Taking Stock / The Middle Class and Value Vampires

Israel may be gearing up for an election, but don't expect much to change after the vote.

1. Capitalist or social democrat?

Let me count the ways it doesn't matter.

It would be nice to think Israel's nascent election campaign will focus on economic and social issues like never before, rather than fixating on security as usual. It would be wonderful if the smoke screens of security thrown up by politicians would give way to a real debate on living standards and culture. Indeed, public sentiment has changed. Economic issues are higher on the agenda than ever, and for a change the new blood flowing into the parties is not entirely the color of khaki: Instead of a bunch of retired generals hoping for a Knesset or cabinet seat we have some ordinary folk who want to improve society. There is Erel Margalit, one of Israel's more successful venture capitalists, and journalist Yair Lapid, a self-proclaimed member of the middle class; there is the steamroller reporter Miki Rosenthal, who secured his reputation (and positioned himself for a political run ) by making an aggressive documentary about one of Israel's richest and most powerful families ("The Shakshuka System," which focused on the Ofer family ).

As lovely as it would be to assume that things have changed, we should curb our enthusiasm and cultivate more realistic - lower - expectations about social and economic change after the election scheduled for January 22, 2013. It doesn't matter whether we get another right-wing government under "capitalist" Benjamin Netanyahu or a centrist government headed by some "social democrat."

Why won't it matter? Because Israel's power map - the groups that control the country's resources and above all its economic structures - is fundamentally the same as always. Public awareness has changed, but not reality. The process has just begun.

Just look at the state comptroller's report on Israel Electric Corporation, released last week. It revealed how the government-controlled utility's workers and executives bled the company dry over the years as the watchdogs snored, watched helplessly or simply didn't care.

Among other things the report described how the IEC deposited NIS 2 billion - that's around $500 million - into a secret account. The money was set aside to buy gifts for company employees and to pay for the free electricity they receive, both of which are supposed to come from the IEC's regular budget.

In fact the comptroller did not disclose any deep, dark secrets here. All this was known and reported previously, including by Haaretz. And there is so much more that is rotten in the IEC, countless sins of omission and commission.

How can this go on? It's because the government - the regulators, the inspectors and the legislators - cannot really take on the powerful interest groups. Who says so? The Trajtenberg Committee itself, which was appointed by the government in response to last year's social protests. In the introduction to its report the committee explained that the watchdogs cannot stand up to public interest groups (like the IEC ) or private ones (like the banks and corporate monopolies ).

Will that change after the election? Not likely. Comb through the candidates' rhetoric for action plans to change Israel's economic structures; you will find nothing. What you will find are plenty of slogans about the middle class, equality, sharing the burden and social democracy versus free markets. But nobody is saying how they would create a fairer and more competitive economy.


2. Political suicide

There isn't a politician in the land who has not embraced the cause of "the middle class." But what is the Israeli middle class?

While the group is purportedly a single entity consisting of the people who are neither poor nor rich, in practice it is composed of two very different groups.

A family where the man works for the IEC and the woman at a bank is middle-class. So is one where the husband is a software engineer at a tech company and the wife owns a small business. But the breadwinners of the former family have something the latter, and the rest of Israel's other "middle-class" families do not, and that is absolute job security. They cannot be fired, and can count on keeping their jobs until they retire.

All the rest may be middle-class today, but they live in constant fear of being pulled into poverty. They do not work in places with near-certain job security and they do not have friends in high places, and they could be fired at any time.

Politicians do not like to differentiate between these two groups, the connected and the unconnected, because the former command enormous political clout.

Some people would like us to think that if all Israeli workers were "connected" - an economic impossibility - all would be well. Others would like us to think that if all Israeli workers were "unconnected" prosperity would reign. But no one is proposing a way to create a model in which everybody is "connected" - not by virtue of one's job, or uncle, but by virtue of being citizens who contribute to society.

Until a politician comes along who dares to admit that Israel's so-called middle class is a colossal bluff and to present a new economic model, don't expect change. Naturally, that won't happen until tackling these issues becomes something other than political suicide, and that will take profound change in Israeli sentiment and values.

In other words it won't happen tomorrow, or next year. State comptroller reports will continue to feature hair-raising stories about the IEC and its ilk.


3. Loser-get-none politics

In their book "Winner-Take-All Politics," political scientists Jacob S. Hacker and Paul Pierson argue that the collapse of the American middle class is not only the result of globalization and the high-tech revolution, but was caused mainly by government policy.

Joseph Stiglitz, a Nobel laureate in economics who has written books about globalization, among other subjects, also chimed in on the subject. He has continued his habit of slaughtering sacred cows, in a piece in Vanity Fair some months ago and also in his most recent book, "The Price of Inequality: How Today's Divided Society Endangers Our Future," released in June of this year. The book's most interesting chapter is "Rent Seeking and the Making of an Unequal Society." In it Stiglitz discusses the markets' tendency to coalesce into economically inefficient monopolistic structures that create no value for the economy or society. If anything, they wring them of value.

Stiglitz thereby stepped on the chief sore point of market economics, places that seem to create value for society but actually are mere conduits to conduct wealth from the many to the few.

Much of the activity in "free markets" the world over boils down to "rent seeking," says Stiglitz. This applies to countries that have had free markets for centuries, such as the United States, and ones such as China where the concept is a recent introduction. It isn't only a question of the known monopolies and cartels, but of the property market, businesses based on franchises and companies that work chiefly with governments under uncompetitive conditions.

Distinguishing between businesses in competitive fields that create value for society and companies engaged in seeking rent is difficult. It isn't usually something up for public discussion and winds up distorting economic policy and democratic processes.

Some claim that the chasm of inequality created in the last 30 years is the inevitable result of rewarding excellence. Stiglitz reminds us that many of the people who achieve the lofty caste of the "one percent" are better at siphoning off value for themselves than at creating value. In other words the free market is not rewarding them for things that help society flourish; it's rewarding them for squeezing value in ways that can impede growth.

Finance and natural-resource exploitation are sectors that are notorious for the damage they wreak during crises, whether financial or environmental. But there are also industries that the public wrongly perceives as being productive. Stiglitz asks the question of who created more value for society and the global economy: the academic Timothy Berners-Lee, who is credited with inventing the World Wide Web, or the people behind Internet companies who made billions after achieving a monopoly in their niche? Is Microsoft, he asks, creating value thanks to its technological innovations, or thanks to a business model that stifles competition?


4. Moshe Kahlon

Endless speculation has been swirling about why Communications and Social Affairs minister Moshe Kahlon (Likud ) has decided to leave politics. I don't know. I haven't talked with him. But if I had to bet I'd say it was because he feels that he has peaked in the current political environment and it's time for him to cash out his chips and wait for the next low point.

He made no great difference in the Social Affairs Ministry, and in recent months there have been efforts to denigrate his achievements at the Communications Ministry. We're told that hammering at the mobile operators is merely the latest wrinkle, that it was like shooting fish in a barrel. So Kahlon, goes that line, doesn't deserve kudos with a capital "K" for introducing competition to the mobile communication sector.

That is to rewrite history. It is indeed no great trick to hammer the mobile operators or some of their owners now, in October 2012. But in 2010, when Kahlon decided to force open the cellular industry to competition come what may, the structure of the market was completely different.

The people controlling the companies were among the most powerful, and frightening, in the land. They controlled politicians, regulators and journalists, reducing the watchdogs of the free market and democracy to whimpering.

But Kahlon dared, and paved the way for regulators and politicians to start truly tackling the rent-seekers that Stiglitz writes about. History should not be rewritten. It should remember Moshe Kahlon as an extraordinary minister and a model to be emulated.