Without Israel's 'Business Police,' Economic Chaos Would Reign

PM Netanyahu is accusing the 'cartel of regulators’ of being the main obstacle to the Israeli economy, instead of doing some housecleaning in his own backyard.

During these not-so-simple times of negotiations with the Palestinians, Prime Minister Benjamin Netanyahu has decided to stress that he has not forgotten the importance of the economy.

“The major obstacle to it is not the cartels and monopolies, even though they exist, but the cartel of regulators – and I intend to deal with it,” said Netanyahu last Thursday at a conference of the Manufacturers Association of Israel in Tel Aviv.

Really? “The regulators' cartel” is the economy's No. 1 enemy? And what is this cartel exactly? Does the premier really suspect that the supervisor of banks, the commissioner of capital markets, the antitrust commissioner, the chairman of Israel Securities Authority and their colleagues meet late at night in a dark parking lot and plan how to become rich at the public’s expense?

Netanyahu said: “There are almost 200 regulators dealing with thousands of regulations, and each one looks at only his own area. The cost of the regulation has not been calculated, and it may conflict with the regulations of other regulators. Therefore, we are seeking to reduce and organize regulation, and to examine its influence on [economic] growth.”

Now it's clear: Regulators – government officials working for the prime minister who are supposed to ensure that other officials do not exploit their power and harm the public’s standard of living – are harming economic growth.

It's known that Netanyahu has recently lost touch with economic matters, but it seems now that this situation actually dates way back, at the very least to the end of the previous decade.

Once upon a time, the reigning economic theory was laissez faire – or, "let us get to work." That is, leave capitalism to its own devices, without government intervention or oversight, since the free markets and other “invisible hands” do the work quite efficiently.

But that world view blew up in the Great Depression in 1929: The world understood that without regulation, unbridled capitalism would spark endless waves of bubbles and crises. The public, which did not put millions aside during the bubble times, would suffer during the crises.

In response, investigative commissions were set up around the globe to implement regulations and supervisory processes. In the United States, for example, it was decided to distinguish between commercial banks and investment banks.

With time regulation eroded, due to the pressure business people wielded on legislators, and then came the crisis of 2008 – from which the world has not yet recovered. When the world saw how irresponsibly the banks and insurance companies had acted, regulation returned. In the United States laws were passed against outrageous executive salaries, against certain practices and conflicts of interest within the banks (as when they traded in securities for customers and also for themselves), and against tax shelters and tax evaders.

The requirements for reporting and transparency were stiffened everywhere. The Europeans demanded stricter reporting for hedge funds, and also examination of the influence of monopolies – for example, in the technology sector.

All over the world today there are efforts to protect the public’s privacy, and oversight of data that commercial firms are allowed to use. There is supervision and regulation of product quality, food, drugs, transportation, communications and many other services.

In principle, no one believes any longer that free markets know how to do the “right thing” for society and the economy. It is clear to everyone that oversight, transparency and regulation are a necessary evil that we cannot do without. Even the "high priest" of the new age of the free market, former U.S. Federal Reserve chairman Alan Greenspan, admitted this after the crisis of 2008 erupted: He told a Congressional committee he had made a “mistake” in believing that banks, operating in their own self-interest, would do what was necessary to protect their shareholders and institutions.

Regulatory roadblocks

But Netanyahu is not convinced of all this. Even after the IDB conglomerate collapsed last year, exposing the systematic failure of regulatory and oversight functions in the capital markets and business sector; after the strike at the Hadassah hospitals showed fundamental problems in the health system; and after wild behavior by the unions at the ports and the Israel Electric Corporation revealed a massive failure in supervision of government authorities and companies – even now the premier thinks there are too many regulators.

Of course, regulation does make life complicated in the world of business: It acts like the traffic police when they set up roadblocks and check licenses. The drivers become angry, but everyone knows how the roads would look if there were no police at all.

Instead of attacking the "business police," the prime minister should examine regulations, and separate bad ones from essential ones.

When the Israel Standards Institute makes life hard for some importers by protecting the monopolies of local manufacturers or exclusive importers – that is regulation that hurts the public and economic growth. When the Israel Lands Authority and others involved in freeing up land for construction and providing building permits are collapsing under the weight of the bureaucracy and corruption – that is regulation that abuses the public. When the civil service turns into an institution dominated by legal procedures and "covering your ass" instead of working according to economic goals – that is regulation that paralyzes economic development.

All these examples of bad regulation must be dealt with.

But there is also essential regulation. History shows that without effective regulation, the agencies that manage people’s money will almost always be tempted to skim off some for themselves. Business people and companies will almost always strive to reach a place where they control markets and dictate noncompetitive prices.

The Israeli public has learned the hard way how cellular operators functioned, and what happened to mobile-phone prices the minute new players entered the market and destroyed the old system. It is not hard to see how the unions, when they have power, strive to take control of their organizations and diminish their value vis-a-vis both owners and customers.

Instead of attacking all the regulators en mass, Netanyahu needs to ask why regulation fails in important areas and to announce a campaign to fix this. He needs to ask why no one – regulators, accountants, directors, bankers, auditors or executives – has ever picked up the gauntlet to prevent the collapse and haircuts at IDB, Zim, Delek Real Estate and Elbit Imaging, etc.

He needs to ask why Israelis end up transferring between one-fifth to one-third of their pension savings to the companies that manage their money. He needs to ask who is responsible for regulation in his own backyard – the civil service – and why large sectors of it operate as if they have no owner.

As the Bible says: "In those days there was no king in Israel; every man did that which was right in his own eyes."

There are, of course, other possibilities. Maybe Netanyahu does not deal with regulatory issues because they don’t interest him. Or he doesn’t distinguish between regulation that intentionally harms the public and that which is meant to protect it. Maybe he said what he did against the regulators last week because the people in the audience were members of the Manufacturers Association, for whom regulation and protecting the public are negative concepts.

Maybe. But if so then Netanyahu must not complain about others who act the same way he does: for example, Palestinian leaders who talk about peace when they speak to the West, but speak completely differently when addressing their own people in their own language.

Michal Fattal