Yair Lapid: What Middle Class Are You Fighting For?

Old Israel is characterized by political incorrectness and unions; New Israel by the home it can't afford.

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Like a warrior hero out of central casting, Finance Minister Yair Lapid has emerged battered and bruised from battling the fiscal monster. Now he is ready to fulfill his promise to rescue the middle-class princess in distress.

Her name is Rikki Cohen, of course, and she has been waiting patiently, chained to a household income of 20,000 shekels a month ($5,700) while Lapid wielded a sword in one hand, chopping away at deficits, and a Facebook shield in the other, defending himself against endless media onslaughts.

Unfortunately, real life is less heroic. True, the government is likely to end with a much smaller deficit in 2013 than it expected – about 3.5% of gross domestic product, compared to a projected 4.63%. But it not yet clear how much of the 2013 fiscal performance was due to one-time factors, like the revenues from taxes on “trapped” profits.

Nevertheless, Lapid went ahead and rescinded an income-tax hike slated to go into effect January 1, on the assumption that 2014 spending and income trends will be much the same as in 2013.

Oops, a tsunami

That act seems to have marked the start of Lapid’s campaign to rescue the middle class. Apart from cancelling the tax hikes, the finance minister loudly (that is, with an evening press conference) cut prices on a range of dairy products and introduced controls on others at the end December. Last week, he suspended duties on imported fresh produce to stem the rise in prices following December’s nationwide storms and promised college students to build 5,000 dormitory rooms.

We should soon be hearing the details of a government plan to build affordable housing.

Lapid led his Yesh Atid party into a dark-horse victory last year by capturing in words – even if they were not accompanied by any specific proposals – the distress of Israel’s bourgeoisie. But with the exception of desperate Facebook postings begging for patience from the voters who brought him to power, the middle class disappeared from his agenda when he met up in his first days as finance minister with a massive budget deficit.

You could only feel sorry for him during his first months in office. Whatever good intentions Lapid had, he was overwhelmed by a fiscal disaster that he was barely aware of until taking office. He was also hobbled by his ignorance of economics. He was criticized mercilessly for betraying his constituency, but the fact is he probably did more for the middle class by putting the government's finances in order than anything else he could have done then.

Now, the time has come to return to Yesh Atid's raison d'etre.

White knight or whipping boy

Ordinary Israelis are certainly in need of relief: Prices for everything from food to housing are high by developed-country standards; incomes have stagnated; the schools deliver an inferior product; the infrastructure the middle class needs most, such as roads and Internet, are poor; and being self-employed or starting a small business is a struggle with red tape.

Lapid has presumably learned a lot in his months at the Finance Ministry, but nothing like a comprehensive program to help the middle class has emerged. Everything is scattershot and designed to attract attention. It seems that he has learned how to be a politician more than anything else, but after his experience as media whipping boy and his crash in the polls that shouldn't come as a surprise.

Even with the best intentions, however, Lapid will have trouble identifying who the middle class is.

Economists like to define it as people earning between 75% and 125% of the median income, but by that definition only 26.6% of Israeli households in 2011 qualify, according to a study by the Knesset Research and Information Center.

That hardly counts as the great mass of Israelis. If you broaden the definition by adding households with income of up to double the median, the percentage rises to 49.4%, but now we’re talking about a very wide income range, with very different lifestyles and interests.

Inside the narrow middle class, the differential in incomes is unusually wide, according to a study by the Taub Center for Social Policy Studies. The gap between households in the 90th percentile and the median in Israel is the highest of all developed countries, as is the gap between the median and the 10th percentile.

Then there is the generational difference the Taub Center has documented: While the median incomes of young families headed by Jewish parents born in Israel stagnated between 2005 and 2010, the incomes of other families increased.

Alt-neu Israel

These differences in many ways reflect the middle classes of the Old Israel and the New Israel.

Old Israel is more likely to work in a monopoly industry and enjoy the protection of powerful unions. It will suffer if cartels are broken up or the power of organized labor is broken. Old Israel already owns a home and has no problem with soaring home prices. Old Israel enjoys the tax breaks for retirement savings.

New Israel is less unionized, more likely to work in high-tech than in a monopoly industry and is struggling to find a home or to make mortgage payments if it has one.

New Israel was the one that turned out in the summer of 2011 to express its grievances, and it gave Lapid his votes last year, but it hasn’t been heard from since.

Old Israel may not be politically correct, but it is powerful because its interests are better organized, through the Histadrut labor federation and the business lobbies. Preserving the status quo is a lot easier than effecting long-term change.

The situation in Israel is not unique; the battle lines are similar across much of Europe and the stakes are often much higher, as evidenced by the continent’s double-digit unemployment rates for young people. Governments are hobbled by heavy pension obligations and labor laws protect older workers, deterring employers from creating jobs for newer ones.

The interests of the Israeli economy – first and foremost, cracking down on monopolies – are more in line with those of the middle class of the New Israel. But more than that, the country's future is reliant on the New Israel's agenda. Better education and more spending on universities will ensure Israel's knowledge-based economy of innovation extends its life into the next generation and spread to other sectors of the economy besides a handful of high-tech startups. Encouraging competition and making it easier for small businesses will reduce the cost of living and spur ensure that the next generation of middle-class Israelis isn't impoverished by mortgage payments.

It will be tough, but Lapid should side with the middle class of the New Israel.

Protesters stand on a poster of Finance Minister Yair Lapid during a demonstration against the government's economic policies. May 2013.Credit: Rami Chelouche

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