Why Interest Groups Roll Right Over Politicians

Or: Why regulators can only take action after a popular protest.

Dreamstime.com, elaboration by Haaretz

Last week, Israel's finance minister said he might well classify the banks and insurance companies as quasi-public bodies. That would mean they'd have to consider the public interest, not only their own profits. Or, said the minister, he might classify them as "hybrid bodies," which under administrative rules would have to consider a number of things beyond profit, such as the public interest.

This would be a conceptual revolution, like the decision to limit private medicine in public hospitals and other reforms.

Until recently, the banks and insurers managed to depict themselves as private businesses, and therefore the government shouldn’t meddle in their affairs, on the grounds that regulation would deter investors. But the public has begun to grasp how these businesses really operate, why they aren’t actually private at all and why most are government-sponsored monopolies or cartels that are effectively taxing the public.

Behind these revolutions lies mainly the social protest that erupted three years ago, notably the moment people realized that the root economic problem in Israel isn’t left or right, Haredi or Arabs, settlers or leftists - but the rotten system of intimacy between wealth and government, monopolies and independent tax militias, corruption, and diminishing public capital.

Calling the cancer by name

The protest birthed the Trajtenberg Committee, which admitted for the first time to the cancer of economic concentration and how interest groups had taken control of the economy. Without Trajtenberg the tycoons could have buried the economic concentration committee. Without the tycoons’ being weakened, the launch of Golan Telecom – which spearheaded competition in the cellular industry – could have been stymied.

Without Golan Telecom’s success and the steep dive of cellular prices, the public wouldn’t have understood how reforms against monopolies and concentration groups can change their lives.

Before the advent of competition in cellular communications, the tycoons argued there was no room for more players and that cosmetic tinkering would fix things. Most of the newspapers and regulators played along with the status quo, actively or passively.

But after cellular prices fell by as much as 80%, consumers and taxpayers began to understand that even a key industry like cellular communications, for which they were paying 20 billion shekels (nearly $6 billion) a year, could be an industry serving mainly itself. Proof: Three years later prices have stayed low, yet the companies are profitable and have enough cash flow to invest in infrastructure.

Tycoons and a groveling press

The social protest dramatically affected all branches of government. If the bankers, tycoons and machers (“fixers”) living off them were to continue tightening their grip on Israeli democracy, it’s doubtful whether the police and courts could have charged and convicted the money-government gang. The Olmerts, the Dankners and their friends would still be running the country, sponsored by a groveling press.

“Thirty years I’ve been in the business and it’s never felt so clean before. What’s happening here is amazing,” the CEO of multiple big Israeli telecom companies told me this week. “They’re draining pus that built up over decades. Machers, lawyers, accountants, ad executives and journalists that served the oligarchy are quaking.”

He’s a bit premature. The tycoons, bankers and machers quickly learn the language of the protest and are bracing for the next round, intending to thwart any change to the existing order. They still control the people using the people’s own money.

The alliance between the tycoons and the tax militias, like the Israel Airports Authority, Israel Electric Corporation and defense establishment, will grow stronger in the years to come. They know they need each other: One milks value from taxpayers and the other from consumers and investors. As they strive to maintain the status quo, you’ll be hearing how reforms hurt the poor.

Once the public really learns the method of the tycoons and bankers, of tax militias and interest groups, people will have to realize what politicians and regulators can and can’t do, and who draws their secret boundaries for them.

It’s no coincidence that the impetus for change in regulation and politics during the last two years came from outside the political system.

The power of the status quo

The Israeli public can be divided into four parts. The first is the ones trying to influence for good, in industry, trade, exports, high-tech, teaching, healthcare and the public service.

The second group is the ones benefiting from the status quo, who only wake up when a politician, journalist or regulator nears their militia with a microscope.

The third group is people in despair or preoccupied with survival, who have no interest in current events or reforms.

The fourth group is the majority waiting for the Messiah, a politician riding a white ass who makes order in the economy because only he knows what to do. There was Benjamin Netanyahu, then Ehud Olmert, Shelly Yacimovich, Yair Lapid and maybe next will be Moshe Kahlon.

The first, third and fourth groups need reminding in depth why politicians can’t, even if they wanted to, cope with most of the interest groups. It’s time to explain why hundreds of thousands of Israelis took to the streets in 2011 to demand change.

Niccolo Machiavelli told us 500 years ago, in his book “The Prince,” that there’s nothing harder, riskier or less certain than trying to create a new order – why the hardest thing in the world is change. Countless experts on numbers and public administration have explained the same in the last 50 years.

Change is all but impossible because the status quo, interests and the establishment are always tremendously powerful – economically, politically, socially and intellectually. New ideas threaten the existing ones that serve the status quo. The economic changes required in Israel and most of the West are especially difficult because they have the same problem: The existing order serves organized, united interest groups. Change will cost them dearly. Meanwhile the chief beneficiaries of change are disorganized masses.

Prof. Mancur Olson wrote 50 years ago that the entrenchment of interest groups engaged mainly in redistributing existing value rather than creating value were the main reason why cultures and economies sank. Other economists, such as Daron Acemoglu, clarified the connection between extortionist elites and economic development.

Why the biggest group always loses

Political economics and games theory teach why the biggest group always loses. While the small interest group can organize easily around clear targets with big economic incentives, the big group is not homogenous and its gain stands to be divided among a great many people.

Here’s an example: 5,000 executives and the thin management layers at the banks stand to lose billions if the banking duopoly is broken. They have a huge incentive to organize and they control the people by controlling its money. Their millions of customers have little incentive and no ability to organize.

Here’s another: Some 200 or 300 workers at the Israel Electric Corporation or Israel Airports Authority stand to lose millions of shekels apiece over the decade to come – amounting to hundreds of millions of shekels a year – following reforms, and are highly motivated to prevent that; but the three million Israelis passing through Ben-Gurion Airport have very small economic incentive and are extremely unlikely to spearhead reform.

How do the interest groups recruit the public against reform? Three years ago their slogan against exposure of economic concentration was to claim it was “anti-business” and that they “create jobs.”

By now, most people realize that eradicating concentration is pro-market and anti-big business and monopoly. So now the interest groups talk about the wealthy and privatization. But the workers at the Airports Authority aren’t organizing against the wealthy. It’s a public body whose income derives entirely from the public. They’re organizing against that public, mainly people who need government help. For instance, the poor, who need 7 billion shekels, the amount that the Alaluf Committee marked as the minimum needed to combat poverty.

What politicians can do and the people can’t

The ones who are supposed to fight for the public are the government and the politicians comprising it. But they have “agent’s syndrome” – their interests diverge from the public’s. Politicians have little incentive to take on deep, difficult problems, especially ones that would hurt powerful interest groups.

Most Knesset members and ministers want to do the right thing. But they find that initiatives that hurt the status quo are dangerous. They know the interest groups will kick back, and meanwhile the public on whose behalf he’s struggling is a feeble partner that only buys into reform if it’s simple, sexy and quick or touches an emotion.

The general public can’t formulate position papers or research a subject properly. Even if there’s a small group of loonies chasing an idea, it may never go mainstream because the media serves the establishment, or relies on the establishment – the banks, tycoons and powerful unions. The interest groups control the information.

The general public can’t fund a politician or create sweetheart jobs for key people. Interest groups are an endless source of resources.

The general public has little ability to stay focused over time; it gets heated over issues highlighted by the media, then moves on. Interest groups have all the time in the world: They’ll keep tabs on the legislative process and enforcement over many years, meanwhile exploiting every crack and opportunity to change the rules to their benefit.

Yet don’t think all politicians are crooked, stupid or lazy. Au contraire, many are extremely industrious and smart. But first and foremost they’re politicians and have to survive, which involves not confronting interest groups. They have to play the game, as there is no other.

How to make keen, focused enemies

The same applies to social activists and journalists. Confronting the interest groups is a way to make keen, focused enemies that will hound you everywhere. The ugliest will hire private detectives or business-information companies to dig into your business.

The general public that should benefit from the change you want to lead will usually stay apathetic, or if it cares, that’s only briefly. But what about Internet? Yes, it’s there, but the old-world rules work online too. How many of the surfers signing petitions and “liking” things persist in their devotion to a cause? While the interest groups, as we said, are constantly working to preserve the status quo and unlike the public, the interest groups have the information and analyses, and means, they need to prove that the status quo needs preserving.

This isn’t theoretical. The Finance Ministry’s own web pages on the economic concentration committee (in Hebrew) lists the people who appeared before the committee a few years ago. 90% of them were reps of the tycoons and of certain branches, armed with opinions that cost them a pretty penny. All had the same message: Why rock the boat, which is sailing along so well? “There’s no smoking gun,” they argued – no high-res photo showing a tycoon mugging a little old lady with notarized confirmation that he is a tycoon and she is an old lady, so economic concentration couldn’t be proved. Q.E.D.

The general public wasn’t at the economic concentration committee discussions and its representatives were far and few between.

During the first three years of the committee’s deliberations, four of its members went to work for energy and property baron Yitzhak Tshuva, banker Zadik Bino or tycoon Nochi Dankner. In 2013 IDB, Dankner’s pyramidal business group, collapsed – though the lobbyists had tried to show the committee that pyramidal structures were a good thing.

Meanwhile, Nochi’s cousin Danny Dankner was fired as chairman of Bank Hapoalim and was convicted of criminal charges twice; Nochi Dankner himself faces charges.

The economic concentration committee had been chaired by Eyal Gabbai, who in 2011 complained at the absence of a “smoking gun.” Last month Gabbai admitted that the committee didn’t look deep or far enough. What happened in those three years? The social protest. The change in public sentiment and the fall of some tycoons, who until a year ago had ruled the watchdogs with an iron fist.

What has Netanyahu done?

This isn’t a story about any particular political party. Just look at the prime minister.

As finance minister, Netanyahu often spoke of the need for competition, and for greater efficiency in the public sector. But as prime minister over nearly a decade, he capitulated to the tax militias and mainly to the defense establishment. He poured huge sums, unregulated, into the “Iranian threat,” a code for all sorts of government units to hire thousands of people who, within some time, become tenured workers. Netanyahu has seen how actuarial liabilities in the defense industry skyrocketed from 30 billion shekels to 300 billion, yet never said a word about it.

That’s symptomatic of a wider syndrome. From 2009 the public sector has grown by 20%, or 200,000 jobs, double the growth in the business sector. Has the public sector been reformed, so each new job adds value to public service?

Three months ago Netanyahu halfway admitted to TheMarker that Israel’s banking system is a duopoly giving credit to friends, and that the economic concentration in the financial system is at its worst. What’s he done about it? Nothing. Yet that’s a topic the whole public would support.

What has Netanyahu done in the last three years about the bloated property prices, which are a terrific mechanism to transfer wealth from the have-nots to the haves? Nothing. Worse – one might suspect he’s pleased about the colossal flop regarding housing prices, which might become associated with Finance Minister Yair Lapid.

Apropos Lapid, he’s a keen disappointment; his political party Yesh Atid was supposed to be a new broom unbeholden to entrenched powers, with a huge electoral mandate. It was expected to slash defense spending, fight corruption and waste in local government, clean out the monopolies – and lower Israeli housing prices by 20% or 30%, against the interests of the banks and property owners. What have we seen of all that? Very little. Mainly, zero VAT on housing, a stark opposite to economic sense.

I don’t agree with many of Shelly Yacimovich’s opinions, but she was the only one who significantly contributed to changing the economic discourse in Israel. But she lives in the world of Labor Party primaries, so until the corruption scandal at Ashdod Port, she almost entirely ignored the tax militias at the big monopolies, which have been a significant factor in Labor primaries for decades.

That’s why neither Labor nor Likud can be a force for real economic change. Yacimovich isn’t Labor leader any more and the new one will probably be comfortable with the tax militias in both the public and private sectors.

About Avigdor Lieberman, I need say no more.

As for Meretz, the party has been reinventing itself for the last three years and may have grasped that by the time the occupation ends, as far as inequality is concerned, Israel will have become a third-world country. It did sponsor some important reforms and is crawling up in surveys, but has been ginger about touching the public-sector tax militias.

Naftali Bennett depicted himself as a warrior against the haves, before the election. Immediately afterward, he remembered that actually the best way to stay in power and get screen time (which he developed brilliantly) is to express extreme views on security and diplomacy.

The latest messiah, according to the polls, is Moshe Kahlon. He did fight the tycoons and led the cellular reform, which is a great model for fighting interest groups. But the probability of him reenacting the cellular reform in the other tax militias is low, barring massive public support. A Likud man his whole life, Kahlon knows exactly how hard it is to take on the special interest groups in the public sector. He’d have to prove very fast that he has the values, or a political model, that would avert a failure like Lapid’s.

You may be really mad right now. I just discounted all of Israel’s big political parties. But that isn’t my intention. Some of the politicians and Knesset members mentioned here are worthy, dedicated and well-meaning, who also do important things that can cost them a personal price. They didn’t invent the system in which interest groups in the public and private sectors trap democracy, leaving politicians little room to maneuver, and become preoccupied with smoke screens that influence the economic and social structures in Israel not one whit.

Nor is this some Israeli invention. Devotees of the American free market method are mostly unaware that the American system is astonishingly similar. American politics is no less enslaved by interest groups than the Israeli one, and if anything is apparently more so. United States President Barack Obama promised to change the system but has been ground down. Washington lobbyists, war-mongers and arms dealers with ties to the Pentagon, are stronger and more influential than ever.

Over the past 20 years, many of the differences between the Republican and Democratic parties have become blurred, as both came to faithfully serve the interest groups. Hillary and Bill Clinton are just as connected with Wall Street as the leaders of the “conservative” Republican Party. Only fringes on the left and certain mavericks on the right remain unbending before the rule of money, the big unions in the monopolistic industries and the giant companies.

My purpose in this text is to explain why no politician riding a white ass will bring the change that so many of you yearn for. Changes always come from outside the establishment, outside the political system, from new ideas and new groups. The history of social movements, such as the civil rights movement in the U.S., show these processes take a very long time. I’d like to believe they can be faster in this digital age. I think the social protest proved that the discourse can change very fast, as can perceptions and economic policy, once the public wakes up. Yet it still takes a lot of time.

The public’s process of learning and waking up has just begun. We are entering a new age of searching for new models. Capitalism and government will have to reinvent themselves. The ones who invent them won’t be establishment, not politicians and not the government: They’ll be the last to join or react. As always, I invite you to wake up and take part in this discourse, because there are no shortcuts.