Netanyahu: Corporate Media Is Responsible for Israeli Crony Capitalism

In an exclusive interview, Prime Minister Benjamin Netanyahu and leading economist Luigi Zingales discuss inequality, competition and the ills of the capitalist system. Netanyahu: If you want equality, real perfect equality, go to North Korea. What you want is a meritocracy.

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"America risks becoming a Downton Abbey economy," Larry Summers wrote in an op-ed the Financial Times ran in February.

"Downton Abbey" is a British series about an aristocratic family and their servants in the early 20th century, a time of vast social gaps.

Most of America's economic growth is benefiting the 1 percent, says Summers, one of the most eminent economists in the United States and a firm believer in the free market.

Summers belongs to that 1 percent. When he joined the Clinton administration 15 years ago he reported wealth of about a million dollars. In 2009, when chosen to advise Barack Obama, he reported wealth of $17 million to $39 million, mostly accrued through services rendered to the U.S. financial system, a key source of inequality in the United States.

The "Occupy America" movement may have started on the fringes, but it's causing tectonic shifts. When even Summers is talking about inequality, the change in sentiment cannot be denied any more.

It isn't just Summers, either. Three years ago The Economist, which is consistently market-economics in its editorial policy, was still arguing in favor of giant salaries for the Wall Street managers. But last week its editors ran a cover showing three businessmen in suits – with heads of a hippopotamus, fox and crocodile. The hippo has a fat cigar. On the table before them are stacks of bills. The title of the edition: "The new age of crony capitalism".

Why is The Economist depicting a fat hippo smoking a cigar? Nothing in particular happened last week to indicate that capitalism has become a way to channel money from the masses to cronies and interest groups. The only thing that happened is that the editors of The Economist have gradually begun to accept that much of the capitalist "successes" in the last 30 years reflect not talent, competition and entrepreneurial spirit, but market failures: monopolies, regulation that serves the powerful, illicit ties between Big Money and government, asymmetry of information, exploitation and mainly corruption, most of it constitutional and established.

Three weeks before, The Economist devoted its cover to the failure of democracy. Although the magazine didn't connect the two, one has to wonder whether the terrific concentration of wealth in the hands of so few, and the huge power of the interest groups, aren't behind not only the market failures – but the failures of democracy itself.

This newspaper has published hundreds of articles on economic concentration in recent years, discussing the danger it poses to democracy and to the market in general. We have particularly addressed "crony capitalism", discussing the issues among others with two leading economists and proponents of the free market, who have begun to warn against crony capitalism in the West: Raghuram Rajan and Luigi Zingales.

Two years ago Zingales escalated his attack on the American system in his book "A Capitalism for the People" in which he argued that the U.S. is gradually turning into Italy, a country where wealth and success aren't a function of talent but of clout and ties to government, banks and the conglomerates.

Last November Prime Minister Benjamin Netanyahu stated in a meeting with journalists, and later repeated in Knesset and in speeches, that Zingales is his new economic guru. Netanyahu, famously an advocate of the American system, pointed to Zingales' latest book, a 300-page attack on the American model.

Zingales also argues that a central solution to the problem of American crony capitalism is populism. While Netanyahu has tried to ignore the social justice protests in Israel, Zingales thinks the road to economic reforms is to use the rage of the masses against the interest groups.

The ideas of fighting economic concentration, corrupt ties between money and government and mainly, lowering the cost of living, and the need to force competition on uncompetitive industries have been advanced by this newspaper for a decade, and rose to a roar during the social-justice protests that began in 2011. In Israel, the Zingales method worked.

Netanyahu's acknowledgement of Zingales' ideas looked like an opportunity to continue the discussion we have carried on over the last decade, with the attack coming this time from the "home" of capitalism.

An Israeli "House of Cards"

Netanyahu is a devoted fan of "House of Cards." As far as he's concerned, one of the main differences between the show and Israeli reality is that in Israel, it's the corporate media that controls politicians; while in the American series, the press is mainly passive.

The series presents an alternative reality to the one described by the press: underground currents flowing beneath the veneer of American politics and government; who really influences and controls the president; how lobbyists buy and sell politicians for cash; and the hypocrisy and interests whitewashed by the philanthropy industry.

In reality, the system that corrupted the American free market and undermined the economy is money in politics. Yet Mark Leibovich, a senior reporter covering Washington for the New York Times, presents a different angle on the collapse of the American system in his book published last year, "This Town."

According to Leibovich, not only the politicians, the lobbyists and big business are responsible: so are senior members of the press, who are an integral part of the Washington club – which is interested mainly in its own interests. Top journalists are present at all the social events held by the lobbyists, the politicians and the 0.1%. The lawyer who handles their contracts is the same lawyer who represents the lobbyists, the press and politicians too.

President Obama, who started his term by declaring war on lobbyists, has taken no meaningful measures to thwart their takeover of democracy. While the number of journalists in the United States is plummeting, the number of lobbyists and PR people has doubled, and is expected to reach about 100,000 this year.

Who is the Israeli Raymond Tusk, a wealthy businessman with a wide network of influence? Sheldon Adelson, an associate of Netanyahu's, does no business in Israel other than owning the newspaper he created for the prime minister - "Israel Hayom" for him - a newspaper that supports Netanyahu unreservedly. The previous prime minister, Ehud Olmert, had ties to a number of leading businessmen and to the "Yedioth Ahronoth" publishing group, which puts out one of Israel's most popular daily newspapers. Yedioth supported Olmert consistently through the last five years, generally publicizing his version in his corruption trials. Last week Olmert was convicted of corruption in the Holyland property affair.

During our interview, Netanyahu surprises by hinting that the ties in Israel between tycoons and politicians pass through the newspapers associated with the tycoons – and it's clear who he means.

The interview with Netanyahu took place last month, before the latest battle was enjoined between Adelson and Yedioth's owner, Noni Mozes, over control of the press, through a bill sponsored by a number of politicians that would effectively close down Israel Hayom. The battle between Mozes and Adelson could now escalate, and start to expose bigger parts of the Israeli "House of Cards."

TheMarker: This time, Prime Minister and Professor Zingales, we're going to talk about not current affairs but about capitalism. My first question for you both is a simple one. We'll start with you, Prime Minister. Are you a capitalist?

Netanyahu: Yes, I'm for free markets, if that's what you mean by capitalist.

And what is capitalism for you?

Netanyahu: It's the ability to have individual initiative and competition to produce goods and services with profit, but not to shut out somebody else from trying to do the same.

Before Professor Zingales joins us, I would like to hear why his book resonated with you so much. What is it that you find interesting and illuminating in the way Professor Zingales looks at capitalism?

Netanyahu: Because I think he focuses on the basic thing, which is how you guarantee competition. Because you can have the distortion of competition, what we call "market failures" in supposedly a free market economy.

You have to constantly make sure that you maintain this principle of competition, and it's not obvious that you'll maintain it – first because efficient firms get market share, and if they dominate in market share, they can shut out competition at a certain point in non-competitive ways.

Secondly, they can link up with other powers. In your book, the main source of power that companies can unite with is politicians, thereby creating crony capitalism. In our system, it's connecting to other powers. It could be the power of the press that has control over political powers, giving you crony capitalism If you prevent competition, you raise prices and you usually are penalizing the lower segments of society who are more dependent on lower prices for products and services as a fraction of their income. And that's something that I'm particularly keen on avoiding.

With that, Netanyahu exposes the underground structure of the Israeli press. Most of the newspapers and media channels are controlled by Israeli businessmen with holdings in monopolies, cartels and businesses that depend in turn on government regulation. Some, like Globes owner Eliezer Fishman, accrued some of their wealth through privatizations.

The "7th Eye," a media watchdog website published by the Israeli Democracy Institute, last week described the daily paper Yedioth Ahronoth as "the first corporate newspaper in Israel", serving as mouthpiece for tycoons and a crossbow when needed. Yedioth is owned by Eliezer Fishman and Noni Mozes.

The economic pundits writing for the corporate media waged media campaigns, for years, against the economic concentration committee set up by the prime minister and the Bank of Israel governor at the time, Stanley Fischer. The panel was tasked with determining whether Israel had a problem with economic concentration and how it affected the capital market, competition and competitiveness. The corporate newspapers claimed there is no problem of economic concentration, and in any case it didn't matter.

The Financial Times on the other hand supported TheMarker's position, writing in an editorial "Reform in Israel" on June 21, 2012 that inequality has emerged as a major issue: It is no longer plausible to assume that economic growth boosts middle-class incomes and reduces poverty. "Concentrated ownership of business is common, particularly in emerging countries. The consequences are malign," the FT wrote, urging the rest of the world to emulate the Israeli example. Israel has a dynamic high-tech industry but fewer than 20 families control conglomerates that encompass half the value of the stock market, resulting in my power, choking competition, the newspaper continues: "It also creates corrupting relationships among business, politicians, bureaucrats and the media."

The FT goes on to argue that the most dangerous aspect may be the combination between financial institutions with non-financial businesses, a peril the Bank of Israel itself pointed out – and it is in the interest of the non-financial businesses to starve competition of credit, creating a stranglehold that led to "dreadful investments, notably in foreign real estate."

This January Steven Davidoff argues in the New York Times that the U.S. should learn from the moves led by a number of journalists from Haaretz - and Netanyahu - to reduce economic concentration in Israel. While Americans talk about income inequality, Israel did something about it, he wrote, describing the business "pyramids" that were "too big to fail," which had the clout to crush competition to the detriment of the public at large – not even benefiting shareholders. Israel set up a committee, usually a place ideas go to die – but in this case, it caused change.

Two years ago, the Israeli economic concentration published its report, which the Knesset confirmed in December 2013. It stated that Israel has one of the most concentrated economies in the world and warned of perils to the economy, to competition, to financial stability and to democracy itself, in stark contrast to the campaigns by the corporate press.

This is the first time the prime minister himself points an accusing finger at the press in Israel, claiming it has played a role in the creation of crony capitalism in Israel.

Before you were prime minister, you were the finance minister. When was the point that you realized that Israel's capitalism is becoming, or is, crony capitalism and that we have to deal with concentration and with breaking up banks and so on?

Netanyahu: No, no, no, no. You're going way to far forward. I think it was in 1976. I went to a project. It was the first time that the Boston Consulting Group looked at governments and worked for governments.

They wanted to do a strategic plan for the government of Sweden. I was on that case and looked at other governments.

So I went around to other governments in Europe in 1976 and I was looking at Britain. I was looking at France. I was looking at other countries, and I could see that they were stymied by concentrations of power that prevented competition. And I thought, hmm, as bad as they are, ours was worse because we had very little room for private sector competition to the extent that we had government-controlled or union-controlled companies, and so you really didn't get the competition or the growth.

That was as early as I remember it. And I said, well, if I ever have a chance, I'll change that.

And why did you decide to form the concentration committee five years ago, four years ago? Where did you see crony capitalism in Israel as described in Professor Zingales's book?

Netanyahu: Well, I saw a lack of competition in a lot of places. You had pyramid structures, and cross ownerships between financial and business entities, which destroys competition. I thought we'll have to get rid of it and that's basically something we started three years ago.

It took us a while to get it through the Knesset, but it's a very important law because it flattens the pyramids and prevents the cross ownership, so it encourages competition. There are other things we need to do. But this is the most elementary thing.

Professor Zingales, you bring a very direct message in your book: that United States, the model of capitalism for many, is gradually reverting to a crony capitalism model like in Italy. And you are very worried about what's happening with capitalism around the world.

Zingales: Yes, absolutely - in a sense. As an immigrant to this country, I look up to the American system as a model of capitalism and in many ways, it is. But over the 25 years I've spent in this country, I realized that there are more and more things that resonate like the country I come from, Italy. And not for the good things, the wine and the food, but for the bad things: the tendency of corruption, the tendency of business to be so influential in government.

The only real benefit of Berlusconi is to have shown to the world how dangerous that avenue is. Berlusconi is a vertical integrated version of the U.S. Congress. And in the U.S. Congress, members of parliament are former and future employees of some firms. In Berlusconi's case, they are direct employees of his firm, so even that filter isn't there.Former Italian PM Berlusconi demonstrated the pitfalls of corrupt government, says Zingales. Photo by Reuters

But the danger is pretty severe, and I think that Americans don't fully understand that, because they've been blessed with a system that has worked so well over such a long period of time.

Mr. Netanyahu: What Professor Zingales is saying is worrisome, because if he's saying that the largest capitalistic economy and democracy in the world is gradually reverting to crony capitalism, we have to think about the DNA of capitalism reverting to concentration and to crony capitalism. It's a constant fight because we confuse pro-market and pro-business all the time.

Netanyahu: But life doesn't stop, you know ... You don't want to move away from markets because you'll collapse. I mean, the 20th century was the perfect lab that showed what you can do with economies that have no markets and economies that have markets – East Germany, West Germany, North Korea, South Korea. It used to be China, Taiwan or China, Hong Kong.

So you can see the intrinsic benefits of markets, which means intrinsic benefits in competition. Does that guarantee that it won't stultify - or crystallize into groups that will try to prevent competition? Of course they will. That's the natural thing. So you have to fix it. But it's an ongoing process. I don't think it's a one-way thing that you can say, well, America is in an irreversible course and we have to, I don't know, amputate the arms or the legs.

You don't need to do that. You can fix it. Once you're aware of the problem, you can define it and fix it directly. I wouldn't toss the baby out with the bathwater. I would not toss out market economies. You'd lose. Everybody would lose.

By the way, social justice would lose and the very capacities of a society to fund the basic needs of its citizens would lose because you fund it basically from the private sector. So what you have to make sure is the private sector allows

That funding.

Netanyahu: that funding, allows competition. And that brings you to conceptually the most difficult part of managing an economy, which is how do you to prevent cartels and monopolies, without creating another cartel and another monopoly of regulators? Because ultimately, if you concentrate that power in one place, in this case, the regulators, that'll be abuse too. And they don't necessarily make the right decisions.

It's a balance and it's a tough balance, and it's conceptually, I think, the most challenging task for political leaders, if they understand what we're talking about, and quite a few of them do.

Leaving the cave

In his book, Professor Zingales talks about inequality and that the market system creates asymmetry of information. Winner takes all. We see it in United States; we see it in Israel. How do you deal with inequality that is intrinsic to the market system?

Netanyahu: First of all, if you want equality, real perfect equality, go to North Korea.

You don't want that. You want to have the inequality of merit, which is what you talk about.

You want to have a meritocracy. You want to have initiative, risk, talent, the ability to create new products, new services to be rewarded. Otherwise we'd still be living in caves, trading sticks and bones and rocks with each other.You want perfect equality? Go to North Korea, says Netanyahu. Photo by Reuters

The reason we got out is because somebody figured out that it's better to be outside in a shelter and till a field, than sit in a cave and chase animals, okay? Somebody who figured that out must have done very well initially.

Then somebody figured that you can take a log and use it as a primitive wheel. And then somebody invented the wheel. All these people did well, like the Bill Gates of our times.

So eventually this becomes a commodity and you move on the next thing. Unless you have the ability to be rewarded for initiative and for risk, you're not going to get progress. So progress depends on that, but what you want to make sure is that the guy who made that invention doesn't block other people from making inventions.

There is an obvious tension between innovation and initiative and equality. You have to strike a balance. And I think in quite a few cases, that balance was thrown out the window. So you have to bring it back.

Professor Zingales, haven't the United States and some other countries passed the point where inequality is a lot like rent-seeking (spending on political lobbying to increase one's share of existing wealth without creating wealth)?

Zingales: There is a component of luck, and a component of the factor that technology and globalization brings to the pictureWhen I grew up in Italy, Gigi Riva was the soccer player of the time. He was not filthy rich because at the time, only Italians watched him. Today, Messi is seen all over the world and he is an ultra-millionaire.

These aspects have nothing to do with crony capitalism. However, there are also aspects linked to crony capitalism, especially in the United States the combination of an economy that is growing - but not for the average worker, which creates more resentment against the system.

I think that, as the prime minister said, if we all become richer, I don't really care that somebody richer than me. But if only a few get richer, and the other don't move, that's where the consensus for the capitalist system disappears.

I fear that in the United States, we're reaching that point.

Once you undermine that consensus, you have the risk of a new sort of a socialist movement that tries to destroy the market.

So precisely because I love the market and I believe like that the prime minister that it is important to have those incentives in place, that I want to make sure that there is general consensus from the system.

I would argue that if we want to have free markets and want legitimacy for this market, we need strong safety nets, because without them, the entire system loses legitimacy. Do you agree?

Netanyahu: Yes, but the question is what you define a safety net for.

I'll tell you what I define a safety net for. I define it as what we're doing now in Israel. We're making it one of the first digital countriesWe're putting in highways and so on, basically making the cost of property in Tel Aviv drive development in the Negev and the Galilee. But at the same time, we're taking the most important highway of them all, the digital highway, which allows you to have innovation and education and everything else, to every home.

This is the first safety net: equal opportunity, genuine opportunity, for education.Protesters shattered a bank window in Tel Aviv, in an isolated case of violence during a protest against the high cost of living, June 23, 2012. Photo by Tomer Apelbaum

Where you have this split between high incomes and low incomes is first of all among the inherited set, but it's more and more in the skill set – people coasting or driving up the ladder in the internet economy, in the new economy – and people who are without these skills.

What you have is this bowl-shaped distribution of income. Why bowl? Those who can compete and have the skills make a lot of money. Those who can't receive welfare endowments, so they're given a safety net at the bottom. In the middle you have this hole of everybody else. You have to fill that gap.

Each country has to find the way to fill that middle ground. But I say, first of all, give everybody the ability to be part of the skill set. You have to give those skills to people, to children. You have to give it to them. Otherwise, they're out. They have no chance.

Even after you do it, you're going to have the unequal distribution of skills. That's inherent in any human system.

So what else can you do to fill up the gaps? Many things. There are many things you can do in our country. You can do tourism. I mean, we're a place where – remember Jesus? We've got the original real estate. There are a billion who could come there. That's employment

I'm not looking for perfect equality. If you look for perfect equality, it'll be the perfect equality of misery, equal misery. You don't want that.

But you don't want extreme inequality either.

Netanyahu: That's correct. And the way to do that is, I say, number one, education but digital education. That's the meaning of education today, otherwise people are out. Secondly, all the elements of employment that we can create to assist the private sector.

Two last questions. Professor Zingales writes a lot in his book about concentration and the things that you were worried about. He writes a lot about the financial sector. I asked him, why are you so concentrated when you talk about concentration, about crony capitalism and finance overlapping?

Netanyahu: Because he's right.

Please.

Zingales: Oh, you know, there was a famous joke in the United State about a robber who got caught. He was asked, Why do you rob banks? Because that's where the money is, he said.

I think the financial sector is crucial to the control of the economy through its loans, through its investments, ability to reallocate resources as a power which is disproportionate vis-a-vis every other power. There is only another sector which is as important, which is the media. Those are the two crucial sectors. If we don't have competition in those two sectors, we don't have a competitive economy.

Netanyahu: Exactly right.

Exactly right you say on media, I understand.

Netanyahu: No, no, the banks too. The bank concentration means – what does it mean? I think that if you look at Israel, I think 1% of the businesses receive an inordinate amount of the loans. That means that a lot of other businesses that could have been successful didn't receive loans.

If that is based on connections, based on a club, then obviously you lose a lot of potential growth in the economy. So you have to put in reforms that guarantee the solidity of the banks, but also create competition among them.

We still have a way to go. We haven't done that. We've taken the banks out of cross-ownership of businesses, but we still don't have as much competition in the banks that I'd like to have in Israel. We need that.

Professor Zingales, I explained to you before this interview that in Israel we have two banks that control 60% of the debt market. This is exaggerated concentration.

What can we do about it? And this brings to the table all your ideas about capture, capture of the entire ecosystem.

AP

Zingales: I'm not an expert on the Israeli economy and so I'm afraid to talk in front of the prime minister but on paper, if you have such a high concentration, you have the first order sort of an inefficiency, which is too expensive loans, too little interest on deposits, et cetera. Those are the usual monopoly deficiencies.

But in addition, there is much more scope for arbitrariness in the way you allocate loans, because the biggest advantage of monopoly power is that you can use it the way you want, and you can use it make more profits. You can use it also to distort it to your own advantages.

One advantage is to pick your friends and favoritism, which can translate very quickly into political power. I think that one should intervene from day one, trying to break down this excessive concentration, make it easier for new firms to enter. Separation between investment and commercial banks can be a solution, partial solution.

You suggest 'positive populism' as a way to change this situation regarding the banks and big conglomerates. Can you explain and elaborate.

Zingales: My book is not just pessimistic about the American system going down. It's also a call for action that comes from awareness, exactly like the prime minister said. I think that the moment you create awareness of the problems, you will have political demand to change it. And I think that the populist, at least in the way I see in the United States, is just an instinctive reaction that something is wrong.

I always tell the story about my two kids. When they were small, they were playing Monopoly and my son, who was older, knew the rules and my daughter didn't. At some point my daughter would leave the game screaming because she's no fool and she understood that something was rigged and my son was claiming he was enforcing all the rules, but I think he was enforcing all the rules that he remembered and that were in his favor.

My daughter was small. She didn't understand what was going on. But she reacted by screaming and leaving. I think that that's exactly what the Occupy movement here in the U.S. is doing.

What I want, is like I want to give my daughter the awareness. I want to give to these movements the awareness of what they can do to change things, because it's not enough to protest. Very often these movements are misdirected into going after all the rich people – they're bad, let's soak the rich. And we know that that kind of populist only leads to disaster. Latin America is the living example. You want to prevent that, and channel the good force of populist in the direction of change.

If my moral up to now was Theodore Roosevelt because the United States was able to do it, now I look at Prime Minister Netanyahu.

Netanyahu: Well, you're very kind. That's a great comparison, I have to tell you. I hope I will be worthy of it. But Roosevelt didn't need anybody. He couldn't care less. I mean, he just was not dependent on the powers that be, on the vested economic interests. He was absolutely independent and fearless. I mean, the way he got into politics is amazing, you know? It's just amazing.

This doesn't happen anymore. The fact that you can be so independent because we are living in a world of big, big corporations and big unions have so much power.

Netanyahu: Really, really, I have to tell you, none of them support it at all. So I just do what I think is right and what I can deal with, but there – it's not only big business. It's also big unions, big unions, big business, big banks

Big everything.

Netanyahu: Big press, okay? When they're united, you're really in trouble, you know? And we had to – and big government. And we had to break out. Israel did relatively well because you do anyway, you do well or badly in relative terms. There is no absolute advantage. What does it mean to have 20% market share? It depends. Is the next guy a 50%? Or the next guy has 5%.

So all power is relative. You have to make sure that there is no concentration of great power and in this, this task I think we've done quite a few things in Israel, but we have a way to go. And in any case, you never come to a resting place, you never stop competing. And now in the global economy we have to be doubly competitive, not only with our firms, but in our macroeconomic policy and our social policies and our education policies.

We have to – we're competing all the time. It's an open market. Now you can't say, oh, well, you know, I'll have inefficient economy. I'll close my economies in some kind of clique. I'll be non-competitive. I'll be gouging prices from my consumers, but I'll be able to compete internationally. You won't. You won't succeed. And so the whole country will go down. You have to have a robust competitive environment inside the country to be able to compete outside the country. And we don't have a choice. Economies that don't understand that, that don't foster competition and don't foster innovation will fall behind. We have not fallen behind, but it's an ongoing task. It never ends; it never ends.

Last question. A lot of young Israelis don't feel they have a fair chance. They don't feel they have opportunities. There's a lot of talk about cronyism in Israel and a lot of people think that there should a lot of changes to the capitalistic model in Israel. They are not that optimistic about the meritocracy in Israel. Are you aware of this sentiment?

Netanyahu: I'm aware of it and some of it is justified. We have to fix it, but you fix it by having monopolistic powers stripped away into competition.

You have to instill competition first because if you are privatize before competition, you are in big trouble.

Netanyahu: That's right... I think this is the biggest task, restoring people's faith in competition. If you use protests and populist pressures to get rid of competition, you'll actually make the situation worse. On the whole, I think we have made progress. We haven't done enough yet. But I think we've done more on a relative basis than many other countries. But...we still have a job to do.

Zingales: I'm impressed. I have to say, I never met a politician with such a clear vision of what to do that coincides with mine, so I'm very flattered that he read my book, but

Netanyahu: I congratulate you for sticking the needle on the point. It's always been about competition. That's what human progress is about. You want to siphon it into productive ways. You take the fruits of competition and you put it back into the society and create more competition and more growth. And that's where I'm at. And if you have things that stop competition by concentration of market power or political power or press power, then you've got to crack it up, break it up, and I'm trying to do that even though they sometimes try to break me.

Interviewer: Prime Minister Netanyahu, Professor Zingales, thank you very much for your time.