On sweat, and killing flies with cannons
1. Stanley Fischer, the governor of the Bank of Israel, showed a degree of courage unusual in our parts, when he exposed to the harsh light of day the worst-kept secret in the country: A tiny clique of rich businessmen, each of whom controls vast numbers of vast companies, constitutes a clear and immediate danger to Israeli democracy.
They subvert competition. They frustrate innovation. They block reforms. Politicians, the press and regulators who read the map of power in Israel have learned that there are some people they shouldn't mess with.
The fact itself was an open secret. But to see the power map in detail - who's cuddled up with whom, and who's carving out giant slices of the pie for himself - we needed Fischer to elaborate the description beyond "18 or 20 families." We needed him to raise the issue of "juntas": groups of organized workers who attached themselves to the public teat decades ago, never to be removed or even to have their productivity overseen.
One of these groups is the employees of the Bank of Israel, headed by Fischer himself. Last week Fischer argued against letting the Finance Ministry supervise the wages of Bank of Israel workers, on the grounds that "There is structural tension between the central bank and the Finance Ministry. It wouldn't be right for the treasury to have a tool it could use any time it has a professional dispute with the Bank of Israel."
It seems that Fischer has learned the rules of the game on Israel's uncompromising playing field. Concede nothing. You'll get no reward for your forbearance. But Fischer needs to understand that there is "structural tension," to borrow his phrase, between the outlandish wage-fest at the Bank of Israel over the last 20 years (which the public woke up to only a few years ago) and the status of the Bank of Israel as economic adviser to the government.
If the Bank of Israel served as a model to the public sector as far as wages were concerned, it would be entitled to demand independence. But it doesn't. The wage machinations and manipulations at the central bank are among the most egregious exposed in the public sector this decade.
On Monday Prime Minister Benjamin Netanyahu carried through on his threat: Despairing of the Finance Ministry and central bank reaching common ground, he made a binding decision. He came down on the side of the Bank of Israel.
Yes, the Finance Ministry will monitor central bank wages, and it will have the power to say yea or nay. But unlike other institutions of government, the central bank will be entitled to appeal the ministry's decrees to a panel, and if it doesn't like the panel's ruling, to the prime minister himself. The prime minister's decision will be final and binding: There's no further appeal option. In other words, the Finance Ministry won't have the last word over central bank salary levels.
2The Finance Ministry: Its demand to wield veto power over wages at the Bank of Israel, and to demand the same transparency and controls instituted throughout the public sector at the central bank as well, is justified. Wages should be monitored and controlled throughout the public sector, and that should apply to all the regulators. Transparency and supervision shouldn't impair the regulatory independence of these bodies.
But the fervor with which Finance argued its case smacks of something beyond dry professionalism. If the Finance Ministry were to conduct a battle in the spotlight against other parts of the public sector, we'd feel a lot more comfortable about its demands of the Bank of Israel.
The discoveries about remuneration norms at the Bank of Israel are outrageous. But if they're looking for daylight robbery, the Bank of Israel isn't the place to start if only because it's such a small organization. It is a shame that the Finance Ministry isn't conducting a similar jihad against bodies that are as rotten as the Bank of Israel and far bigger. For example, the defense establishment. Billions upon billions of shekels are squandered there without any proper disclosure or supervision, because the defense junta is, probably, the most powerful in the land.
Fischer is often criticized for his globe-trotting, although there is no questioning the fact that Israel has no better ambassador in economic circles. But the cost of his trips don't even register against the scale of the cost of the Defense Ministry's various and sundry junkets.
The Bank of Israel and the Finance Ministry should be teaming up to battle corruption in the public sector. But the former is itself tainted, while the latter is fixated on a single target, the Bank of Israel, which though worthy and strategic is a very small target indeed.
3Executive wages: The Wall Street Journal, that bastion of strict conservative economics, hasn't budged leftward so much as an inch regarding executive pay. The daylight robbery on Wall Street and the way the party ended last year changed nothing whatsoever at the paper. No: the WSJ continues to argue in favor of leaving the market totally free to set executive wages, whether the pay in question be $1 million, $10 million or $100 million a year. Last week, in its editorial, it attacked the Obama administration's decision to appoint a wages czar to companies that got government aid, such as Big Auto. In the opinion of the WSJ, even when a company relies on taxpayer money to survive its board should be free to set wages as the directors see fit.
What about the financial crisis? Weren't there any lessons to be learned? In the paper's view, government policy bears the chief responsibility for the meltdown.
And this has what to do with Israel, exactly? It's all very far away. The Israeli government didn't have to bail out any companies, and the wage excesses are in the "free market," where managers are compensated according to the "market for executives" and corporate performance. Right?
Only superficially. Israeli companies can be divided into three groups. The first consists of companies that really do exist and fight for survival in the free market, like the high-tech pack. The second group is companies contending in the free market, but the fluctuations in their profits and the failure of institutional investors to supervise properly allow their executives to make huge salaries even as investors are going broke.
The third group are the profitable, strong companies whose managers take home vast salaries. Many operate in uncompetitive markets. The high remuneration of their managers is based on the ability of these managers (or of the companies' controlling shareholders) to torpedo competition. Improvement in the performance of these companies doesn't derive from improved productivity or innovation but rather on their ability to wield their monopolistic power to extort the public, their suppliers, or both.
There's a saying in Aramaic, which boils down to: wage proportionate to sorrow. One could interpret that abrupt sentiment in any number of ways. Aficionados of the free market would say, if you sweat and suffer you'll be rewarded. But in the Israel described above, remuneration does not always reflect productivity and effort. Perhaps the saying should go the other way around: remuneration shall determine the sorrow. Of investors, that is, and taxpayers.
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