moving their world headquarters to the United States, their largest market.
It would help, of course, if Barak reduced Israeli tax
rates across—the—board, but this is unlikely given his need for additional
money. In any event, high—tech exports only amount to about 5—6 percent of the
gross domestic product, and this ratio has been relatively constant for more
than a decade. The hype about Israeli high—tech is more rhetoric than reality.
The total amount of venture capital that has come to Israel in the past four
years, some $4 billion, is about one—tenth the level of “free money” that has
flowed in during the same period in foreign aid, grants, charity, and
guaranteed loans.
Boomingly Stagnant
In the spirit of Marxist metaphysics, which consists of
convoluted linguistic attempts at resolving putative contradictions, it is
frequently reported in the popular media that Israel is enjoying a high—tech
export boom, that the country is an economic powerhouse, that Israelis have
taken their place among the top 20 countries of the world — on a par with many
in Western Europe, that Israel has outgrown its need for aid and charity, and
that billions of dollars in venture capital have poured into the country.
This and more.
But wait! Barak, with the assistance of Carville, Shrum, and Greenberg, told
Israeli voters that the domestic economy needed to be stimulated to overcome
high unemployment, slow growth, and increasing poverty.
Which is it? A booming, high—tech economy? A moribund,
stagnant economy? Or both, at the same time? It appears that it takes a Labor
Party prime minister to resolve this contradiction.
