Yes, Mr. Kahlon, Israeli Housing Prices Can Be Lowered

Moshe Kahlon must decide if he’s going to be finance minister for Israel or a finance minister catering to interest groups.

Guy Rolnik
Guy Rolnik
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Moshe Kahlon, head of the Kulanu party, speaks during a conference in Tel Aviv March 11, 2015.
Moshe Kahlon, head of the Kulanu party, speaks during a conference in Tel Aviv March 11, 2015.Credit: Reuters
Guy Rolnik
Guy Rolnik

Prime Minister Benjamin Netanyahu has become awfully predictable in recent years. He abandoned the public, societal and economic challenges Israelis face and built his reputation and prestige on exogenous threats.

Like his friends the Republicans in the United States, Netanyahu marks his enemies and challenges, especially in the Middle East – once Hezbollah, then Iran and now Islamic State (also known as ISIS or ISIL) – while diminishing or simply ignoring his greatest enemies at home: the way big money and interest groups have dominated domestic politics; the corruption, nepotism and cronyism in the public sector and economic policy, that serves the few at the expense of the public’s welfare.

Netanyahu’s awkward apology moments before the election, to the chairman of the workers committee at the Israel Airports Authority (one of the most powerful and rotten monopolies in Israel), reveals another facet of his conduct. Forty years after Likud’s revolutionary first election win, it is now very much like the party it so badly wanted to oust, Mapai [the forerunner of Labor]: it has become a clientelistic party that draws its power from a few dozen groups of workers that, in turn, draw on the state budget and enjoy employment terms like few others in the land.

We cannot expect great things from Avigdor Lieberman (Yisrael Beiteinu) and Arye Dery (Shas). Dery only notices his “transparent” brethren before elections; his history in government never evinced any inclination to confront the powers that be. In any case, his 1999 conviction for fraud and corruption renders him irrelevant, not to mention illegitimate, when it comes to tackling corruption and nepotism, and rehabilitating the public sector.

As for Lieberman, he has evaded charges time and again, and never has explained exactly how millions of dollars arrived in the bank accounts of himself, his daughter Michal and his driver Igor. He will probably continue to ruffle the public, create rifts with the Arab population and, mainly, grant interviews to TV networks eager for sensation and scandal.

Then there’s Naftali Bennett (Habayit Hayehudi), who positioned himself as a warrior against the high the cost of living in Israel and economic concentration ahead of the 2013 elections, then adopted a Liebermanish doctrine of devoting discussion mainly to security issues and the settlements. His longing for the defense portfolio exposes what he really wants – the premiership; not to devote his energy to the pain of most Israelis, including many of his former colleagues in high-tech.

Now for Moshe Kahlon (Kulanu), who will be joining Netanyahu’s next government with no boost from any particular billionaires or tycoons, without massive involvement of television channels or sweetheart newspapers, or secret deals with powerful labor unions. He is the first politician in Israel’s history who, during election campaigning, chose to talk about the true powers in Israel, which is in itself good reason for those powers that enjoy the status quo to lurk in wait for his every misstep and mistake.

First to make a move were the banks and former Finance Minister Yair Lapid (who used to work in ads for Bank Hapoalim). At press conferences called to announce their 2014 results, the banks presented their industry as improving in efficiency and competitiveness, one that is “reinventing itself” for the digital age.

If the Israeli banking system reinvents itself independently, it will be a wonder of the ages: A duopoly that for decades drew huge monopolistic rents from the people, which it distributed among 10,000 executives – and yet, one bright morning, ups and decides to change its evil ways.

Economic theory, on the other hand, says that big companies only improve their efficiency and create value for customers when they’re under true competitive pressure. The new rhetoric at the banks is groundwork ahead of the campaign to delegitimize Kahlon as he attacks economic concentration in the financial system, which weakens democracy and distorts the allocation of resources.

The Facebook minister

The previous finance minister, Lapid, chose to ignore the financial system and did his utmost to avoid confronting powers in the public sector. And although he suffered a humiliation in the last election, Lapid is nothing if not a master of media. Last week, he chose to start his stint in opposition giving advice to the next finance minister, via his Facebook page. Lapid explained that Kahlon’s true test won’t be confronting the monopolies (in the public and private sector), nor rehabilitating the public sector – instead, it will be insisting on a small cabinet with a small number of ministers. Eighteen, maybe 10.

A good idea, that. It would send a terrific message about not seeing the public sector as a cookie jar; it would show that the public sector is meant to serve the people, not the few.

Yet it was the last government, the smallest in decades, that proved that the number of ministers in and of itself assures nothing. A Bank of Israel report published last week shows that public-sector wages continued to grow in 2013 and 2014, despite the atmosphere of crisis in which the last Netanyahu cabinet began its term. Nominal government spending in general, and spending on wages in particular, continued to grow in 2013, as happened in the five preceding years, only declining in 2014 because inflation dropped.

Restricting the number of ministers in the cabinet could have made a difference if it had been accompanied by a concrete plan to actually rehabilitate the public sector, dismantle the system of veteran workers (“Generation A”) who enjoy extraordinary terms compared with hundreds of thousands of subcontract workers – a system that widens social gaps and, worse, blocks technological advance, innovation and efficiency that the taxpayer deserves.

Kahlon’s long-term test will be his willingness to boldly go to the place former finance ministers did not want to go unless they were forced there, like in the economic crisis of 1985, or following the social protests of 2011: confrontation with the powers that are bilking the public of its assets – capital, public services and land.

Reforming the finance system and public services will take a long time and will be painful. So Kahlon’s first test in this context will be to formulate a working plan for the Finance Ministry departments, to give them the backwind they need to change the present equilibrium that a very few enjoy; to tell them he wants to see courageous, creative moves.

A simple first test for Kahlon as finance minister will apparently be a place he could bring change quickly, though it would be highly unpopular among the established, powerful echelons in Israel: the real-estate market.

Increasing the supply of land will be difficult. But it’s necessary, and Kahlon must undertake it if he is to keep his campaign promises. The treasury people have a plan in place that would immediately reverse the trend in the housing market: heavily taxing the uppermost 10% and 1% of property investors and homeowners who keep their apartments empty.

Accepting these recommendations will be the first test of Kahlon, the treasury leaders and the entire government: taking on one of the biggest and strongest groups in the nation, who over decades accrued hundreds of thousands of apartments for investment, and are the greatest beneficiaries of the real-estate bubble destroying a whole generation of Israelis without connections in the right places.

A report by the State Revenue Division of the Finance Ministry, published by TheMarker a year ago, reveals an astonishing fact: that this group includes not only building contractors and the richest businessmen, but a great many employees of the broad public sector – from retired soldiers to doctors to municipal employees and a lot of public-sector employees normally associated with the bottom of the economic ladder. Within the Finance Ministry and political system are presumably a great many members of this group who would love to explain to Kahlon the enormity of his economic or political mistake if he adopts the idea, which Lapid shunned.

Kahlon will, therefore, have to decide – at the very outset of his term, before the great struggle with the finance system, the great private monopolies and the independent tax militias in the public sector – if he’s declaring a state of emergency in the real-estate market and whipping out an unconventional weapon to stop this machine that takes from the have-nots and gives to the haves. Kahlon will have to pick sides.

And as a seasoned political animal, he surely knows that the true essence of many of the people in the political and public system who orate about the good of the people and “helping the weak” will stand revealed, the moment their pockets get involved.



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