The Wealthy Minions of Yair Lapid

A breakdown of last week's election results shows that where the money flows, so does enthusiasm for Yair Lapid. If Israel's dark-horse politician does become finance minister, he could be in for a rude awakening.

A look at the final election statistics, broken down by locale, tells the story of the elections for the 19th Knesset. Israel’s two wealthiest deciles elected a new party for themselves that would represent it and its economic interests in the government: Yair Lapid’s Yesh Atid.

The voting patterns leave no room for doubt. In Ramat Hasharon, 29 percent of the electorate voted for Yesh Atid; 29 percent in Hod Hasharon; 26 percent in Herzliya; 21 percent in Tel Aviv; 24 percent in Raanana; 25 percent in Givatayim; 32 percent in Kfar Shmaryahu and 35 percent in Savyon. In all these areas, Lapid got the majority of the vote, often far ahead the other parties. The wealthier the locale, the larger the vote for Lapid.

This means that Yesh Atid is the party of the Ashkenazim, the secular people, the bourgeoisie of the upper-middle class. Yesh Atid is also the party of young people whose parents own real estate but who fear they will never be able to buy their own home. It is also the party of the truly wealthy.

Perhaps Lapid’s success should not have come as such a surprise. In a political world where the public elects its candidate via process of elimination, by the party that will go easy on its wallet and represent its own kind, Yair Lapid’s Yesh Atid was the only choice.

For the well-off “white tribe,” the right-wing bloc has never been a realistic option. This is because of the money that goes to maintaining the settlements, the money that is transferred to the Haredim, as well as workers’ committees at the ports and Israel Aircraft Industries, those who harness their political power through Likud. It's not necessarily a huge amount of money, in terms of the overall state budget, but the upper deciles feel that while they are the workers creating most of the national product, the ones who pay taxes and do army service – AKA bear the national burden – the money is going to every sector except their own.

In comparison, none of the other center-left parties were relevant. Shelly Yacimovich and the Labor Party committed political suicide when they hitched their campaign to tax hikes on the wealthy and an economic plan that seemed, to the upper decile, totally detached from reality. Meretz was always too much on the fringe and too socialist, and Tzipi Livni talked about negotiations with the Palestinians when these elections were about money and how it would be distributed among the various tribes in Israel.

Ticking off the boxes

Yair Lapid was the only option left, and he even met most of the requirements: He grew up in the upper bourgeoisie, he was funded by wealthy businesspeople from that bourgeoisie and he came with people who were identified with it, such as Herzliya mayor Yael German. The “northerners” wanted a party of their own, with their own principles and their own people. And they got it.

There is one nagging question in the midst of all the explanations for Lapid's success. That is the assertion that he was the answer to the protests of two summers ago, and the calls for "social justice" that came with them. Those protests were actually a sector-based demonstration by the two upper deciles, which wanted a bigger piece of the national pie.

It seems that neither the protests nor the vote for Yair Lapid were ever about “social justice,” in the sense of narrowing the gap between the upper and lower deciles. On the contrary: If Lapid, who ran for office on the slogan “Where’s the money?,” finds a way to get money from others and bring it to his electorate, as they hope he will, then the income gap between the two highest deciles and the rest of the population will only grow wider.

Can the 'wealth effect' pull its weight?

The analysts and traders in the stock market were optimistic about Lapid’s success and said that the fear of a socialist policy had been removed. The stock market saw slight increases over the two trading days after the election results were reported.

It’s hard to know whether that explanation is accurate since stock markets worldwide went up on those two days, and hardly a soul there even knows who Yair Lapid is. But it is still logical. If the feeling of happiness among Israel’s wealthy (who invest in the stock market) grew stronger because “their man” was the big winner of the 2013 elections, then their financial optimism and willingness to invest in shares and businesses may grow stronger as well. But can the Israeli version of the “wealth effect” really lift up the stock market and perhaps the entire economy with an increase in optimism and consumer spending?

To answer this question, it’s worth taking a look at the results of a new study published last week by three well-known economists – Robert Shiller, Karl E. Case and the late John Quigley – entitled “Wealth Effects Revisited – 1975–2012.” Shiller and Case are known in Israel by the Case-Shiller Index, the housing prices index they created for the American market, and the recent study deals with the same area. These three economists revisited a study they did in the past in order to examine the influence of the “wealth effect” on the economy, consumption and the gross national product. This time, however, they used a much larger base of statistics, from 1975 to 2012, which includes the years of the recent financial crisis.

Their question? How did ups and downs in the stock market, together with ups and downs in the housing market, affect consumer spending and, by way of that, the gross national product?

The house as an anchor

The results are very interesting. When the researchers examined the effect of stock market price levels on the rate of consumer spending, they found the relationship was so weak as to be negligible. It turned out that increases in the stock market had almost no effect on the public’s willingness to increase its consumer spending. But when they examined the causal relationship between housing prices and consumer spending, they found it was very strong and worked in both directions. In other words, when housing prices change, consumer spending changes with them – and at a significant rate.

Thus, when housing prices in the United States plummeted by 30 percent from 2005 to 2009 and consumers’ “feeling of wealth” dropped accordingly, consumer spending declined by 3.5 percent. In the U.S., where almost 70 percent of the economy is based on consumer spending, this is a dramatic finding. Consumer spending in the U.S. is about $10 trillion per year, and a 3.5-percent drop means a decline of $350 billion – and that is without taking into account the spending and investment in new houses and apartments, which slowed dramatically. The effect also explains why the U.S. central bank is doing everything it can to bring housing prices back up, including keeping interest rates low and making massive purchases of mortgage-backed securities at a dizzying rate of $40 billion per month, with no end in sight.

According to the study’s results, the effect also holds when housing prices increase, but at that point consumer spending increases at a slower rate. This is a new finding. This result corresponds well with several studies (mainly those of Israeli economists Daniel Kahneman and Amos Tversky, for which Kahneman won the Nobel Prize in Economics in 2002) about risk aversion and consumer prudence.

If a person's financial situation takes a turn for the worse, that downward shift, and the resulting anxiety that comes with it, are a stronger factor than a change for the better, and the happiness that comes with it.

In both cases, the researchers examined the possibility that the relationship was not causal – for example, by introducing a third factor such as “trust in the economy,” which might also explain the increase in housing prices and the rise in consumer spending. But they ruled out that possibility, claiming that housing prices had a direct, causal effect on consumer spending and economic activity as a whole.

Think twice, Yair. Think twice.

What does all this have to do with Yair Lapid? The first answer is that the specific optimism of the bourgeois in the wake of his electoral success, or even an increase in share prices on the stock market and the resulting “wealth effect,” will not influence consumer spending or economic activity in the long term.

The second answer is more important. If a significant drop in housing prices has a negative effect on consumer spending and on the economy, then the new government, of which Lapid may be finance minister, will have to think twice before adopting a policy of rapid reduction in housing prices. That was the message Netanyahu wished to convey when he announced, 36 hours before the elections, that he would appoint Minister Moshe Kahlon director-general of the Israel Lands Administration.

When Lapid meets with Professor Stanley Fischer, governor of the Bank of Israel, he will start getting lessons in economics from him – including the one where Fischer explains that all the financial crises of recent times began when a real-estate market bubble burst. Add to that the fact that Lapid’s electorate are members of the upper-middle class who own real estate, and we can guess that lowering housing prices will not be the first item on his agenda. On top of that, the other segment of Lapid’s electorate are young people who do not own their own housing – and this could make his confusion all the greater.

Courtesy
Tomer Appelbaum