Netanyahu, a Brave Finance Minister Turned Populist Premier

The prime minister’s pathetic election economics overshadow his past achievements — ones that are now enshrined in Israel’s falling rate of poverty.

Emil Salman

Prime Minister Benjamin Netanyahu’s pathetic election economics — for example, the strange declaration on raising the minimum wage to 5,000 shekels ($1,272) a month, at a time he knows that he cannot do so — does not honor the man. Mostly because it is not clear at all why Netanyahu needs such populist tricks when he can show the public the real results of his policies.

Indeed, someone else did that for him last week: In the course of 83 pages he is shown to be one of the most important economic leaders of our generation. These are the 83 pages of the National Insurance Institute’s 2013 poverty report.

But to our great regret the Netanyahu under discussion in the poverty report is the Netanyahu of 2003. At that time when the Israeli economy was sunk in the deepest recession it has ever known, Netanyahu, serving as finance minister, implemented a harsh, firm, sharp and controversial economic policy.

It was a policy of sharp cuts in NII allowances and later income tax cuts with the goal of halting the budget’s march to bankruptcy and reversing the chronic increase in welfare spending and poverty that characterized the late 1990s. The short-term goal was to avoid the collapse of the economy at any cost, which fit in well with Netanyahu’s long-term ideology of getting people into the workforce by reducing the allowances for the non-working poor.

Netanyahu was hit with harsh criticism at the time. His term as finance minister in Ariel Sharon’s government earned him the image of a cruel person, one that he has been trying to shake ever since. Look now, for example, how nice he is about raising the minimum wage.

There are those who say Netanyahu remains haunted by the decisions he made in 2003 and that he decided, upon returning to the Prime Minister’s office in 2009, to stop being so cruel and to show his softer, gentler side. His pathetic behavior lately fits in well with this theory, which is a shame. If Netanyahu had read the poverty report he would have discovered a song of praise for the courageous policies he took in 2003.

The NII poverty report is written as a summary of a historic change.“The findings point to the success of the policy of increasing employment,” states the clear but cautious language of the NII report. “The rates of employment are in a continuous rising trend since 2004, and as a result the incidence of poverty has fallen among various groups, particularly since 2010. This is the passage to growth for the benefit of the poor after 2008. Most of the growth in employment was actually among the low-wage workers.” The changes in inequality, it says elsewhere in the report, “teach of a significant progressive change.”

In other words, the era of rising inequality in Israel is over. The NII economists were forced to word this in such a way in light of the exceptional findings in the poverty report, which testify to improvement in almost every poverty figure in Israel.

Poverty rate falls

The poverty rate fell last year to 21.8% of the population from 23.5% in 2012. The percentage of families living in poverty fell from 19% to 18.6%. The sharp drop is attributed by the NII to the great Israeli employment miracle: The jump starting in 2003 that changed Israel from an economy characterized by too few people in the labor force into a nation that is now well ahead of the average in this measure.

“The reason for the decline in poverty is the improvement in earnings among workers [earning] low wages,” writes the NII. “Both because of the growth in employment, and as a result of the rise in wages. The growth in employment was particularly sharp among the populations usually excluded from the labor market. So, in recent years there has been a rise in real wages also among poor workers, which has accumulated to 2% to 2.5%.”

In other words, the figures in the poverty report show of rare positive scissors movement. On one side, the rate of labor force participation of the poorest segments of the population in the workforce has grown. The labor force participation rate for parents in single-parent families is almost identical to that of the general population. The rate for parents of five or more children also climbed sharply, while other dramatic gains came among Arabs and those with little education. For Haredim, unfortunately, the picture is less clear.

The improved employment profile for the weakest segments of society has resulted in a pronounced demographic change among Israel’s poor. The number of poor who do not work dropped from 19% to 18%. The percentage of poor families with a single breadwinner fell from 41% to 37%. The percentage of poor families with two breadwinners rose from 11.6% to 12.7%. This is a clear result of the increase in the number of working poor in the family.

All told, 5.7% of families in which there are two breadwinners are still poor, a small increase over 2012, and one of the few findings of the report that point to a worsening of the poverty situation. But in this case it is for a good reason. The sharp rise in the number of working poor increases the number of families with two breadwinners who are still poor.

Surprising increase in wages of lowest earners

The second side of the scissors movement is what has made the rise in employment so powerful — the surprising fact that at the same time there has also been a sharp recovery in the wages of the lowest-income workers.

This is a new finding. Until now, it was commonly thought that the masses of poorer workers joining the labor market drove wages down. The NII still has no explanation for this trend. One theory is that what we had hoped for these workers is taking place, namely that they are enjoying salary increases as they stay on the job longer and gain experience. Another possibility is the positive effect of the negative income tax on low-wage earners.

In any case, since the financial crisis of 2008 the weakest workers have seen almost no lag in their wages relative to the overall labor force. During the economic crisis the salaries of the best-paid workers took a big hit, while the wages of the weakest were almost unchanged. Since the recovery started, the salaries of the highest paid have risen by some 3.7%, the highest growth rate since the early 2000s.

The NII says economic growth since 2008 has finally begun encompassing all income groups. This is a major change: “Breaking the stagnation in poverty situation,” as the NII puts it. In fact the change is so great that it even outweighs the further cuts in child allowances n 2013, reports the NII.

The picture painted by the poverty report is still filled with grim aspects. Israel’s poverty rate still puts it in third place among developed nations, albeit an improvement over the first and second places where we have been in the past. We are in the fifth place in terms of social inequality. In addition, there are still problems of wages for the working poor, reflected in the continued growth in the number of poor families with two wage earners. There is also a statistical dispute as to how accurate the figures of improved employment in 2013 are. Another problem is that two thirds of the poor live in long-term poverty.

And most importantly, the NII notes that the best way of lifting people out of poverty is through employment. But this policy extracts a heavy price for those poor who do not work. There are poor people incapable of working — and not just Haredim, who choose poverty without work. The situation of these groups of poor has declined further because of the cuts in child allowances.

In light of what the NII says, the voters should be asking where is that brave finance minister who seems to have been replaced by a populist prime minister?