For Economic Czar, Israel’s Top Problem Is a Lack of Trust

‘For eight months a gang tried to prove that my colleagues and I were corrupt,’ says Eugene Kandel as he readies to leave

Ofer Vaknin

For six years, Prof Eugene Kandel has run the National Economic Council, the economic policy-making apparatus of the Prime Minister’s Office. Kandel himself has been Prime Minister Benjamin Netanyahu’s closest economic adviser. He and his boss share the same economic views and it seems their political perspectives are also very similar.

In an interview with TheMarker as he gets ready to leave office, Kandel was difficult, aggressive, sometimes frustrating. He behaved like a man who feels himself to be under attack from all sides merely because of his neoliberal opinions, who cannot understand how people who disagree with him also question his integrity. He sees himself as an ardent Zionist who, he notes, immigrated to Israel not once but twice — the first time as a boy, a prisoner of Zion from Russia, and a second time when he gave up a position at the University of Chicago and returned to Israel with his wife and their children.

He feels injured to the core. His pain explains his central thesis, which is that Israel’s future is in danger because of the hypercriticism and the shallowness and hurtfulness of public discourse.

Working in government is like trying to run with a foot and hand tied behind your back, he observes. “Nothing can get done, not even buying a chair for the office, without it taking months and endless permits.”

Aren’t you just repeating the usual mantra that all the government’s problems are the fault of its legal advisers and accountants?

“I’m really not. Government bureaucracy isn’t the problem, it’s just the symptom. The disease is the lack of trust. The ministry directors general spend most of their time removing barriers that were placed there because of the lack of trust in them and their integrity. The directors general aren’t trusted to act for the public good, so they’re not left to work in peace. That lack of trust, which is fed by conspiracy theories, paralyzes us. There’s a popular slogan, ‘Corrupt people, we’re sick of you.’ What exactly am I — a civil servant — supposed to do with a slogan like that? If everybody thinks I’m corrupt whatever I do, what’s the point in striving to prove otherwise? It drives me crazy because people who blow up a bridge immediately stand trial for destroying precious physical capital, but the people destroying the most precious capital we have, our social capital, are raised up on high in the media and in society. Trust is social capital and without trust, economies can’t function. We saw in the 2008 crisis how lack of faith between banks paralyzed the global credit market. Loss of faith has destructive implications for the ability of governments to serve their citizens, and we are at an advanced stage of that loss of faith.”

Aliyah twice over

Kandel, 56, married with three children, is a professor of finance at the Hebrew University of Jerusalem. After earning bachelor’s and master’s degrees in economics there, he went to the Mecca of free-market orthodoxy, the University of Chicago, where he earned both an MBA and a Ph.D. in economics. Once a mark of distinction, to have a doctorate in economics from the University of Chicago after the 2008 global financial crisis challenged some of the fundamental assumptions of free-market economics — and in Israel, after the social protests that began in 2011 — is seen by many as a mark of Cain.

Kandel lives in the collision zone between the way he perceives the economy and the way the public perceives it. An expert of world renown who analyzes the markets using the precision tools of theoretical mathematics, he finds himself forced to contend with criticism from people who have never studied economics, who demand an amorphous “social justice” and have difficulty understanding pro-business arguments. In this collision, Kandel and Netanyahu are one: Both believe in the free market and both have been slammed and mockery for their beliefs.

How do you explain the fact that the prime minister has vanished from the housing crisis? He let Yair Lapid or Moshe Kahlon — the former and current finance ministers — crash and burn contending with Israel’s most serious socioeconomic crisis, and doesn’t get uninvolved?

“On the contrary, Netanyahu was first to address the housing crisis when he was elected in 2009, with the bold ‘terraces’ reform [which would have enabled homeowner to undertake light construction without having to obtain a building permit]. To this day we’re paying the price for the fact that the plan was not approved.”

You are merely lending credence to the criticism: He tried one solution, it didn’t work and since then he’s let everybody fail at it.

“For four years he was the man who pushed for handling the crisis — and remember how the housing crisis began: because of the decision by the Olmert government to stop planning and building, which created huge surplus demand for housing.”

The Olmert government? Six years have passed since then and former Prime Minister Ehud Olmert is still to blame for the housing crisis?

“You know how long it takes to plan and build housing in Israel? Thirteen years on average. It’s not a question of blame, it is simply taking long years to solve the problem. So we shortened procedures and it still takes years because of the trust problem — the loss of trust causes power to be disseminated among the various planning committees, which holds up the solution.”

By your math, if only six of the 13 years it will take for the solution to the housing crisis to kick in have passed, it will take seven more years for the crisis to be resolved?

“No, it will take two to three years, because the government is pushing to shorten procedures.”

Don’t buy a home

Two years ago, you said in an interview that you told your daughter not to buy an apartment. Since then, housing prices have risen 20%. Is she still speaking to you?

“I’m not sorry for what I said and my daughter isn’t mad at me, because in any case she wasn’t in a position to buy an apartment then. Nor is she today. It was merely an attempt to explain to the public that the one raising prices is it, by racing to buy at any price.

“The fact is that in Israel, builders don’t keep and rent out apartments, they sell them, because the rental income doesn’t pay. The ones renting out apartments are investors who buy them from the builders. That shows the investment doesn’t make sense and isn’t good. But because of the lack of trust, people don’t believe it when the government says housing prices can decline, so they buy at irrational prices and make a bad investment.

“Take me, for example. Since we returned [to Israel] from Chicago 18 years ago, we have been living in a rented apartment, and I don’t regret it. Until 2009, it paid for me not to own a apartment. Since 2009 I’ve lost money because prices rose a great deal. But that doesn’t matter to me, because rents haven’t changed in real terms.”

Isn’t the housing crisis a mark of the government’s poor performance?

“We could do better in housing if the different branches of government would coordinate. The Israel Lands Authority, the Finance Ministry, Housing Ministry, Justice Ministry and the planning committees — the root of the trouble is the lack of trust between them. We create regulatory fiefs and because of the distrust of politicians, we make these fiefs independent. Then we wind up with six or seven independent players, each of which sees only its interest and none looking at the big picture.

“It’s like Krilov’s fable, how everybody pulls the wagon in different directions and it can’t move. Here too the problem is that nobody is coordinating the process because nobody has the authority to do so. There is no one body that concentrates all the authority and responsibility, so the crisis is never anyone’s fault: Each of the regulators did exactly what the law told him to, and the wagon being stuck isn’t his fault. We have a real governance problem and that’s why the National Economic Council suggested a mechanism of national projects. If a given project crosses multiple ministries, the mechanism would converge the process.”

Are you referring to what’s been called the “David Gilo-bypass” plan, which looked like an attempt to force the antitrust commissioner to accept the government’s plan for natural gas?

“Yes, because the gas plan exposed the problem — that each regulator operates alone.”

Gilo worked alone because the government abandoned him and left him to deal with problem of the natural gas monopoly by himself.

“I prefer not to get into that, but David Gilo was offered help many times — and he refused the offers. Until in the middle of December he threw his bombshell, that he was giving up on the regulation he prepared with the gas companies, and he did it without even informing the government of his intentions in advance. So there is not a lone tortured saint here, and all the rest are ‘haters of Israel.’”

‘The gas monopoly gives in all the time’

There is no doubt that the heart of the attack on Kandel resulted from his fierce support for the natural gas framework. It was a personal attack at times, which quite often did not hesitate to make insinuations about Kandel’s integrity, or to hint that he was motivated by foreign interests.

“You want to know why I’m leaving? Because for eight months a gang of people took it upon themselves to prove to the public that my colleagues and I are corrupt, because of the gas framework. The entire media came after me with this claim, and I don’t understand. If I’m corrupt, then investigate me. And if you can’t prove I’m corrupt, then stop calling me that. I participated in a conference in which they asked what was the biggest danger to Israel. I thought the main danger was the ‘shallow and hurtful discourse that endangers democracy.’ The next morning there was an attack on me on the radio — of course without bothering to speak to me — that Kandel opposes democratic debate, and also hinted that this is connected to my growing up in Russia. We are holding a debate of slogans, of sound bites, and instead of arguing about the essence of things, we reject the speaker as corrupt. I warned about this shallow and hurtful debate, and fell victim to exactly this debate.” Kandel says he is not frustrated personally by this though, because he does not have political ambitions, but he is upset because it causes harm to Israel.

Let’s talk about the professional criticism of the gas framework: How did we agree to remain dependent on a gas monopoly?

“It would have been better without the monopoly, but that’s not realistic. The gas companies have property rights to the gas they found, and if we would have taken them to court it would have lengthened into a process of eight years, during which we wouldn’t have gas. We thought it was preferable to weaken the monopoly with [their] consent, with the sale of the Karish and Tanin [offshore fields], and with the sale of part of Tamar.”

Doesn’t the enormous economic and political power of these companies worry you?

“What power, exactly? So far, I haven’t seen what they’ve gained from being so big and scary; just the opposite, it costs them a lot. They’re attacked all the time, and they are always giving in — both in the Sheshinski [recommendations on taxing natural resources] and the gas framework.”

What about the issue of the price of natural gas: World prices are falling. Will we be able to enjoy that in Israel too?

“First of all, a large part of the decline in prices around the world is irrelevant for us. We are not tied to the American market, and the prices in Europe too will affect us only if we use the export option through the liquefaction facility in Egypt. Otherwise, the prices relevant for Israel are the local export prices, to neighboring countries. And in the framework there is a section that says that if the export prices fall, they must sell at similar prices in Israel too.”

Regulatory immunity

And this justifies the precedent of granting the gas companies regulatory immunity for a period of five to 15 years?

“Investors came, took the risk in gas exploration and after they found gas we told them that in fact this gas is ours and not theirs. With our own hands we turned ourselves into a state that people don’t believe. A report by a Norwegian company ranked us after Indonesia in terms of regulatory stability. Investors simply don’t want to come here anymore, they don’t trust us not to screw them after they succeed.”

The paradox is that the gas framework is the one thing that has overshadowed Kandel’s six years of work on the National Economic Council. But the council is much more than that. Kandel is only the second chairman, after Prof. Manuel Trajtenberg, who is now a member of Knesset. Under Kandel the council has positioned itself as Israel’s main strategic economic planning body, while focusing on long-term and structural issues. This positioning was a very wise move, because it prevented an almost unavoidable conflict with the institution that previously controlled government economic planning, the Finance Ministry.

Among the council’s most important achievements are the establishment of a strategic planning staff, including the appointment of deputy directors general for planning and strategy in all government ministries; the law to reduce economic concentration; the recommendation of a credit database for all Israelis; the development of quality of life and sustainability indexes; a national plan for developing fossil-fuel alternatives; promoting the establishment of real estate investment trusts (REITs); plans to increase employment among ultra-Orthodox Jews; identifying professions with a shortage of trained workers and planning for the future employment market. In addition, council members have served on the most important planning forums.

Still optimistic

How do you see the future of Israel?

“I’m very optimistic. Israel is an amazing country. The ability of people in Israel to come to the aid of others and also create the most innovative things is unprecedented. I didn’t make aliyah to Israel twice for no reason. The problem is that we have forgotten this. The public debate is only endless self-flagellation. It has become the national sport, and if we don’t stop it Israel’s future will be sad.

“This doesn’t mean we don’t need to criticize, or to fight corruption. But we need to remember that in general we are amazing, and the battle must focus only on what prevents us from being even more amazing — not on rejecting everything, to sow a lack of confidence in our own abilities. This is the difference between northern Europe and southern Europe, a gap between the discourse of faith and prosperity, and one of disagreement and blame. If we focus on this debate of a lack of faith in ourselves, we will become very mediocre.”