Benjamin Netanyahu's news conference at the beginning of the week sharpened the ideological debate between the worldview that supports a free economy, and the socialist worldview. The socialist view says that government spending should increase because with more money it will be possible to solve more social problems. To that end, of course, heavier taxes must be paid by the rich. And who are the rich? Anyone who earns more than me.
The socialist approach says that the means of production - capital, land, and labor - should remain under government control, and that privatization and reforms are sinful because they take away the means of production, power, and control from the government and enrich those with capital. The socialist approach says that growth is a swinish capitalist slogan because it is meant to only benefit the wealthy.
It's against that background that Netanyahu's June 2003 economic program came under bitter criticism by those who appointed themselves the protectors of society. They argued that his plan would lead to catastrophe, that the sharp cuts in the budget would deepen the recession, that growth would be negative, that unemployment would grow and wages decline. Amir Peretz predicted that unemployment would easily pass the 11 percent mark.
But Netanyahu did the exact opposite of what the recommended. He cut the budget, cut allotments, lowered taxes and conducted reforms and privatizations, and the economy recovered and grew at 4 percent a year. Wages rose by 2.7 percent, and unemployment dropped from 11 percent to 10 percent. Some 100,000 Israelis went back to work - not necessarily in high tech, but in commerce, services, tourism, construction, agriculture and even as house cleaners. Growth began to trickle down, to all strata.
Now, they say, that was easy: The poor get poorer and the gap between the rich and the poor gets greater. And indeed there is a problem, but it was not born in the last two years. It's already 30 years old. In the early 1970s, the Black Panthers was formed, followed by Tami, a movement that demanded social change. The state's leaders chose the easy solution: They increased welfare instead of investing in education, physical and cultural infrastructure, in roads and trains and vocational training for adults. The government invested huge amounts of money in the territories, but for people in the outlying towns far from the cities, they handed out fish instead of teaching them to catch them.
The result was a mental change. Life without work became a tolerable norm. It turned out it was more worthwhile to collect allotments and benefits from the government than to get up every morning and go to work. Taxes rose to pay for the welfare, which grew by the year, but the result was an increased number of poor and widening gaps in society. The system failed, big time.
Furthermore, the government committed an economic and social crime when it opened the gates of the country to foreign workers in the mid-1990s, and thus threw tens of thousands of Israelis out of construction, agriculture, and services and into the arms of unemployment and welfare allotments.
To stop this destructive process, some tough surgery was required, to encourage a transition from welfare to work: a cut in the allotments and at the same time, a cut in income taxes.
Clearly, the result was difficult in the first stage. Less welfare meant a rise in poverty and social gaps, and that is exactly what is happening now. But that is what happens in every difficult surgery. First it hurts, but when the pus is removed, the patient recovers and is saved. That takes time.
In another 18 months, when the 2005 poverty report is published, we will find that the gaps have been narrowed. The elderly are now getting a 4 percent increase in their old-age payments. Many people are joining the workforce. The number of people getting allotments is on the decline, and therefore it is possible and necessary to increase the amounts given to those who really need the allotments: those who cannot work, the sick, the elderly and the infirm.
It is only when the economy is free that it can move forward, freeing more resources and enabling giving more to the weak. The engine of economic freedom is the best social engine that exists.
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