Kahlon’s Dangerous Mix of Netanyahu and Begin

The man who slashed Israeli mobile bills has been tapped to be Israel's next finance minister. But Moshe Kahlon's next reforms are going to be a lot harder, and won't be helped by his legacy of Beginomics and Bibi politics.

Moti Milrod

Moshe Kahlon, the man Benjamin Netanyahu has tapped to be Israel's next finance minister, has made it perfectly clear what he wants to do when he gets there.

At the top of the pile is reducing Israel's embarrassingly high poverty rate and trimming yawning gaps in income inequality. Nor is Kahlon ignoring the plight of the middle class: He promised to look after the interests of Israelis who make 10,000 shekels ($2,500) a month too (putting him in stark contrast to Yair Lapid who – to great derision at the time – thought the "middle class" personified as the imaginary Rikki Cohen and her husband earned about twice that much.

How is Kahlon going to do that? The first is by profoundly reforming the real estate market to bring down housing prices, which have risen by some 50% in the space of a few years.

The centerpiece of his plan is to disband the Israel Lands Authority, which has been rightly blamed for limiting the supply of land, thereby preventing builders from constructing enough homes to meet demand. In its place Kahlon envisions a single housing entity that would cut through all the bureaucracy and ensure enough homes are built over the next few years to fill the shortfall, which Kahlon says has reached 250,000 units.

Certainly housing has to be dealt with. Prices at their current levels are enough to impoverish any middle class family that aspires to a home of their own in the middle of the country. Increasing supply is the way to bring them down, and the ILA is a major barrier to doing that.

AP

But doing away with the ILA is going to be a long and tedious process that could end up forcing prices higher as unions battle to block it. Don’t be surprised if Kahlon does a Lapid and opts for a quick but dubious fix like the ill-fated "Zero-VAT" plan.

Banks aren't candy

Kahlon’s second big agenda item is to force competition onto the the banking sector, which he says is earning fat profits at the expense of depositors. He wants to force the banks to divest their credit card businesses and small-bank subsidiaries, to create more lenders that could fight over customers with better service and lower fees.

He also aims to break up cartels in natural gas and the food industry.

In effect, what he wants is to repeat his beloved cellular reform with the banks and the gas and food cartels. He wants to break up the cartels and bring down prices.

What worked for a cellphones might work for food, but Kahlon is going to discover that banking and gas are a different order of problem.

When banks are not healthy

Banking is a delicate business. When banks are healthy they allow the wheels of business to spin; when they are not, they can bring an economy to its knees as an American, Icelander or Irishman can bitterly tell you from recent experience.

Introducing competition isn’t an easy process to control: It could save depositors money, but it could just as easily risk the banks’ financial health and encourage reckless lending.

Israel can afford to let the upstart mobile minnows like Golan Telecom lose money as it tries to win market share, and if it collapses, no one except a few creditors and shareholders will be hurt. If Bank Hapoalim is in trouble, we all are.

Natural gas is a different can of worms. It’s a big and global business that demands billions of dollars in investment and technical skills that only a few multinational companies possess. Israel’s problematic geopolitical situation only adds to the risk any company takes in doing business here.

For the government to be playing bait-and-switch games by changing regulatory and contractual terms with the energy companies developing offshore fields is very dangerous. Noble Energy may be too committed to pack up and leave easily, but other companies don’t have to come at all. Overseas customers for the gas are already getting cold feet, wondering when Israel will get its act together to allow development of its giant undersea field, Leviathan, to proceed. Kahlon should think very carefully about taking anti-cartel measures in the gas industry.

Health and bad habits

The third item in Kahlon’s In box is to increase spending on health, welfare and education.

Again, that is laudable and in most cases necessary because Israel has become notoriously stingy in terms of government spending. But Kahlon faces a budget shortfall for 2015 and is committed to not raising taxes. His boss, Netanyahu, won’t countenance any significant cut in defense spending and his Haredi coalition partners will be demanding child allowances and yeshiva funding be restored.

So where is the money going to come from? Kahlon could try widening the deficit, which is going to be lower than planned this year because the government will be operating under the 2014 budget until Kahlon can win passage of his own spending package. (Under Israeli law, if the fiscal year starts without an official budget in place, the nation runs on the budget of the year before, with no changes allowed whatsoever, until a budget is finally approved).

But here again, Kahlon is playing a dangerous game. The great Israeli success story of the past 15 years has been the government’s strong fiscal position. For Israel to be widening the deficit at a time when the economy is growing rather than waiting for the Keynesian moment when its contracting creates a bad habit that will be hard to break.

Kahlon could raise taxes or do away with some of the more pointless exemptions, but it would take an act of rare political courage.

Taking the Milton without the Friedman

Kahlon is a proud Likudnik, but that’s his biggest problem of all. His Likud is not Netanyahu’s free-market, tycoon-fawning, fiscally restrained Likud, but the old Likud of Menachem Begin that likes capitalism and big government in equal doses.

Recall, it was Begin who invited the godfather of free market economics to advise him on policy after the party took power in 1977. But as one observer said at the time Begin followed through on only half of the advice, taking the Milton without the Friedman.

Begin liked the idea of destroying Israel’s socialist establishment, but he couldn’t let go of the idea of populist economics that increased social welfare spending and the birth of the Haredi schnorrer economy, massive deficits, hyperinflation and serial devaluations.

Worse still, on security issues, Kahlon is a Likudnik in the Netanyahu mold -- one that favors negotiations toward a Palestinian state sometime in the distant future when a more amenable Palestinian leadership in in place, the threat of Islamic extremism has passed, and pigs fly. In the meantime Israel will keep expanding settlements, ensuring there will be nothing to negotiate over when the time comes.

This do-nothing strategy has worked for Netanyahu so far, but with the new rightist government that is likely to be coming to power it will be harder to maintain. There will be no Tzipi Livni or Yair Lapid to play good cop to Naftali Bennett’s and Avigdor Lieberman’s bad cop. Already Obama is on the attack and Europe will soon follow.

Kahlon probably has enough sense not to talk bad cop, although that might change as his economic agenda stalls. Meantime, there will be enough people in the cabinet who have no fear of risking a barrage of anti-Israel boycotts and sanctions to make his job as the economy’s boss all the more difficult.