It's Fun in La-la Land, for Now

Living in Israel is a costly habit. Why is that?

The intonation did not deceive you. It's expensive here. Living is expensive. The high cost of mobile communications, Internet service, owning a car, buying coffee and razor blades and a home is not anecdotal. It is not happenstance. It is not a one-time blip. Living in Israel is expensive.

No, this isn't a question of inflation, waves of price increases. Inflation is a protracted uptrend in prices, usually due to monetary reasons. There is no point in taking to the streets and howling for the government to lower prices (or raise interest rates in order to lower prices ). Prices in Israel are high, structurally high, in a whole host of industries and branches.

Factory China

The Israeli economy grew strongly in 2010 and seems set to grow briskly this year too. How could it be that wide swathes of the population don't feel it?

Well, that's neither surprising nor unique to Israel. Even Warren Buffett, the No. 1 fan of the capitalist system, admits as much: In the last 20 years, he told TheMarker two weeks ago, the rich in the U.S. grew richer, while the average Joe took home the same wage.

I paraphrase his words. What he actually said was, "The average worker went nowhere."

Most Israelis are going nowhere.

Some have realized as much. Some are too preoccupied with their daily struggle to even think about such abstractions. And some are still living in la-la land, a place where people think the economy can keep being run the way it is.

The residents of la-la land think the money they're setting aside for their pensions will suffice, or that the government will take care of them. They're in for a rude shock. Many are likely to lose their jobs before retirement age and their savings won't suffice for even half their present standard of living. They will discover that the National Insurance Institute will give them less than NIS 2,000 a month and that healthcare services constantly increase in price, mathematically and monotonically.

But for the nonce they're living in la-la land, watching "Big Brother" and "The Beauty and the Geek" on television, buying homes at bloated prices, reading newspapers whose content is controlled by a handful of tycoons and voting in elections for politicians who bluster about security while looting, by commission or omission, the future of their voters.

Latter-day plagues

The number of Israelis going nowhere has grown in the last decade, and the way things are going, it will be growing a lot more. That is because the State of Israel can be divided into four groups: (1 ) The people connected with the vast state monopolies and the powerful unions. (2 ) The people connected with the top-level private monopolies, cartels and business groups. (3 ) The uppermost 1% of talented people who made it in competitive branches - high-tech and various professional - thanks to their skill. (4 ) The people without connections. In other words, you.

High prices are not a problem in and of themselves, if wages rise in tandem and the standard of living is high. There are countries that have a high standard of living. But in Israel the high prices are a sign of two economic plagues: low competition in the economy, and low effectiveness of the public sector. These are not uniquely Israeli diseases, but that's pretty cold comfort.

Prof. Michael Porter has spent the last 30 years trying again and again to explain to governments around the world that over time living standards depend not on the country's natural resources, the quality of its manpower or location. They are a function of its productivity. That is what ultimately determines production per capita.

Productivity is the value of output created by a unit of labor, or of capital. A country by nature aspires to improve its people's standard of living, and the people's standard of living depends on the productivity it ekes out of its capital or labor. Productivity of labor is what will determine wage levels , and productivity of capital is what will determine the return on investment by the owners.

The main challenge of government is, therefore, to constantly increase productivity in the economy, that of the business sector and that of the public sector. Despite the "miracle" of the Israeli high-tech sector, the rate at which productivity has increased in Israel in the last 20 years is among the slowest in the world.

Walk the capitalist walk

The best way to improve productivity in any economy is competition: Vigorous rivalry between all the players is crucial to challenge the companies to constantly hone their edge. This isn't "capitalist ideology" - on the contrary. Most of the people called "capitalists," in Israel and elsewhere, do the opposite: They devote great energy to stifling the competition. Competition threatens their profits, their status and their clout. Competition is good for the economy, not for capitalists.

There are many reasons for the high prices in Israel. Not all have to do with competition in the business sector, and the low productivity in the public sector. But in many sectors, the high prices are a clear indication that competition and productivity are low.

Price comparisons can mislead. The Israel Electric Corp boasts that for years Israeli electricity prices have been low, by international standards.

That bluff hides the tremendous debt that the company has taken on in the last decade, rendering it effectively bankrupt: It must rely on government handouts, or raise its prices.

When Moshe Kahlon took over as communications minister, he emulated his predecessor: At a Bezeq conference he praised the stability and power of Israel's telecom companies.

A year and a half later, having studied the industry, we have a minister who thoroughly understands that the stability and power of Israel's telecom companies is because Israel's telecom industry is backward, that consumers pay through the nose, and that the quality doesn't lie in the companies "stability and power" but in the quality of services they offer and the price of those services.

Kahlon is doing the right thing by trying to bring in new players and imposing heavy regulation on the incumbents. We need more Kahlons, in every industry, people who preach competition and productivity, people who understand that exposing their bleeding hearts is meaningless if they don't take action to increase competition and productivity.

Last week the BBC ran a survey of 28,000 people in 27 nations. It found great fear of China's mushrooming economic power. While the leading economies of the West are cutting back and watching the tectonic changes in the global economy with trepidation, the power is gradually shifting to China, India and other emerging markets. One would think that in a tiny exports-oriented country like Israel, competition would be at the top of the economic agenda.

But it's la-la land, and our politicians have managed to divert the public's attention to smokescreens - the perennial security situation, the defense budget - so that in those few moments when the public drags its eyes from "Big Brother" and soccer, nobody asks a simple question: What pressures are there in Israeli society to increase productivity, in order to secure our standard of living 20 years down the line? What will secure Israel's competitive status in 20 years?