Reforms, Bona Fide and Bogus

1. Here is a quick quiz on economics: When was the last time the Bank of Israel lowered interest rates? By how much? To what level? How much higher is Israeli interest on the shekel, compared with American interest on the dollar?

If you know the answers, then you're in the loop of the capital market. Only people in the loop could possibly have noticed the Bank of Israel's monthly announcement last week. TheMarker readers for instance had to leaf to page 12 of the print edition to find the story.

First of all, the answers: Last Monday the Bank of Israel lowered Israeli interest rates from 4.5% to 4.25%, which is 1% below (not above) American interest rates on the greenback.

Six years ago, when the Bank of Israel was gradually shaving back local interest rates, the Governor at the time - David Klein - was asked how low Israeli interest rates could go. What was the absolute minimum gap between interest on the shekel and dollar?

Klein hesitated. Central bankers hate questions like that. Finally he said that Israel's risk premium (compared with the American risk premium) required the Bank of Israel to maintain a positive gap of 1% to 1.5%.

Interest on the dollar vs the shekel (%)

Blue line: Interest on the dollar.
Red line: Internet on the shekel.

If we'd been farsighted enough, we could have asked Klein if he could foresee interest on the shekel being a whole 1% below interest on the dollar.

Probably Klein would have guffawed and said there's no point in dealing with scenarios that far-fetched. After all, just a decade ago, Israeli inflation was racing at 10%. Four years ago Bank of Israel interest was at 10% too.

Times change

But will wonders never cease? Last week the incumbent governor, Stanley Fischer, cut local rates by 25 basis points to 4.25% and nobody blinked. It's clear to all by now that inflation can be kept down, financial stability can be preserved, and the forex market can stay cool even when interest on the shekel is 1% below interest on the dollar.

Two reasons leap to mind. One is that the USD has been under terrific pressure in recent years, because of America's towering trade deficits, and the influx of foreign investment in Israel, which has kept the shekel riding high.

But the fact that the currency of a tiny nation existing under a cloud of threat can be so steady, and attract investment even at interest significantly below that on the dollar, is not self-evident.  Nor is the flood of foreign investment to a territory known mainly for being at the heart of a powder keg a trivial thing.

Now let's ferret through the archives of the business section of the papers, and read the forecasts by people with an agenda, regarding the sweeping reforms that Israel carried out in the financial markets in the last decade.

Some insisted that the shekel was a bloated balloon sucking its strength from an artificially maintained interest rate gap. It would explode with terrifying violence one day, they wailed, and hundreds of billions in the public's savings would flee abroad.

They say you have to study history, or be condemned to repeat its mistakes. The opposite is also true: we have to study history to understand the achievements, too, or we won't be able to repeat them.

2. Hand on the heart: This is the last time we will write about the reform regarding the tax you pay on your company car, ie "the leasing reform".

First of all, we have to glare skeptically at the blindingly obvious. Why is the act of canceling part of the tax break on using a company car being called a "reform"?

We thought "reforms" were structural changes that governments did, that will change the behavior of companies or consumers, to better optimize the allocation of resources, in order to encourage competition, economic growth, that sort of thing. In what exactly is tweaking tax rates a "reform"?

Second of all, canceling tax breaks on company cars is the right thing to do. So were the abolishment of many a tax break in recent years. It's elementary that a subsidy (or tax break) should target the needy, not the item they need. If you want to stimulate a given sector, you don't do it by subsidizing company cars.

Third of all, and this is the most important point - there is good reason for the wails of grief arising from much of the private sector about this tax hike.

During the last week, TheMarker readers read quite a bit about how determined Finance Minister Avraham "Me reformer too" Hirchson is to push through this "leasing reform". But on page 14 of the Thursday paper, we read that the very same minister, together with the National Infrastructures minister, are suggesting that the government postpone reform at the Israel Electric Corporation.

Proposals to reform the IEC have been meandering about the Finance Ministry for ten years, and now the finance minister and his henchmen want to delay for a few more years. How many years? Who can say, but there's a clue: in the same story, TheMarker writer Sharon Kedmi revealed that workers "agreed for the first time" to splitting up the utility, in 2020.

The hi-tech workers would surely love to defer the 'leasing reform' to 2020, if only because nobody has job security any more anywhere in hi-tech, or in growing swathes of the private sector.

But the hi-tech workers don't pull the strings in the Labor party center, or in the Likud Central Committee. They can't pull the plug on the whole nation as the Israel Electric Corporation workers have done when stirred. They operate and live in a competitive market.

That is in a nutshell how reforms are handled in our parts. Tax an ax to sectors with no consolidated political clout, and waffle and pick to death enormously important reforms, that would involve tackling and vanquishing real powers.

Look at the pension reform four years ago. After less than two months of discussions, the Finance Ministry went and slashed pension rights for a million savers by 10% to 30%. What about the hundreds upon hundreds of public-sector workers with "non-contributory pension plans", who are basically relying on the state (you, the taxpayer) to pay their pensions, from start to finish? What about the pork barrels studding the defense establishment? Don't touch.

3. Why is there such an outcry over the leasing reform, but not over the much more important reforms being done to death?

Simple. Israeli savers are chronically short-sighted, and not a little narcissistic, too.

They don't see far ahead, to realize the dimensions of the crisis they face when they're retired - and so are all those non-contributory pensioners sitting at home on their dime. The most narcissistic of the lot figure they're safe.

One morning, aged 50 or 60, they'll wake up and discover that their pension is a pitiful thing, that the high salaries they got in the private sector are nothing compared with the enormous pension arrangements in government, and then they'll realize the truth about the Israeli labor market. But by then it will be too late.