Two Spins

1. The Finance Ministry

The story last week was this: the prime minister and defense minister wanted to break the budget framework, to scatter billions of shekels and reverse the responsible economic policies that Israel had instituted in recent years. But at the last second, the cavalry arrived, in the form of the treasury clerks, and won the day.

Ehud Olmert and Amir Peretz surrendered and the budget was preserved. The Defense Ministry, which had asked for NIS 30 billion extra, had to grumpily settle for just NIS 8.2 billion.

That was the spin. Now for the real story.

The Defense Ministry demanded an insane budget increase of NIS 30 billion. It knew that number to be entirely specious, but adopted the famous tactic of asking for the moon, knowing it would get less.

When it got "only" NIS 8.2 billion, everybody was happy. Defense was happy because it could release its belt, stop the streamlining and resume gaining weight. The Finance Ministry was happy because it got the credit for "preserving the budget". And of course the prime minister and finance minister were happy, given that their main occupation is political survival.

That NIS 8.2 billion blasts economic policy four years backwards. In 2007, public expenditure will be increasing by 3.3%, which is triple the original target. The deficit, which had to be reduced in order to bring Israel's deficit to more acceptable levels, will rise anew.

The Finance Ministry failed in its bid to guard the budget, but that didn't happen last month or the month before, when the war broke out. The problem lies with its lax supervision over the defense budget. The Finance Ministry has no clue what Defense does with its money; and it approved the NIS 8.2 billion without asking exactly where the money will be going; how much of it will be used to rearm, and how much will simply wind up in the pockets of the system's sweethearts.

2. Ram Caspi

He is one of Israel's leading negotiators. Tycoons hiring Caspi know he'll close the deal for them. But applauding his macroeconomic analyses is a bit much.

Last week Caspi explained that close ties between wealth and government is a good thing. The papers have more power than the business barons, and unless they get on board and applaud the close ties between wealth and government, then the wealth will flee Israel. The country will turn into a sort of hotel where the rich and powerful will only visit on weekends.

One can easily understand why Caspi wants to tighten the ties between wealth and government: he's the mediator. One can also easily understand why he's wrong.

a. The rich need their ties with government mainly when government wants to institute change and add competition that hurts their businesses. Caspi knows that the time the state had to help businesses is over. The state's main contribution should be to get out of the way, only making sure that the market structure is competitive.

b. Caspi points at the tremendous Israeli investments in eastern European real estate as proof that the state done wrong. Are we to understand that if there had been tighter ties between wealth and government, then the money wouldn't have been invested there?

Thing is, Israeli investments abroad have nothing to do with ties between wealth and government. Eastern Europe is growing fast and it presents tremendous business opportunities for savvy businessmen. Israeli growth rates are lower and so are returns.

Anyway, there's no shortage of capital in Israel. Businessmen have constantly improving possibilities of financing their ideas. There is a surplus of wealth looking for investments. Stopping the reforms, or granting exemptions to Caspi's clients, won't speed up economic growth; it will slow it. Growth is not going to come from Caspi's five biggest clients who buy and sell whole companies; it will come from the tens of thousands of little and medium sized businesses, which need a competitive playing field, as open as possible, and a minimum of government meddling.