Don't Blame Haredim and Arabs for Their Poverty - Blame Bibi

Can a leopard change its spots? When it comes to incumbent Prime Minister Benjamin Netanyahu, the prevailing assessment is that he can. Netanyahu, Mr. Economics, led the Israeli economy during the 2003 crisis and adopted a strict neo-liberal policy at the time. He reduced National Insurance Institute allowances, and at the same time lowered taxes for the middle and upper classes. Six years later, in 2009, when he once again took the economic reins in the midst of a crisis, he adopted the opposite policy. He squandered the budget during his four years as prime minister, and acceded to almost every budgetary demand. Doctors, lawyers, social-justice protesters – almost anyone who asked received.

• Long live Bibi the bathtub king
• Netanyahu puts onus on Israeli Arabs for economic development
• At Davos, Israeli central bank chief stresses poor Haredim, Israeli Arabs
• Bank chief Flug visits Arab towns: 'Optimistic’ about sector’s progress
• Young Israeli Arabs make strides in entering workforce
• Working poor represent Israeli 'growth sector,’ Bloomberg News says

There is no question that Netanyahu bears the ultimate responsibility for the government's failure to manage the budget during the past two years. The huge deviation from the deficit in 2012 and the equally huge deviation of NIS 12 to NIS 15 billion from the expenditure ceiling for the 2013 budget are a direct result of his policies from the past four years. The prevailing assessment is that Netanyahu changed his spots after concluding that his policy in 2003 damaged him politically, earning him the reputation of a cruel politician.

This change is regrettable, however, because in adopting it, Netanyahu – like his voters – is making the mistake of misunderstanding Israel's economic data.

The data teach us not only that Netanyahu's 2003 policy (and that of his predecessor as finance minister, Silvan Shalom) extricated Israel from the deep economic mud in which it was mired at the time, but that it also encouraged social progress over the long term. In other words, in the long term, this policy is likely to bring about a reduction in poverty, and it is already narrowing the gaps.

How is it possible that reducing allowances and taxes leads to narrowing gaps? It's not, at least over the short term. The fact is that Israel was, and remains, one of the world record holders when it comes to social gaps. According to the most recent NII poverty report, the Gini coefficient, which measures inequality in Israel, is 5.6 percent higher today than it was a decade ago (when 2011 data is compared to 1999 data).

But the latest poverty report teaches us that during the past five years the social gaps in Israel have begun to shrink. The Gini coefficient decreased between 2006 and 2011 by a rate of 3.3 percent. As a result, Israel, which is ranked second among the developed countries in its poverty rate (24.8 percent), improved its rating in terms of gaps. There we rank fifth – which is still disgraceful, and makes us one of the world leaders in inequality, but still attests to a measure of improvement.

Paradoxically, the improvement in the social gaps is attributed, according to the NII as well, to Netanyahu's draconian policy. On one hand, simultaneously reducing allowances and taxes only serves to weaken the weak and strengthen the strong – and inevitably increases the gaps between them. On the other hand, these steps represent the government's stick and carrot: putting pressure on those who choose not to work, and providing benefits for those who do.

Over the long term, both measures have made going out to work more worthwhile. And we are now beginning to reap the fruits, as more Haredim and Arabs join the job market, and the gaps between classes grow smaller. Joining the workforce contributes most to improving the situation of the poor, as the latest poverty report reflects.

The most prominent finding of the poverty report is that while the number of poor people has increased, their situation has improved. In other words, there are more poor people, but their personal situation is relatively better and they are closer to being above the poverty line. That's due to the higher rate of Haredi and Arab participation in the job market. These may be weak (poor) workers, but poor workers are still generally less poor than those who don't work.

The decline in the severity of poverty, like the decline in social gaps, stems from an increase in employment among the more feeble classes. Netanyahu's cruel economic policy in 2003 – which essentially transferred allowances to the middle and upper class by lowering their taxes – increased the pressure on weaker elements of society and forced them to go out and work. This is certainly true of those who traditionally choose not to work, a.k.a., the Haredim.

The problem with Netanyahu's policy - and in this the State of Israel really was cruel to its poor - is that it wasn't completed. It's not enough to cut allowances to coerce the poor, especially Haredim, to work. The state has to help integrate them into the workforce by providing the proper tools, such as education and vocational training; it has to enforce labor laws, help these people find work, encourage employers to hire them and pay allowances that encourage employment (a negative income tax). The State of Israel barely did any of those things.

A study conducted recently at the department of public policy at Tel Aviv University found that a negative income tax allowance, whose maximum amount for families with multiple children is NIS 460 per month, manages to extricate 12 percent of the poor from poverty, at most. The study found that there is too much red tape involved in getting the allowance, and that the allowance itself is too meager to spur any poor person to work. Even the Wisconsin Plan ("workfare"), the most important policy tool the state could have used to integrate the poor into the job market, was torpedoed by MKs Shelly Yacimovich and Haim Katz. Today there is not a single government instrument to help the poor find work.

According to OECD figures, Israel spends only 0.27 percent of its GDP on getting the poor off welfare and into the workforce, compared to an average of 0.6 percent in developed countries. We, who have the worst social gaps and one of the lowest rates of nonparticipation in the workforce among developed countries, spend far less on crafting a policy that reduces poverty by encouraging work. We won't get far this way.