Taking Stock / What the PM's Vision for 2011 Needs

Strategy, for one; direction, for another. Here are five points on prices, policy and populism.

1 Populism, prices and the media: "The middle class is sliding," bellowed one of Israel's more prominent businessmen in a chat with the press, after two weeks of front-page headlines about the public "uprising" against the price increase in Israel. One might think that any moment the people would pour by the thousand into some Tel Aviv version of Tahrir Square, howling for change.

If you've been following the press and watching television, you probably think that the lot of Israel's middle class suddenly deteriorated in recent weeks or months, and that social gaps widened further as the prices of staple goods soared.

protest - AP - February 22 2011

While it's true that prices have been rising, the rest is inaccurate. The price of gasoline increased because the government raised tax on it and because its price rose in world markets. The lot of Israel's middle class has been deteriorating for a decade, not a few weeks. Social gaps have been widening for decades, not months.

The only recent change is the upheaval in Egypt. That created apprehension among the public, which certain people with vested interests were quick to exploit: populist parliamentarians, union chieftains desperate to divert the debate from their productivity and efficiency, and a handful of big businessmen who had been completely taken aback by the spine that the Finance Ministry showed in raising their tax rates on exploiting Israel's natural resources (mainly natural gas ).

The storm over the Sheshinski Committee (which discussed tax on exploitation of Israel's natural gas reserves ) is a harbinger for the future: The government will not fold like a wet napkin before the frowns of big business; it may even urge reforms to increase productivity, which the business barons wouldn't like. It could diminish their status.

Of course, not everybody is a cynic. Some of the news editors and commentators who jumped on the prices bandwagon genuinely saw the unrest in Egypt and price increases price (which certainly did happen ) as an opportunity to raise certain topics such as social gaps and the status of the middle class.

Although they may have been manipulated by a small, cynical group, their motives were pure. But they didn't realize that the way they were handling the problem played into the hands of the people whose interest in prices, or social gaps, aspires to zero.

The media failed in not making a demand of the flamethrowers scorching the tax hike on gasoline. Namely, the detractors should have suggested ways to finance the loss of income for the state if the tax increase was canceled. Maybe some of the voices complaining about gasoline prices would have had good ideas. But as long as the debate is confined to uses, not sources, it's worthless.

One can only imagine the direction the debate would have taken if somebody had suggested paying for revoking the gasoline tax hike by instituting estate tax, or abolishing tax exemptions to which certain big companies are entitled. That would have changed the debate entirely.

Suddenly a lot of people would have remembered that every decision on tax has ramifications for competition, the tax system's effectiveness and income gaps.

2 Prices, policy and the Finance Ministry: The media failed in the way it handled the topic of prices, but there's a good reason. It's the media's nature to inflame, react superficially, look at the short term and not the long one, and wallow in the shallows rather than study the depths. More to blame is the Finance Ministry, which seems to go into shock when under organized attack.

The ministry people might shrug off responsibility by arguing that they are professionals, while the attack is populist and political. But that would be wrong. They cannot dismiss responsibility for failing to build a clear economic map, for failing to develop clear macroeconomic policy, for failing to have any strategy at all. The ministry created a 2-year budget and it has a working plan: there are reforms here and there, and initiatives by its various departments. But there is no overall strategy. No direction, at least certainly not one that can be communicated to the public.

Tax on gasoline was not a stand-alone initiative; it was part of a broad government policy on tax. Nor does tax policy stand alone; it's part of a whole macroeconomic picture. But in the last decade, the status and power of the state revenue department at the Finance Ministry have weakened. The tax hike on gasoline was not a thoroughly considered, thoughtful move, it was a spasm, the quickest solution to a problem. And when a public uproar ensued, the Finance Ministry didn't have anybody who could explain tax policy and the macroeconomic and social logic behind it.

3Penury, policy and Egypt: Did millions of people take to the street because prices had been rising for months? Superficially, yes: That cut to the bone. But the fact that tens of millions of Egyptians were living in abject poverty was nothing new. It has been that way for decades.

If anything, the last few years were the best the Egyptian economy had known. The thing was that Hosni Mubarak, like many leaders in this region, instituted a macroeconomic policy known as "crony capitalism" in which the free market mainly serves people near the center of power. Control of government companies, resources and concessions was a function of cronyism and loyalty, friendship and corruption, not talent and competition.

Mubarak didn't invent the method. A lot of economies are that way. But in his case, it was extreme, and his underlying challenges were bigger.

The oil-rich nations can afford crony capitalism. Southeast Asia has talented manpower. Mubarak had 80 million mouths to feed.

If not for the Internet, Al Jazeera and the U.S. administration, he could have hung on for years to come and retire with billions stolen from the Egyptian people. But as things are, his successors probably won't want or be able to institute democracy and a free, more competitive economy. Government remains in the hands of the same generals connected to the same business interests.

4 Benjamin Netanyahu: The prime minister is convinced that the campaign yowling about price hikes was organized to spite him by politicians linked to the media and business interests. They took advantage of the events in Egypt and the increase in gasoline prices to weaken him, Netanyahu thinks.

It's true. But Netanyahu is an easy target, because in this stint as prime minister, he has neglected the economy. He has not formulated a direction and strategy, and he keeps harping about his years as finance minister from 2003 to 2005.

Mr. Prime Minister, the world has moved on. The challenges of 2003 are not the challenges of 2011 and certainly not of 2015. The tools needed to deal with them are different too.

In 2003, Netanyahu needed to scale back the public sector. Israel was teetering on the brink of bankruptcy. It was running an enormous deficit and debt. Today's challenges and the means to contend with them are completely different. We don't need to scale back the public sector, we need to make it more effective and efficient. We don't need to privatize education, healthcare and welfare, we need to improve them. Our leaders can't just sell off some giant government company and stand there grinning with a giant check in hand for a photo. These are difficult reforms that require leadership, public backing and clear direction.

In the last few weeks Netanyahu has seemed easily stressed and pressed regarding the prices and tax on gasoline. But the problem isn't political and media pressure alone, it's that he hasn't had a clear economic policy and road map to sell to the public. Without direction, he gets blown by the changing winds.

5 Ofer Eini and the tycoons: Every coalition in recent Israeli history has crumbled to dust, with one exception: that of the labor leaders in hand with the leaders of the monopolies and cartels.

No wonder this coalition went to battle to lower gasoline prices. Unlike most products in the household consumer basket, the hit to gasoline stemmed from global pricing and tax policy. Histadrut labor federation chairman Ofer Eini and the tycoons can't afford to discuss the rest of that consumption basket, because discomfiting questions could arise about productivity in everything from the ports (through which items are imported ), food, construction, communications, electricity, healthcare and education.

It works for Eini to attack water prices but to neglect mentioning that underlying the price of water is the cost of sources. It works for the tycoons to pass the debate about prices on to the treasury; for instance, by diverting it to tax on gasoline. Questions of where the money is to come from don't matter to them, as long as it isn't from their bailiwicks.