Print
PDF FormatVII
The dysfunction of the European welfare state should give pause to Israel’s social-democratic Left in its hasty push for more state intervention in the economy. The evidence reflects heavily, and poorly, on the effectiveness of the policies these groups advocate in achieving the goals they say they support. The prospect of Israel returning to this path bodes ill for those of its citizens who are poor, unemployed and ill-educated, the very people whose inclusion in mainstream society must be reinforced. But the new social democrats are growing in strength, and may succeed in stopping or undoing the 1985 reforms. If they do, Israel will become enmeshed in a deepening economic crisis: More Israelis will suffer economically than otherwise would have, and a dark cloud of economic uncertainty will hover over the nation’s future—contributing further to the extremism and polarization that currently characterize much of Israeli society and politics.
During the 1930s, in the depths of a worldwide economic depression, advocates of state intervention in the economy enjoyed the support of a considerable body of economic theory. Soviet economists invented the foundations of modern econometric modeling. Prominent Western economists set forth the theoretical underpinnings of what was considered a viable model of the centrally planned economy, as Keynes and his disciples developed the theory of demand management. This body of theory was of crucial importance: It seemed to explain the way the world worked, and it prescribed what to do, and why. But it has long been discredited, and nothing similar has taken its place. Having lost the tone of conviction a robust economic theory carries, étatist discourse on economics has been reduced to demonology: It knows what it is against more than what it is for.
In place of theory has come narrative, the modern economics morality play. According to this narrative, because international competition costs Israeli jobs, competition should be limited. Privatization and competition both lead to downsizing (a heartless American import) and increased unemployment. Tight macroeconomic policies mandate small deficits and high interest rates, and therefore hold back growth while increasing unemployment. The attempt to squeeze deficits within fiscally responsible limits jeopardizes social insurance, particularly public pensions and, to a lesser degree, health care. This social-democratic narrative on the evils of the free market turns on its head standard economic analysis of European development during the last two decades. Based as it is on a superficial reading of the economic and social history of Europe during the past twenty years, its very superficiality makes it appealing to a mass electorate.
Narrative, alas, is no substitute for analysis, nor is it a basis for policies that work. None of the arguments in favor of étatist economic policies is substantiated by economic evidence—neither Ovadia Soffer’s argument that the market economy causes unemployment and income differentials, nor Ben-Ami’s position that unemployment is caused by insufficient demand, which only government stimulus can dependably reverse.50 True, when an inefficient economy changes its rules in an effort to become more efficient, it will experience a temporary period of higher unemployment. This transitional unemployment is only to be expected, as some firms shed excess labor, before other, more efficient firms take up the slack and put these workers to use. But, if accompanied by appropriate fiscal and monetary policy, the free market does not create long-term, rising, intractable unemployment. That requires the welfare state.
Dr. Yitzhak Klein is a public policy analyst.
Notes
1. Michael Bruno, Crisis, Stabilization and Economic Reform: Therapy by Consensus (Oxford: Clarendon, 1993), p. 100.
2. Between 1990 and 1995 the West German economy created approximately 1.8 million jobs. A subsequent economic downturn eliminated an equal number, however. For data, see Organization for Economic Cooperation and Development (hereafter OECD), OECD Economic Outlook #61, June 1997, Table A20, “Employment,” p. A23.
3. Amnon Neubach, Ephraim Zadka and Assaf Razin, Challenges to the Israeli Economy: Aliya, Growth and Global Integration (Tel Aviv: Ma’ariv, 1989), pp. 82-87. [Hebrew]
4. Ha’aretz, January 5, 1998.
5. Ha’aretz, May 27, 1997.
6. Globes, July 31-August 1, 1997.
7. See Ha’aretz, June 4, 1997.
8. Party chairman Ehud Barak was selected to be the party’s prime-ministerial candidate, and therefore will enter automatically at the top of the Knesset list, with the second spot reserved for Shimon Peres; Ben-Ami actually took first place, therefore, in a competition which did not include Barak or Peres.
9. Ma’ariv, July 8, 1996. Ben-Ami is very clear on what he opposes: “Netanyahu’s ‘era of excellence’ has turned into an era of the greatest social obtuseness Israel has ever known.… A hard-core Reaganite ideology, an overtly anti-social philosophy, dictated by him and the Governor of the Bank of Israel.” To Ben-Ami, “wholesale privatization” means only profits for shareholders and higher prices for consumers. Ha’aretz Supplement, May 23, 1997.
10. Ha’aretz Supplement, May 23, 1997.
11. Ovadia Soffer, “Enlightened Privatization,” Ma’ariv Supplement, June 16, 1997, p. 6.
12. It is surprising how similar it is to earlier socialist critiques of the market: Change “the end of the twentieth century” to “the end of the nineteenth century” and the words might have been taken from a left-wing publication in France a hundred years ago.
13. Yoav Peled, “The Liberal Manifesto,” Ha’aretz Books Supplement, September 24, 1997, p. 4. It is interesting to note Peled’s interpretation of the genesis of the “peace process.” He writes that “a precondition of the liberalization process is the discovery of some solution to the Arab-Israeli conflict,” and concludes that “it is no surprise, therefore, that those hurt by the liberalist redistribution struggle against liberalization as well as the Oslo process, which they view, justly, as one of its essential components.” Peled himself is of Ashkenazic background.
14. Peled, “Manifesto.”
15. Peled, “Manifesto.”
16. The depth of their bitterness can be gauged from the following passage by another member of Keshet’s secretariat, Sami Shalom Shitreet: “When an Ashkenazi slaps me on the shoulder and tells me we are brothers, does he have in mind anything we truly share, other than thirty days’ reserve duty a year? Will he share with me his plot of land, whose price is soaring into the millions? Will he share his reparations from Germany? Will he give up a single place in the university for my son? Will he forgive my heavy debts, as his own were forgiven?… He is interested in only one form of partnership, in which my poverty creates his wealth.” “Cracks in the Ashkenazic Revolution,” Ha’ir, July 5, 1996, p. 53.
17. Kol Ha’ir, June 6, 1997.
18. Kol Ha’ir, June 6, 1997.
19. Ha’aretz, July 6, 1997.
20. The government’s decision to withhold implementation of this law until the year 2000 or later prompted several of its “social” coalition members to threaten to vote against the 1999 budget when it was presented for a vote in late December. Ha’aretz, December 31, 1998. The measure was finally approved in part in the budget passed on February 5, 1999, adding some $135 million in additional spending to the budget. The Jerusalem Post, February 7, 1999.
21. The notable exception is journalists covering economics issues who, reflecting the sentiments of most economists, continue to support the project of market reforms.
22. Dafna Vardi, “The Iron Lady’s Victims,” Ma’ariv Yom Kippur Supplement, September 29, 1998, p. 26.
23. Shlomo Ben-Ami, “To Hell With Society, What Counts Is the Numbers,” Ma’ariv Yom Kippur Supplement, September 29, 1998, p. 27.
24. Bank of Israel, 1996 Annual Report, Chart 1a, “The Israeli Market: Basic Facts 1986-1996,” p. 3; Chart 5a, “Fiscal Policy, Main Indicators 1990-1996,”
pp. 3, 11. [Hebrew]
pp. 3, 11. [Hebrew]
25. The government’s weakness in this area is in no small measure attributable to the form of the 1996 elections. These were the first national elections to take place under the new law for the direct election of the prime minister. Meant to strengthen the prime minister’s authority, this election procedure paradoxically has had the opposite effect of fragmenting the vote among different parties: Because voters could give voice to their larger, national-level concerns through their prime-ministerial ballot, many more votes on the Knesset ballot went to smaller, single-issue or special-interest parties. Today, the Likud and Labor together account for about half the Knesset seats, as opposed to nearly two-thirds in the previous Knesset. Even under the new regime, governments still depend for their survival upon the maintenance of a coalition making up a majority in the Knesset, so this has meant a great deal more leverage for the smaller parties in a coalition—most of which actively campaign for increased governmental outlays for their particular interests.
26. The 1997 figure includes not only the budget reduction for 1997 passed in December 1996 but an additional NIS 600-million cut in mid-1997, when it became clear that otherwise the deficit target would not be met. Regarding the 1998 figure: The Finance Ministry proposed a budget cut of NIS 2.3 billion for 1998, an estimate based on unrealistically optimistic assumptions about interest rates and the state of the economy. There was little doubt that, as in 1997, the government would have to propose an additional cut of half a billion to a billion shekels to meet its deficit target.
27. Ha’aretz, January 2, 1997.
28. Ha’aretz, January 6, 1998.
29. High domestic interest rates led to an inflow of billions of dollars into the Israeli economy, as the public borrowed dollars abroad at low interest rates and exchanged them for shekels, which they then deposited in Israeli accounts bearing much higher rates. The Bank of Israel accepted the dollars, investing them in dollar-denominated bonds issued in the United States and Europe. In an unusual move the Bank paid its owner, the Government of Israel, an NIS 5-billion ($1.25-billion) “dividend” on its foreign-currency earnings in 1998. Were it not for this unusual development, the deficit target would have been exceeded by that amount, about 1.5 percent of Israel’s GDP.
30. Ha’aretz, August 18, 1997.
31. Ha’aretz, December 4, 1997.
32. Ha’aretz, December 8, 1997.
33. In Israel, one hears from time to time the argument that the popularity of ostensibly “left-leaning” leaders such as Bill Clinton and Tony Blair demonstrates their public’s rejection of the economic ideas of Reagan and Thatcher. Yet in the U.S. and Britain, and in Europe as well, their success is widely understood to reflect the exact opposite: Clinton and Blair have both adopted economic policies that are conservative in all but name, and in both countries their popularity reflects a resounding triumph for market reform in the popular sentiment. See, for example, “Europe’s Right,” The Economist, January 23, 1999. In both countries, the general public has witnessed dramatic economic success despite initial difficult periods, and simultaneously has seen Europe’s social democracies struggle to maintain stable, consistent economic growth.
34. Unemployment in Spain has been omitted from this discussion, as it is extreme even in European terms: Currently over 19 percent, it has been as high as 23.7 percent this decade. OECD Economic Outlook #64, December 1998, Annex Table 21, p. 211.
35.The OECD Jobs Study: Facts, Analysis, Strategies. Policy Report to Ministers, June, 1994, Chart 1.17, “Long-Term Unemployed and Inflows, 1979 and 1991,” Part I, p. 48. Even though the definition of the term “workforce” includes only people working or actively looking for work, many long-term unemployed receive unemployment benefits and therefore go through the motions of looking for work—registering at unemployment offices, etc. In practice most will work seldom or never.
36. The OECD Jobs Study: Evidence and Explanations, June 1994, Chart 1.13, “Unemployment Rates in Individual OECD Countries, 1950-1995,” Part 1, p. 36.
37. The OECD Jobs Study: Facts, Analysis, Strategies. Policy Report to Ministers, June 1994. See also The OECD Jobs Study: Evidence and Explanations, Part II: The Adjustment Potential of the Labour Market, 1994.
38. OECD Economic Outlook #64, December, 1998, Annex Table 21, “Unemployment Rates,” p. 211.
39. Both economic and general media reports in the United States are replete with stories of industry- and sometimes economy-wide shortages of labor. This is particularly true in information technology industries (where trained workers are at a premium), but is also found in the building trades, heavy industries, most engineering fields, and the whole range of service industries. In many parts of the country, worker shortages have prompted companies, and sometimes entire cities, towns or counties, to develop employment packages that include hefty hiring bonuses, relocation costs and other perks—which in the old days would have been reserved for top management and professional positions—to tempt prospective mid- and lower-level employees.
40. OECD Economic Outlook #64, December 1998, Annex Table 28, “General Government Total Outlays,” p. 218.
41. OECD Outlook #64, Annex Table 28, p. 218.
42. OECD Outlook #64, Annex Table 34, “General Government Gross Financial Liabilities,” p. 224.
43. Sheetal K. Chand and Albert Jaeger, “Aging Populations and Public Pension Schemes,” IMF Occasional Paper #147, December 1996. This study projected pension liabilities out to 2050.
44. See Roger Eatwell, “Why Are Fascism and Racism Reviving in Western Europe?” Political Quarterly, 65:3, July-September 1994, pp. 313-325, especially pp. 319-320; Bettina Westle and Oskar Niedermayer, “Contemporary Right-Wing Extremism in West Germany: ‘The Republicans’ and Their Electorate,” European Journal of Political Research, 22, 1992, pp. 83-100, especially p. 96.
45. See Nonna Mayer and Pascal Perrineau, “Why Do They Vote for Le Pen?” European Journal of Political Research, 22, 1992, pp. 132-133; Eatwell, “Fascism and Racism”; Robert Knight, “Haider, the Freedom Party, and the Extreme Right in Austria,” Parliamentary Affairs, July 1992, pp. 285-299.
46. Françoise Gaspard, a historian and former Socialist mayor of the town of Dreux, provides a poignant record of the decline in prestige of the liberal political order in the wake of economic dysfunction, in A Small City in France (Cambridge: Harvard, 1995). Dreux was the first French town of any size where the National Front became an electoral power, and one of the first to elect a National Front mayor. Gaspard notes that twenty-five years of economic prosperity in France after World War II were followed by “fifteen years of deep recession.” This is her view of the French economy since 1980, when François Mitterand was president and the Socialists controlled the government. During this period Dreux was pushed to the margins of French society and the French economy. Gaspard notes that the burden of the failure of French public policy fell equally on all parts of the working class: “Native” Frenchmen as well as first- and second-generation immigrants. The response of many in Dreux and elsewhere was to lose faith in the state and its policies, coupled with a turn to xenophobia. Gaspard describes but fails to note the significance of the fact that the National Front leadership and many of its voters in Dreux were not unemployed members of the working class, the natural constituency of Gaspard’s party, but were instead from all social classes. Gaspard is well aware of the state’s failure; what she fails to grasp is that the welfare state may have been its cause, and therefore cannot remedy it.
47. It is not only the Anglo-Saxon countries that provide a sharp contrast with the performance of most European economies: So does the performance of the Israeli economy during the decade of economic reform (1985-1995). As in Britain, the era of reform in Israel produced an initial rise in unemployment and a couple of years of slow growth. Beginning in 1990 the contrast sharpens, with growth and job creation in Israel booming. The recent re-departure from economic prudence created Israel’s current recession and threatens to prolong it.
48. The annual report Children in Israel: 1998 notes that in 1997, 34.4 percent of Israel’s population were children, the sixth-highest percentage in the world, after such countries as Syria, Jordan and Egypt. Ha’aretz, December 29, 1998.
49. See note 34 above.
50. Marx was never guilty of this sin commonly committed by his latter-day heirs. He had respect for economic theory and based his work on the best theory available in his time. At the heart of Marx’s thesis was a plausible economic model of what exploitation meant and how it functioned. His theory began to fade in the 1870s, however, when the marginal theory of value supplanted the labor theory on which Marx had based his work.
