One of the more frustrating things in the public discourse – here and abroad – is the chasm between what politicians tell us about the state of the economy and society, and our gut feeling. The two don't just add up.
For example, prime minister, finance minister and governor of the Bank of Israel keep telling us that the state of Israel's economy is terrific. Look at our achievement! they cry. Israel forged ahead while others fell; the statistics show our situation improving on all fronts. Things are going to get even better, they preen.
Thing is, the public feels exactly the opposite.
People feel their situation is getting worse by the day. They feel that things within their grasp are in danger of slipping through their fingers. They are worried about the mid-term future, and even more so about the long-term one (pensions, anyone?). They are terrified that their children are going to have it even tougher.
Quite a few people, including those who can secure their and their children’s economic future, fear these trends will turn Israel into a country they and their children will no longer want to live in.
None of this is adding up, especially when it comes to reward and punishment.
In the last three years, the public learned how tycoons and the wealthy borrowed from the public at scandalously sweet terms, lost the money due to poor management and risky business - and kept laughing all the way to the bank while the public lost its money. The spendthrift borrowers paid no penalty. And week in and week out we see how special interest groups shamelessly manipulate politicians and the government into giving them money from the public coffers. And we see nothing being done to change the system or stop the pilfering.
Take vote contracting among Israel Aerospace Industries employees: They voted in the Likud party primary according to their union leader's dictates.
The state comptroller wagged his finger, the media provided extensive coverage and commentators explained the nature of the “deal,” but nothing happened except that the workers were not allowed to go to the polls on company buses. At the next election, it will all happen again.
Every time a problem comes up, a nasty public injustice is exposed or a pressure group is found stealing the public’s money, the politicians and the government say it’s one bad apple. At best, the government and the plunderers say, “It’s not illegal,” “No criminal intentions were proven,” that the affair is “an exceptional case,” that “a technical error” occurred, or that “no studies prove there was even a problem.” In many cases, they even say that whatever was done was the right thing.
The people are right – and ignored
Here’s another example. When the committee to examine economic concentration was formed, many people, including some in the media, claimed that Israel had no problem with monopolies, lack of competition or overcentralization. They said that even if such things existed, they were good for “a small economy like ours.” Here, too, anyone afraid of the committee’s conclusions rushed to explain that no studies proved such centralization existed or that it was harmful to the economy and the public.
But they were not telling the truth. Such studies do exist, and in fields where there are no suitable studies, research can be done. As long as politicians and regulators are not determined to take a good look at the system and change it, these studies provide the only scientific proof of what much of the public knows first-hand.
There are countless examples of this in Israel and in the world, especially in the United States. In Israel, the committee tasked with increasing competition revealed statistics collected by the Bank of Israel, the Securities Authority and the Finance Ministry that proved beyond a doubt that about 20 families controlled half the stock market and all of the public's money. In the U.S., much of the research in the socioeconomic field began investigating issues that cropped up after the 2008 crisis. Almost every day they find another angle or figure that proves how much the government ignores reality and how accurate the public’s feelings are. Here are three examples.
1. Long before the financial crisis, many people in the high-tech and financial sectors knew that something was wrong with the process of giving stock options to employees, particularly high-ranking managers. The latter were getting richer while shareholders were left with crumbs. When the regulators did nothing, finance professor Dr. Erik Lie of the University of Iowa looked into why so many options had been given to managers precisely on dates that yielded enormous profits. He discovered that the odds of that happening randomly were one in several billion.
That was how the options backdating scandal broke. Dozens of high-tech companies were found to be giving managers options, assigning the options dates on which the share price (and therefore the basis for calculating the managers’ profits) was particularly low. This is like filling out a lottery ticket the day after the numbers have been picked. The resulting investigations and trials landed several managers in jail.
2. One of the things that amazes the American public to this day is that after everything that came to light in the 2008 financial crisis, not a single banker was ever prosecuted in the wake of the mortgage crisis, which resulted from the sale of millions of mortgages to people who clearly would never be able to repay the loans.
A new study presented by economist Luigi Zingales, and conducted by Tomasz Piskorski, Amit Seru and James Witkin, found that six to seven percent of the mortgages included inaccurate reports on the property's rental or additional mortgages taken out on it. Those were many of the mortgages that in the end were never repaid, and collapsed.
This means that the reporting errors were no accident. They were made deliberately, and they prove that several of the U.S.’s large mortgage banks knowingly sold defective products – itself a criminal act – and that this was the organizational culture in the bank. The default of these mortgages was one of the major reasons for the financial crisis, including the trillions of dollars that taxpayers poured into those same banks to stop the avalanche.
Was anyone ever punished for that? We all know the answer. Not only did the bank managers get to go home without ever seeing the inside of a courtroom, but they also went home wealthy. For example, Angelo Mozilo, the CEO of Countrywide Financial, who received a salary and bonuses of $470 million, was not asked to take part in the bank's bailout or pay any share of the $12 million in fines that it paid to the authorities.
3. Another example is that of a former Israeli, Lucian Bebchuk of Harvard University, who worked as a consultant for the economic concentration committee. In his latest study, the final version of which is to be published later this year, Bebchuk finds that much of the money businesses spend for lobbying activity and pressuring politicians is off the investors’ radar.
He states that shareholders are interested in receiving information about such actions – for example, to make sure those actions are good for the shareholders, not just the owners and managers. In an essay, Bebchuk calls upon the U.S. Securities and Exchange Commission to require companies to report such activity, and explains why the current procedure of voluntary reporting is not enough. This is only one case of hundreds. The public is well aware that company managers’ donations to politicians are not always intended to improve its situation – but it took an academic study to prove it.
Expand the research
Unfortunately, socioeconomic research in Israel is far more meager. There are several reasons for this, including the number of universities and researchers, the lack of reliable information or the government’s willingness to release it. Also, Israeli researchers often would rather analyze American data because that is more prestigious. But when politicians and the government are unwilling to even acknowledge the problem and conveniently avoid dealing with it because “there are no statistics or proof,” the socioeconomic researcher’s role becomes more important than ever.
Our recommendation to the new Knesset members, those whose souls are still uncorrupted by years of navigating the old political system, is to expand the scope of socioeconomic research in academia, the Knesset’s economics department and independent institutions. They will find that the truth lies in the public’s gut feelings, and that the government knows this but is trying to hide it. They will also finally have the proof they need to carry out vital reforms.
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