Israel’s Problem Isn’t the 1%

The middle class is fragmenting as money-soaked monopolies and the high-tech sector grow distant from the rest of the economy.

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The end of September was party time for the 1%. If they weren't breaking out the champagne and trading up to a bigger super-yacht, they certainly made known their pleasure at the U.S. Federal Reserve's decision to continue its policy of quantitative easing for now. From Wall Street to Tokyo, stocks and bonds rallied on the news, as they did in Tel Aviv a few days later when the Sukkot holiday break ended.

Quantitative easing, as the Fed's strategy is called, is designed to shore up the flagging U.S. economy by keeping interest rates low and freeing up capital to invest in business rather than in government debt.

How successful it has been is hard to judge. On the one hand, the U.S. economy is experiencing its weakest post-recession recovery in decades and unemployment is still above 7%. On the other hand, things might well have been a lot worse without it.

But one thing you can be sure of. QE has lifted prices of equities and other assets, almost entirely to the benefit of America's wealthiest.

Emanuel Saez, an economist at the University of California at Berkley, estimates that 95% of all the gains in America's recovery began in 2009 have accrued to the top 1%. "This is the biggest distribution of wealth from the middle class and poor to the rich ever," the billionaire hedge fund manager Stanley Druckenmiller told CNBC television last week.

The Bank of Israel hasn't engaged in QE to anywhere the same extent as the Fed, for the obvious reason that the Israeli economy never got sucked into the global financial crisis. But that hasn't saved us from the same sort of wealth transfer America and much of the developed world has been seeing. Even though the Tel Aviv Stock Exchange was trading at a two-year-high this week, its performance has been poor: The Standard & Poor's 500 index is up some 20% so far this year while the TA-25 has recorded just a 4.8% gain.

The real problem isn't the rich waxing richer, but that the middle class is shrinking and fragmenting . There is plenty of anecdotal evidence for that. Just take the contrasting fortunes of the travel and shopping mall industries over the High Holidays.

Jet-setters versus window-shoppers

Ben-Gurion Airport was packed with outbound travelers – 1.5 million air travelers were expected to pass through the airport – an increase of about 10% over last year – and El Al added about 25,000 seats on overseas flights to destinations like New York, Bangkok and London. The Israel Hotel Association reported occupancies running as high as 100%. For people who could afford to travel just weeks after they were travelling over the summer vacation, times are good.

That carefree spending didn't reach the country's malls. They were packed because shopping centers are a cheap form of entertainment. But those families were prowling every inch of the malls but the checkout lines: The market research firm Retail Information System found that the week between the week before Rosh Hashanah through September 22, sales at the country's malls fell 1.9% from the same time last year to an average of NIS 56 a square meter. 

In terms of income, Israel has two middle classes. The traditional upper middle class are the people who work at state-owned monopolies and are represented by powerful unions.

The average monthly salary in Israel was NIS 9,302 in March. However, if you were among the 147,000 who were employed by a state-owned enterprise it was NIS 16,200. If you worked in the especially lucrative water and power monopolies it was NIS 18,510.

The other highly lucrative sector was finance, where the average was NIS 17,100 a month, with those at the banks earning NIS 19,228.

There was a time when the monopoly-union juggernaut extended to wide swathes of the workforce; today, it is a privilege so valued that employees of the ports and electric company do whatever they can to ensure their children can get jobs in it.

To that traditional upper middle class, a new segment has emerged over the last decade or so – the denizens of Israel's high tech sector. They include the employees of startup companies who get to take home a tiny – but for a middle class family an enormous – share of the proceeds when their company is acquired by a foreign multinational. Many, many more techies are employed at the scores of research and development centers operated in Israel by foreign companies, where salaries and benefits are far more generous than those offered by local industry.

Cracks in the backbone

The great middle of Israeli society, like elsewhere, shares many of the same values, a certain level of education and culture, expectations for growing prosperity, job and life satisfaction, and for a relatively high level of comfort and security. These shared values and experiences are what hold us together. They ensure that the middle class has a stake in politics, is ready to pay its taxes, serve in the army – in short, they serve as the backbone of society.

But the gap in middle class incomes is growing so pronounced that there will be fewer and fewer of these shared values and interests.

The housing crisis shows just how those common values are being frayed. If you were to read the newspaper headlines and government reports about the skyrocketing cost of housing, you would think there would think there would a revolution is ready to explode in the streets as desperate families risk their financial futures to provide a roof over their heads. Of course, these are all written by journalists and government bureaucrats, two groups firmly ensconced in the lower middle class.

For the lower middle class, there is indeed a crisis – and a worrying one because the lower middle class is younger than the traditional one. It is the one, based on the average wage, who will need to pay the equivalent of 135 monthly salaries to buy a homes.

But, of course, an Israel Electric Corporation workers or a Waze employee face no similar burden. Indeed, for the traditional upper middle class, who bought their homes years ago, rising home prices are a boon.

A despairing lower middle class once took to the streets in the summer of 2011 and later voted for Yair Lapid, but they are fighting a battle against economic trends and political forces far more powerful than a thousand protest tents can ever hope to overcome. If change is going to come, it will have to come from a recognition at the top of the political establishment that something very big is in stake for Israel.

An Israeli mall in the doldrums of summer.Credit: Ofer Vaknin

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