When Shelly Yacimovich was elected head of the Labor Party in September 2011, the business sector, which had been tied to the party for years, got very nervous. Yacimovich’s social-democratic approach, not to mention the social-justice protests that year, sowed fear among many people who had seen the party as their political home.
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Some fled to two parties that were founded the next year: Tzipi Livni’s Hatnuah and Yair Lapid’s Yesh Atid. After the January 2013 parliamentary election, Lapid became finance minister.
Before that happened, there were fears that the Labor Party would enter the government and Yacimovich would become finance minister. The concern was that she would usher in big government, price controls, caps on executive salaries, budget deficits, inheritance tax, higher taxes on the rich, VAT exemptions on basic products and a disruption of the tax system.
It was also feared that she would make the government cave to the demands of labor unions and embrace an economic populism that would weigh on Israel’s economy. We would face the prospect of Bolshevism; who knows what else that woman would do.
These fears found expression in Yesh Atid’s resounding success in the 2013 election; it captured 19 seats, even though it was a new party whose role was unclear. Some Yesh Atid voters were apparently Labor people frightened by Yacimovich’s socialism. They preferred Lapid, the capitalist. After all, he hadn’t only been a journalist, he had been a pitchman for Bank Hapoalim.
They didn’t know what his take was on socioeconomic issues; his columns in the daily Yedioth Ahronoth hadn’t exactly spelled out a clear ideological platform. But they assumed that Lapid would provide a saner voice.
He wouldn’t divert the Israeli economy from the path it had taken since the 1980s: reduced government intervention, a nearly total elimination of price controls and subsidies, and smaller budget deficits.
When Lapid was appointed finance minister last year, businesspeople breathed a sigh of relief. They didn’t assume he knew how to run an economy, but they thought he wouldn’t mess things up.
The optimists even felt that because he hadn’t been elected by the unions, the party central committees and traditional pressure groups would allow for a longer leash – treatment that was never awarded by the likes of Likud and Labor.
So now, with the current government in power for a year and a half, let’s look at the policies that Lapid has planned or carried out.
We find the VAT exemption for first-time purchasers of new apartments, a cap on financial executives’ annual salaries at 3.5 million shekels ($925,000), and price controls on staple items like cream and white-cheese spread, and now also on canola oil, whole-wheat bread, yogurt, dairy snacks, soy milk, frozen vegetables and toilet paper.
Also planned is a 2015 budget deficit of 3.4% of gross domestic product, even though the government’s target had been 2.5%. Also in the works are increased royalties on natural resources, even though the government isn’t even halfway into its term.
What has come over Lapid? Has he become a socialist? A Marxist? What’s next? Will he push for everyone to earn the same wage? Will he set up communes or nationalize businesses?
I don’t know what Lapid’s basic economic worldview is, but I assume that a year and a half at the Finance Ministry hasn’t changed his outlook – to the extent that he has one.
He hasn’t become a socialist. Actually, every time Lapid has done something that has diverged from the outlook of a modern market economy, he has sneered that he wasn’t thrilled with the idea.
Worrying about his tombstone
When he pursued the VAT exemption on new homes, he said differential value-added tax wasn't the right approach as a rule, but it was right when it came to housing. Regarding price controls, he said these were Bolshevik, “but I use them because I have no alternative.”
Before last year’s election, Lapid wrote, addressing younger Israelis: “A deficit is a loan my generation takes from your generation, without having the faintest clue as to how to pay it back.” As finance minister, he said: “I don’t think anyone wants it written on his tombstone: ‘Here lies Moshe, who maintained fiscal balance.’”
There are several explanations for what has come over Lapid. The most obvious is that you see things differently when you’re in office. It’s nice to cling to a particular worldview, but when you’re responsible for running an economy, life suddenly looks different. Still, that explanation is too easy.
A second explanation is that Lapid clearly favors a market economy and responsible management of the budget, but he doesn’t have a clue how to put it into practice. As a result, he chooses solutions that contradict his worldview such a price controls, subsidies and higher budget deficits.
A third explanation is that Lapid actually knows how to reduce the cost of living and responsibly manage the economy, but he also knows that this involves battling ferocious forces that he chooses not to take on.
A fourth possibility is that Lapid treats the economy superficially and isn’t willing or able to take an interest in the detailed implications of things like price controls, value-added-tax exemptions or increased budget deficits.
Instead, he looks at every step individually. No doubt, lower prices, VAT exemptions and promises not to raise taxes produce great sound bytes for an election campaign.
A fifth possibility is that Lapid does understand the consequences of such problematic policies but thinks the people are superficial and incapable of linking populist steps such as VAT reductions, price controls and higher budget deficits to the destructive consequences.
A sixth possibility is that Lapid had the misfortune of landing in the Finance Ministry, and he’s doing what he can without a clear ideological approach, without clear direction and without connecting the dots among his various steps. He’s merely paying attention to his political advisers. That’s not good for Israel’s economy or overall society; the polls show that it’s not even good for Lapid.
The right way to do it
By the way, price controls, higher deficits and subsidies are legitimate policies, even if they’re not as popular among economists. But their use needs to be based on criteria divorced from the capitalist-socialist dichotomy. Instead they must relate to economic structures.
Opening markets to competition as a response to the cost of living and executives’ excessive salaries is preferable to controls. If the budget deficit is increased, this should be to encourage economic growth, not for populist purposes. And if a product is to be subsidized, it should be done in a way that limits a distortion of the market.
Managing that kind of policy and doing the right thing requires a minister with a solid worldview, with a willingness to fight strong and extortionist groups and an ability to put political considerations, image and popularity aside. Unfortunately, Lapid has none of these qualities. It’s not a matter of Bolshevism.