Free Market Fanatics See a Communist at the Bank of Israel

No crisis seems able to shake the government's belief in Thatcherite-Reaganite economics. But Karnit Flug deserves credit for trying, challenging Netanyahu on his own terms.

Ravit Hecht
Ravit Hecht
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It’s not surprising that under the rule of one of the most extreme right governments in Israel’s history, both politically and economically speaking, Justice Minister Tzipi Livni (Hatnuah) is considered a radical peace activist, and Bank of Israel Governor Karnit Flug is already bordering on the lunatic margins of communism. What did Karnit Flug say that brought on the attack by the free market fanatics, who believe in reducing taxes as a cure for every problem and favor the government’s total shedding of responsibility for its citizens, even if the social pyramid tips over onto their heads?

Flug said that the increase in life expectancy will lead to a sharp decline in the ratio between the number of people of working age and the elderly population, and as a result the working public must increase its payments for funding old-age pensions, and the government has to increase its expenditures on health and welfare for the citizens. She also said that the painful problem of the failure of Haredi men and Arab women to become integrated into the job market is expected to subtract 1.3 percent from the already low growth. She added that in light of forecasts of the composition of the population in the coming years, there will be a need to increase taxes only in order to maintain the present level of services.

In that context Flug enumerated several tax benefits that subtract tens of billions of shekels annually from the government’s revenues; Some of these benefits may be going to strong populations that can manage without them. She also mentioned that there is a need to improve and streamline the public sector and to increase Israel’s low work productivity.

It is surprising how the 2008 financial crisis and major collapses such as that of the IDB group or even the Hadassah Medical Center, which was funded by public money but was under private management, were unable to undermine the Thatcherite-Reaganite belief in the sanctity of private management. The public sector earns a significant percentage of the criticism aimed at it, but examples of distortions and market failures can be found equally in the private oasis: Coca-Cola (The Central Bottling Company) uses its monopolistic power no less than the Israel Electric Corporation, and the cartel of the banks, which is private for the most part, is strangling the sophisticated market no less than any Histradrut labor federation guild.

Flug’s words are annoying to Prime Minister Benjamin Netanyahu because an economic authority who speaks his language, even if she clearly does not espouse his opinions, is calling on him to take responsibility for the socioeconomic situation of Israel’s citizens. The Bank of Israel reports, especially in the Flug era, repeatedly enumerate the many social problems in Israel: the high cost of housing, growth that does not filter down to the lower deciles, a problematic job market that includes working people who are poor, low productivity, underemployment and eroded wages that no lowering of taxes will be able to prettify.

Netanyahu boasts of extricating the economy from a serious recession in 2003, and of leading Israel to impressive growth percentages, by Western standards, thanks to cutting allowances and reducing taxes. That reform, along with its proven accomplishments, also brought Israel to first place in rates of poverty and inequality among developed countries; to a more than doubling of the number of households which are below the poverty line despite having two wage-earners; to a constant erosion of public health and education; to a cost of living that is producing a generation that lacks housing, financial security or an ability to save for a frightening desert of old age. Flug’s restrained capitalism could be a middle road between the two extremes that have become bankrupt – Mapai-type socialism (Mapai was the forerunner of the Labor party) and neo-liberalism. Maybe we should give Flug a chance after all.

Karnit Flug. Credit: Tomer Appelbaum