Taking Stock / Ahead of the Battle Over Power Itself

Why Fischer came out batting for Sheshinski.

He circled his prey warily, built his case piece by piece, missing not a single point pro or con. He built an ostensibly balanced picture, cold and sober, that could have been an intellectual discussion of financing or taxation. But when he pounced and went in for the kill it was clear that this was no mere academic exercise in economics. This was a critical civics lesson.

Eytan Sheshinski
Emil Salman

"Vested interests must not be allowed to affect the distribution of the gas profits by illicit means. The public must not be swayed by dirty tactics and personal affronts." Thus spake Prof. Stanley Fischer, Governor of the Bank of Israel.

'Nuff said. From that moment, all was clear as day. He didn't have to add a single word.

For the first time since the appointment of the panel to revisit the tax and royalty regime for oil and natural gas companies operating in Israel, the professor chairing the committee, Eytan Sheshinski, could breathe easy. The sheriff had ridden in, laid his hand on the professor's shoulder and spelled it out: You mess with him, you're messing with me.

Nobody wants to mess with Fischer. His reputation and prestige are unmatched in Israel. Unlike most of his colleagues he isn't simply marking time before getting a cushy job with one of Israel's oligarchs. He doesn't live under the constant threat of being evicted from the club of the 500 men working for the local oligarchs, in a state of perennial terror of losing their fireside seat in the clubhouse, their top-tier wage and cocktail party status.

Why? Because that isn't his club. His club is in Washington, or Basel.

Also, he knows a thing or two about economics and the free market.

The organizers of the Israel 2021 Conference of TheMarker asked Fischer to relate in his speech two weeks ago to the topic of long-term planning in Israel.

On the face of it, his "dirty tricks" speech was about an isolated case, the efforts by tycoons to sway the government and the public against raising taxes. Ostensibly, it was not about long-term strategy.

But delegitimizing the dirty tactics used by some to sway public opinion to advance the oligarchs' interests is not a tactical matter. It is strategic.

When politicians, lobbyists, publicists and public figures working on behalf of the oligarchs threaten individuals and state agencies, they constitute a clear and present danger not only to the economy, but to democracy.

Fischer lays a trap

Fischer's timing was no accident. Six days after the Sheshinski Committee recommendations were announced, ominous voices sounded from the Prime Minister's Office. Prime Minister Benjamin Netanyahu would hear both sides to the argument, we were told. In other words, while the committee had already heard the claims of the gas barons Netanyahu hinted that he would rzeopen the discussion.

Fischer (not to mention Sheshinski and the other committee members ) realized that boundaries needed to be set right away.

By throwing his weight behind the Sheshinski recommendations, Fischer trapped Netanyahu. He spelled out to the prime minister that any change to the recommendations would be illegitimate from both the public and the economic perspectives.

Wait: How is it that the firmest support for Sheshinski came from Fischer, of all people? Permit us to note that as an economist, Fischer spent most of his career developing, defending and promoting, with almost missionary zeal, "the Washington consensus" that ruled the International Monetary Fund, the World Bank and most economists for the past 30 years. The heart of the Washington consensus is competition, the free market, tax cuts, mobile exchange rates, deregulation, privatization and the encouragement of foreign investment.

So how it is that this man, a former first deputy managing director of the IMF and former vice chairman of the Wall Street empire known as Citigroup, supports the recommendations of a government panel to dramatically increase taxes on private investors, some of them foreign, who found huge natural gas fields, and to do so after the fact (meaning, after they found the gas )?

One possibility is that Fischer, after Washington was forced to rescue most Wall Street investment banks in the wake of the global economic crisis, has been privately revisiting the Washington consensus.

There might be a simpler explanation. Fischer doesn't see free-market principles as articles of faith, but rather as means to economic ends. If taxes on business barons can be increased significantly without harming their incentive to make risky investments in the future, then that's what should be done when it comes to natural resources that belong to the Israeli public.

Fischer's intervention in a red-hot disagreement between a handful of tycoons and a government panel shows that even though theoretically he is focusing on issues that are within the purview of the Bank of Israel, in practice he sees it as his right and duty to intervene in any economic or civilian issue he feels is sufficiently important.

Tax on hydrocarbon drills has nothing whatsoever to do with the stability of Israel's banks. It is only tangentially and distantly related to inflation or to the state's foreign currency reserves. Moreover, the main message of Fischer's speech was not some fiscal insight or monetary aspect of the gas discoveries: It was the democracy of the thing, the public aspect of the fight, the "dirty tactics," as he called it.

Dirty tactics and the Dankner precedent

When Fischer says "dirty tactics", he is speaking from his heart. A year and a half have passed since he and the supervisor of banks at the Bank of Israel were in the very position Sheshinski is in now, under violent assault by a handful of tycoons. Then it was because as the financial crisis raged the central bank leaders felt that the chairman of Bank Hapoalim at the time, Danny Dankner, had to go.

Fischer was astonished to find that most of the major players in the Israeli public sphere were disinclined to openly support his battle to impose proper governance on the biggest banking corporation in Israel. Some even spoke out against him and his supervisor. He discovered who really runs the country, and sometimes the media, and who did not cavil at using dirty tactics.

A direct line runs between the battle over the Sheshinski Committee and the battle over ousting Dankner from Bank Hapoalim, or as a top government source put it to us last week, "The battle over Sheshinski is just a weapons test for the battle over the economic concentration committee." That would be the committee Netanyahu appointed to discuss the power accrued by a handful of business magnates and how it affects competition and competitiveness. "Sheshinski was up against one and a half tycoon," the government source sniffed. "The economic concentration committee members will be up against the 10 most powerful people in Israel."

Sheshinski involved a battle over big money and government tax and energy policy. The battle of the economic concentration committee will be over power itself, about the structure of the economy. In mentioning the "dirty tactics" used to sway public opinion, Fischer revealed that he is aware of the issues that have less to do with the economy than with the very nature of democracy in Israel.

A month ago, before the Sheshinski Committee issued its final report, a treasury official was asked what he thought would happen if the Israeli gas companies had total control over one of Israel's big news organizations. After hesitating he said drily, "The committee would probably never have been created."