Why the Coming Election Won't Bring Change

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Netanyahu and Lapid during a cabinet meeting in Jerusalem, November 10, 2014.Credit: Mark Israel

Whether you are repelled by Prime Minister Benjamin Netanyahu and what he represents or are among his supporters, he did well this month. His decision to expose the tip of the ties between big money, government and big media was another step in removing the veil of ignorance blinding the Israeli public for all too long regarding the powers that pull the strings in politicians.

Netanyahu did it for his own political reasons, and crassly and perhaps clumsily at that – he is hardly a paragon of virtue in the world of money-government-media – but the bottom line is that the public is gradually learning that too much of the media, like most of the politicians, have no ethics or integrity, and serve not their readers nor the public interest, but mainly the interest groups.

The annual survey by the Israel Democracy Institute shows how the press joined the list of democratic institutions in which the public has lost faith. It has nothing to do with left or right, to secular or religious, with territories and the “peace process.” Almost everybody has realized that, too often, the state isn’t being run on their behalf, but on behalf of people tied into government, money and power.

In Israel there’s a saying, “The public is stupid, so the public will pay.” It’s catchy. There’s even a great song about it by Shalom Hanoch, but it isn’t so.

The Israeli public probably is no stupider than the American public, the British public, or any other. The broad public in most democracies has difficulty organizing and representing its own interests. Israeli democracy is no different, in that most of the representation in political and democratic institutes is of interest groups.

The survey revealed some more interesting things in this context. A majority believes the government should be involved in the economy, and that the government, not themselves, bears the responsibility for their economic welfare. The Republicans wouldn’t get far in an Israeli election.

The astonishing thing is that the two parties for which their voters have the highest hopes of salvation from their economic ills are Shas and Yesh Atid, led respectively by Arye Dery and Yair Lapid.

The two parties would seem to have little in common, but from one perspective, Yesh Atid is like the Shas of a certain Ashkenazi community that thinks Lapid will “take care” of it.

They’d better hope he doesn’t let them down a la Shas. Dery, who released his “invisible Mizrahim” campaign clip last week, still hasn’t explained the nature of the consulting services he granted in recent years, in exchange for millions of shekels, to the biggest monopolistic pyramid in Israel, IDB. And Lapid, who made a good living from Bank Hapoalim, has not pursued reform of the biggest and most destructive monopoly in Israel, the banking system.

But in Israel, social democracy is a very limited thing. In parallel with the high expectations the public has of the government, it doesn’t want to pay more taxes. In other words, most people like the “social-democratic” model advocated by some politicians and public personalities, as long as they don’t have to pay more tax.

Ostensibly, that is a dilemma. Without tax increases, how can the quality of government service be improved? Is the public being stupid?

No. The public is seeing a large part of its tax money not coming back to it through quality services, but routed to the interest groups or just squandered through stupidity and inefficiency, or spent on corruption.

The second elephant in the room

In recent years, the public has become more aware of economic issues: cost of living, education, health care and welfare. Thoughts wandered beyond security, peace, religion and state.

But the public has found no recourse in politicians, who prefer to continue selling slogans about the “welfare state” and “investment in education” without explaining how it will all be paid for.

Nobody wants to mention the elephant in the room – how to reform the public sector, in order to truly utilize taxpayers’ money to improve the public’s welfare.

There’s good reason no party will touch that elephant: Almost a third of all Israel’s workers are employed by government, in one form or another. No politician would be caught dead suggesting profound reform in that elephantine arena.

The good news is that until the public protest, there had been a second elephant in the room that nobody would touch: the monopolies, the cartels, siphoning off value and dominating the capital market. The jobs and budgets they heaped onto the watchdogs made them untouchable.

This is where we are finally making some progress: Almost all the parties are talking about them.

The politicians may have changed their rhetoric – but the regulators are changing their behavior. In recent months, Dorit Salinger, commissioner of the capital markets, and David Gilo, antitrust commissioner, have stood out for their efforts to shake off the protracted embrace of the interest groups they are supposed to supervise.

The bad news is that despite the slow change in public sentiment and in the norms of the regulators facing the monopolies and interest groups in the private sector, unless the quality and effectiveness of the broad public sector is profoundly reformed, the ability to lead any economic policy that would improve social services and lower the cost of living in Israel is slight.

Until 20 years ago, Israel suffered from “twin deficits” – heavy budget deficits and heavy trade deficits. The twins constrained economic growth and the improvement of services to the public.

Now we are suffering from a far more fundamental deficit: in social capital.

Social capital is the degree to which the public has faith in the government and that individuals have in each other. Social capital is critical to creating a high quality, effective public sector. It is critical to people agreeing to pay taxes and support economic reforms.

The deeper the social deficit runs, and the lower the people’s faith in government and in each other falls, the more we bog down in distrust, which is bad for everybody.

When citizens have no faith in their fellow men or government, it erodes the social incentives to obey the law, pay tax, pursue fairness in business and in government, and to eschew corruption. If everyone else breaks the law and pursues their own selfish interest at best, those trying to behave fairly and ethically pay a price.

The challenge: Efficient allocation of capital and human capital

Political and business leaders keep saying that Israeli economic policy should aim to create attractive terms for “capital” and “human capital.” Encouraging capital expenditure – in equipment, factories, advanced industries and in developing human capital (education) – sounds axiomatic.

They matter, but less than in the past. What distinguishes fast-growing economies from laggards in the past few decades is the allocation of capital and of human capital.

Israel, like most developed nations, has no lack of financial capital for capital expenditure, nor is there a critical shortage of excellent human capital. Globalization has enabled rapid, easy movement of money and people around the world. The challenge of the developed economies is to allocate the capital and human capital as efficiently as possible.

Theoretically, the open, free markets of capital and human capital should be the best instruments for its allocation. In practice, in Israel and in many other places, market failures and interest groups warp allocation through control of government and regulation.

Usually when discussing warped resource allocation, people mean capital, whether in the concentrated Israeli financial market or government payments to interest groups. But bad allocation of human capital is just as worrying: hiring and promoting not by merit and the principles of efficiency and management, but based on alien interests and nepotism. Corrupt allocation of financial capital usually leads to corruption of human capital, and vice versa.

The level of social capital and quality in the public sector are processes that feed one another. When human capital and faith are high, the level of service is also high and vice versa.

The main asset of the Scandinavian and other countries that have a high standard of living, inclusive economic growth and low inequality is high social capital. Unless we first address the problem of overcoming the low social capital equality in Israel, attempts to fix the economy and society won’t go far.

In contrast to their promises, politicians on the left and right, and center, have little to no ability to lead change, because without social capital – mutual faith in one another and in institutions – there will be no coalition for change. We will remain with the interest groups acting to preserve the status quo.

We need leadership that few in Israel’s political arena would be prepared to demonstrate. Some build their careers on stirring up real or imagined threats, some from whipping up bad feeling and conflict; most sell illusions about magic solutions that nobody’s actually buying. The coming election is unlikely to bring change because nobody is talking about social capital. The public isn’t stupid. It knows that the parties’ promises are largely empty. The public isn’t stupid, but it will continue to pay the price.