Yair Lapid Must End the Economic Occupation of Israel

The finance minister suddenly got tough on Hamas, but we don’t need more generals. We need him to attack housing prices and the finance cartels

Olivier Fitoussi

Finance Minister Yair Lapid took arrows from everybody at TheMarker last week.

Meirav Arlosoroff slammed him for failing to pursue meaningful reforms via the Economic Arrangements Bill and showing little will to confront the economy’s power brokers. Sami Peretz rapped him for his faulty plan to address the 2015 budget deficit. Arik Mirovsky explained how Lapid’s zero-VAT plan won’t lower housing prices, if it doesn’t muck things up in general. And then there’s the ministry’s total failure to reform the energy market.

Lapid’s supporters say the criticism is unwarranted. First, they point to the legacy he received. Most of Israel’s structural problems are ancient, so fixing them will take time. Second, Lapid, unlike his predecessors, is at least trying.

On the first point, they’re right. Housing prices started to bloat well before Lapid entered the Finance Ministry. The waste and corruption at the private and public monopolies have been deeply rooted for ages; workers at the Israel Electric Corporation have been laughing at the treasury clerks and Prime Minister Benjamin Netanyahu for years. These failures can’t be tied to Lapid.

On the second claim, they’re wrong. Lapid isn’t genuinely trying to change the status quo. In fact, when he took over at the Finance Ministry, it was clear he wanted to be Santa Claus. He didn’t plan to confront the powerful in the economy, because confrontations with interest groups lead to smears and bitter battles. Politicians will always choose the easy way and make the common Yossi in the street pay.

Lapid didn’t take advantage of the tailwind that brought him into the Finance Ministry, or the budget crisis, to signal a new direction for the economy. Instead, he raised taxes across the board, including the value-added tax, a method that hurts the very people he portends to represent.

The “achievements” that Lapid and his supporters celebrate on Facebook, such as smaller government and money for Holocaust survivors, are minor. Reducing the size of the cabinet should be a symbolic act that streamlines government and helps reform the public sector. Lapid shows no sign of progress here; he doesn’t even seem to be taking an interest. Any “achievement” based on increasing the budget, without indicating where the money will come from, is an illusion.

True achievements can only be attained via structural reforms and streamlining to boost productivity and competitiveness, and to share out the pie more equitably – fewer resources to insiders and more to the talented and creative.

The disappointment with Lapid on these issues is the direct result of the promise he brought with him. He’s Israel’s first newbie politician to shoot from zero to 19 seats in the 120-person Knesset, and he did it on a ticket of economic reforms that would succor his brother slaves. He promised to find out “where the money is.”

Lapid came fresh to politics and the Finance Ministry, unlike the leaders of the Labor Party and Likud, whose corrupt party politics goes back decades. These politics are deeply rooted in independent tax militias — from local-government leaders to gangs entrenched in corrupt local government. Then there are the public monopolies and state-owned companies, historic levels of political appointments, and hidden unemployment at the ministries.

He came with a brand-new party that eschewed a grueling primary election. He had utter freedom of movement and a whole newspaper group behind him. But instead of using these extraordinary conditions to usher in a new politics, Lapid decided that the road to the premiership went through the hubs of power.

Stop bashing the Haredim

Lapid particularly disappointed his voters who believed that the answer to “where’s the money?” lay with the Haredim — the ultra-Orthodox Jews.

A year and a half into the job, the tens of billions of shekels looted – according to Lapid himself – over decades by the ultra-Orthodox haven’t been found. Lapid and his voters discovered what every novice in the Finance Ministry's budgets department knows: Since the Haredim’s child allowances were cut a decade ago, that community gets a lot less money than the public thinks. The budget for yeshivas is less than 5% of the banks’ revenues and a fifth of the outlay on pensions for military vets.

A worrying indication that Lapid had decided not to tackle the pork barrels, tenure, corruption and inequality created by the independent tax militias arrived during and after Operation Protective Edge. Lapid suddenly started talking about the peace process and a regional conference. He started spewing militant slogans such as “Hamas’ leaders will pay.”

If Lapid is going to be a politician for both the left and right, the army and peace, he has rendered himself irrelevant. Since 1948 we’ve had enough politicians like that. We’ve had Avigdor Lieberman, who would “transfer” Israeli citizens and grow rich while about it. We’ve had Naftali Bennett, who would ensure that we control another nation for the next 1,000 generations. And we’ve had the Labor Party, that safe bet. They’ve been bringing peace upon us for decades now.

But the left shouldn’t worry about weakening. Our experience with Ehud Olmert and Ariel Sharon showed that the corrupt seek sanctuary in the diplomatic process, breaking hard left when in distress. Oddly enough, the Gaza disengagement happened around the time charges were being pressed against Sharon and his sons. As for Olmert, who was born in Likud, the more he climbed the ranks, the less he kept his right-wing ideology.

Lapid’s voters don’t need another general to flex his muscles against Hamas, nor do they need another diplomatic strategist. They want him to use his charisma, Knesset seats and Yesh Atid’s dictatorial structure to slash the cost of living and set the economy free.

An assembly line for economic zombies

Both left and right, doves and hawks, agree about the two places that most need attention: the cancer of housing prices and the robbery by the banks.

Those are Lapid’s two big tests. The first is real simple: Housing prices have to drop, and fast. If they don’t tumble 20% to 30%, the Israeli government is operating an assembly line of poverty. It is cultivating a generation of economic zombies who sacrifice quality of life for housing services. After all, the real cost is a quarter of the price on the market.

It’s just a matter of time until the people figure out what’s been happening the past decade — who gained from the surge in housing prices and land; who gained form the rental income. The anger will be all the keener if during Lapid’s term the real estate market made the inequality worse.

Lapid’s second test is to announce a reform of the banking and insurance industries, which cost the public 100 billion shekels ($27 billion) a year. They suffocate small and midsized businesses, and lavish credit on a small clique of members that join cartels, not compete.

Israel’s banks will never face competition without massive, creative regulatory intervention, which only the Finance Ministry can lead, as the Bank of Israel will kick up tremendous opposition. Competition in the financial system could save the economy seven times more than the 5 billion shekels a year that Moshe Kahlon’s reform of the cellphone industry saved. Mainly, it could revive the thousands of small businesses that the banks have snubbed in favor of the top 20 families.

Unlike reforms in the public sector, which by nature take ages, Lapid’s tests in the real estate and banking systems are simple. Property prices could be reduced by administrative resolutions, changes to the tax system that eliminate the attraction of property investments, and a flood of land for development. In finance, he should seek to reduce the market share of the two biggest banks, Hapoalim and Leumi, and massively support new players.

These are his tests, not a regional conference with the Saudis, not pummeling Hamas, not sloganeering about the middle class, and not vowing to shun new taxes while loading more debt onto the next generation.

Lapid’s slaves stand behind him on these issues. We also vow to support him in any way necessary if he abandons the old politics.

Meretz matters

Against Lapid, who has suddenly put on an army helmet, and the Labor Party, whose concern for social issues vanishes when the discussion reaches the big monopolies, Meretz stands out for coming to its senses. This left-wing party realizes that the economic occupation of Israelis by an extortionist oligarchy is as much a problem to its voters as the occupied territories.

This month Meretz continued its battle to dismantle the groups controlling Israel’s financial institutions; a handful of families use leverage to buy and sell institutions that manage 3 trillion shekels belonging to the public.

Meretz is currently the only party doing anything to restore the people’s control over the country’s wealth. The economy’s structure allows the top 3% or so to control the other 97%. And there’s weak corporate governance to boot, as the corruption scandals at the banks and conglomerates show.

Last week young Meretz activists protested the appointment of Oded Sarig, former capital markets commissioner at the Finance Ministry, as CEO of insurance giant Migdal a year after he left the ministry. And it was only two years after he let his company be sold.

The protest shows Israelis’ revolution in awareness in the last five years; they now realize that independent regulation is critical to democracy and a free economy. Meretz’s ability to influence the financial system in this generation could be greater than its influence on Mideast diplomacy.