Taking Stock / Lapid Let Us Down

1. New government, old habits

• Yair Lapid: Budget will aid middle class in long term
• Even before a single budget cut is carried out, Lapid loses trust and affection of much of his electorate
• How long before Israelis' anger boils over again?
• In Israel, Lapid and Netanyahu out-Thatcher Thatcher
• Taking Stock / Hands up! It's a bank robbery

A year and a half after the biggest social-justice protest in Israeli history, the new government approved a budget in the bad, old manner.

Tiptoeing to avoid stepping on the toes of organized pressure groups, it closed the deficit by sweeping tax hikes that don't distinguish productive, competitive workers and industries from corrupt, bloated sectors.

The disappointment is vast because the public gave Israel's 24th finance minister power like no finance minister ever had.

Standing behind Yair Lapid are 18 Knesset members, representing 543,000 voters. Even the members of the press connected to pressure groups supported him. No finance minister in Israel ever had a tailwind like that.

Not just tailwind: Change at the top of the Finance Ministry provides an opportunity to break the mold, leverage the crisis and attack the conventions and fossilized structures harmful to society.

In the summer of 2011, as Lapid jumped onto the bandwagon of the protest and entered politics with a newspaper column My fellow slaves, a thing went down on Tel Aviv's Rothschild Boulevard, where the tent protest camp had set up shop.

What happened is that the protesters rudely ejected Ofer Eini, the chairman of the Histadrut (Israel's labor federation). None of the protest leaders had any pretense of understanding economics, but intuition told them that the uber-union is a key collaborator in Israel's prevailing economic system.

Lapid's choice to hold his first press conference with Eini by his side left no room for doubt: No game-changer he. The new minister joined forces with the oldest power hub in the scene.

It is exactly through accords with Big Union that the government evaded its responsibilities toward workers, taxpayers, consumers and savers for years.

The "agreement with the workers" reached with Eini was an agreement to ignore the plight of millions of others. Left outside in the cold are workers at small and medium-size businesses, the people who don't work for the monopolies, hundreds of thousands of self-employed, temps and freelancers. It also screws many of those ostensibly protected by the Histadrut but in practice, live at the bottom of the public-sector power pyramid.

How often you can fool the people?

The agreement with Eini preserves a bad status quo. It also legitimizes the economic structures that keep productivity, competitiveness and equality in Israel among the lowest in the developed world.

Lapid's support for the theory that the Histadrut represents the workers, and that agreement with it is agreement with all workers, is nothing new. Previous prime ministers and finance ministers did the same.

By omission and commission, they supported the tycoons and the concentrated structure of the economy with the fallacy that the tycoons represent the business sector and generate economic growth through jobs.

Today Israelis realize that most of the tycoons don't create value. They gain control of existing value by "fixing" the rules of the game.

The people don't believe anymore that a handshake between the finance minister and Histadrut head will solve their problems. They know they and their children will stay outside, and their hope for a better future is fading.

Tell it to the marines

Aside from the press conference with Eini, the clearest sign that Lapid capitulated to the status quo is the abject surrender in the area of defense.

The defense budget has almost doubled in the last ten years, in nominal terms, though the economies of Israel's traditional enemies imploded. Even though Lapid and the rest of Israel learned that career soldiers get pensions five to 10 times bigger than ordinary folk, the defense budget wasn't touched.

Not that the defense establishment stays within its budget anyway. It never does and the treasury knows it. The "defense budget" has long since become a tacit lie that everyone goes along with.

Netanyahu and Lapid quailed before the defense establishment, though the public is learning to distinguish between national security and defense expenditure.

Lapid, in his defense, is a novice in economics and politics. But the disappointment with his boss, Prime Minister Benjamin Netanyahu, and with his brother, Industry, Trade and Labor Minister Naftali Bennett, is two-fold.

For years Netanyahu has spoken about the need for structural economic reforms and for confronting powerful interest groups.  It was Netanyahu who established the Economic Concentration Committee three years ago. 

But when his chance came to start building a more competitive, just economy, he chose the short-term political gratification of seeing Lapid weakened. Bennett, who declared war on the interest groups just a month ago, threw his support behind Lapid's budget, though it had been a clear opportunity to use the financial crisis to start fixing Israel's economic ills for the greater good.

2. Economic concentration

As the attack on him escalated, two weeks ago Lapid announced that he would address the issue of economic concentration. He wouldn't let the tycoons control the economy.

However, the start of discussions at the Knesset Finance Committee made clear the distance between rhetoric and action.

Representatives from Meretz, Labor and Habayit Hayehudi seem determined to take a hard line and expand upon the conclusions of the Economic Concentration Committee to reduce economic concentration in the business sector.

Surprisingly, it is the representatives of Yesh Atid in the committee who are taking the opposite tack or are staying mum.

3. Shriveled pensions

Some 25 years have passed since a sweeping reform of Israel's capital market began. Five years have passed since pensions funds were privatized. In the last year Israel's citizens have understood that their disposable income and pension savings are tied to the structure of the capital market, to business-sector norms, and to institutional corruption.

The public is angry because when inconvenienced, the tycoons seem to shrug off debt. Some of the richest people default on debts to the public in what the markets call "haircuts." The public is angry about the disconnect between the tycoons' spendthrift and showy lifestyles and the way banks, institutional investors and others write down their debts.

The public has yet to grasp the vast disparity between its pension expectations and what they're likely to get.

This is because in the past 30 years, and particular in the last five years, a strong and pleasant tailwind has benefited most savers: low interest rates.

When interest rates drop, bond prices rise and so, often, do share prices. 

But the effect of lowering interest rates is all but exhausted. At some point this effect will reverse.

Even if interest rates don't rise, the main engine driving the growth of returns on investments will grind to a halt. And then the true price of haircuts, management fees, lousy investments and conflicts of interest will be much higher, as reflected in the returns on pension investments.

In other words, the great pension protest still lies ahead.