How on Earth Could Bibi Still Be Around? It’s the Economy, Stupid

Just last week Jerusalem got a rude reminder from the Bank of Israel that the good times won't roll forever and once they grind to a halt, Netanyahu's toast

Governor Karnit Flug, left, with Finance Minister Moshe Kahlon. Both are wearing dark suits. Flug jas short dark hair and appears to be wearing a flowered blouse. Kahlon is gray-haired and is wearing a white shirt and dark blue tie. Behind the two is the menorah symbol of the State of Israel.
Finance Ministry spokesman

What is the real secret of Benjamin Netanyahu's staying power in the face of multiple police investigations and family scandals?

It would be facile to attribute it to just one thing, but if you had to, the immortal words (more or less) of James Carville, the strategist behind Bill Clinton's successful 1992 presidential campaign, would do fine: “It’s the economy, stupid.”

Whatever you might think of Bibi as master of diplomacy – the one who saw down Obama, has kept Israel out of regional upheavals, and has helped to orchestrate a partnership with the Saudis -- none of that buys the loyalty of voters like an economy of seemingly endless growth.

The chattering class tries to explain the Bibi’s Teflon coating any way but the obvious one. They say he is the beneficiary of Israel’s tribal politics or that the opposition is spineless and offers no alternative. They miss the most obvious reason of all, which is that Israelis, like most people in Western democracies, look first and foremost at their paycheck when they vote.

As dilemmas go

Just look at the record. Since 2003, Israel has enjoyed uninterrupted economic growth averaging 3.8% a year, including years when much of the rest of the world was reeling from the global financial crisis. Unemployment is 3.8%, the lowest rate in decades, even as more and more Israelis join the labor force. Food prices have actually fallen 5% since 2015 even if they remain high by developed-country standards.

What’s there to complain about? Well, the price of housing continues to climb, but for the great majority of Israelis who already own a home, the government’s inability to deal with the problem has made their house an excellent investment.

Other finance ministers can only be envious of Israel’s Moshe Kahlon, a man whose biggest problem is deciding what to do with all the tax-revenue windfalls the government has enjoyed. Should I lower taxes or increase spending on schools or the handicapped? What a dilemma.

And then, alas, Bank of Israel Governor Karnit Flug came last week to spoil the party.

The minister's dark side

Bad enough that the bank’s annual report and Flug herself, at a news conference, took to task Kahlon’s centerpiece housing program as likely to cause home prices to rise. She also warned that his fiscal policies are leaving Israel vulnerable when the economy sours, as it will inevitably will.

In short, the bank said that government was running bigger deficits than it should at a time when the economy doesn’t need any help from increased government spending. When the recession comes, Flug argued, Israel won’t be able to increase spending to offset its worst effects because the financial resources were squandered when times were good.

Kahlon is usually regarded as one of the saner members of Netanyahu’s cabinet. But it turns out that Kahlon has his dark side, too, one that peddles alternative facts when the real ones are unpleasing.

A year-and-a-half ago, he stopped the Government Assessor from issuing quarterly reports on housing prices because they kept showing that prices were rising quickly. Last week his aides all but said Flug would not be considered for a second term of Bank of Israel governor because she dared to suggest that not all will be well with the economy forever, and that his policies will exacerbate the problem, when it comes.

The Bank of Israel could be accused of being alarmist. Australia today and the Netherlands in the past have both enjoyed 26 straight years of economic growth. But they are outliers. The fact that we’ve had 15 straight years means that with each passing year, time is less and less on our side. The economy is near or at full capacity.

Worrywart or not, Flug is not a politician and has no political aspirations as far as anyone knows. She is an appointed official, one of whose roles is to act as the government’s economic adviser.

Yet Kahlon apparently prefers advice that tells him everything he is doing is fine and to keep up the good work. He would be better off tacking toward the side of bearishness, but when you look at the politics of the economy, you understand his temptation to prefer the opposite.

Kahlon doesn’t want to be the finance minister who was around when the recession set in and certainly doesn’t want to be the one to make really hard choices with limited resources when it does. He’s a famously nice guy who doesn’t like to fight, but fights there will be, over how to apportion blame and divvy up constricted budgets.

In the end, however, it will be Bibi who is the biggest loser of them all.

The prime minister isn’t personally popular. Without a booming economy to keep the mass of voters on his side, Bibi’s days will be numbered.

How could it happen? The Bank of Israel warns of the risk of a global tech slowdown. Maybe it will be a global trade war ignited by Trump or a devastating missile war with Hezbollah. The public’s growing and household debt and the government’s fiscal laxity increase the risk that any of these developments could reverberate through the economy as rising unemployment increases defaults.