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Winter 2005
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Fulfilling Israel’s Promise
Steven Malanga
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The nation needs free-market reforms.

Americans have had over 200 years’ experience with the wealth-creating benefits of the free-market economy. Israel, by contrast, a country born just 55 years ago, has economic roots in a “Bolshevik” past, as the head of the Tel Aviv Stock Exchange puts it. As a result, Israel suffers from tax rates 50 percent higher than ours, a concentration of economic power in a few protected industries, lavish welfare spending that eats up much of the national budget, and a fierce resistance to reform.

Israel should have a thriving economy. Despite being on a permanent war footing, the nation has attracted some $100 billion in foreign investment, notes Daniel Doron of the Israel Center for Social and Economic Progress, a free-market think tank. Israel boasts a highly educated workforce, sophisticated research institutions, and a strong tradition of technological innovation. But thanks to statist economic policies, Israel’s unemployment and poverty rates are about double the U.S.’s, and its per-capita income is 45 percent lower. Its growth rate lags those of countries with lower levels of education and foreign investment.

The problem is Israel’s swollen public sector. Accounting for 55 percent of the nation’s economy, it requires job-killing tax rates—60 percent, until Likud finance minister (and former prime minister) Benjamin Netanyahu cut them recently to a still-excessive 49 percent. Netanyahu is now trying to attract more capital by cutting taxes on businesses, especially foreign firms. To succeed, he’ll need to rein in government spending, and that is no easy task. Labor Party head Shimon Peres has already denounced Netanyahu’s reforms as “swinish capitalism,” giving a sense of the level of the debate. And now that Labor is joining the government coalition, it will be even harder to achieve reforms.

Invited to speak on American welfare reform at the Israeli Institute for Policy and Strategy’s annual Herzliya Conference, I got a vivid sense of the stakes. In a session on government’s responsibility to the poor, speakers—among them, a local mayor and heads of various charities—concluded that Israel must not abandon its commitment to its vast welfare apparatus. Yet through the entire session—it also featured impassioned impromptu speeches from the audience by Knesset members and by advocates of various government-funded programs—no one seemed willing to acknowledge that much of the country’s social spending went to pensioners already boasting a higher than average standard of living and to favored groups not required to work, such as members of ultraorthodox religious groups. Nor did one hear a single mention of how the government could keep paying for such generosity.

The largesse has fostered a culture of dependence. Finance ministry deputy director Yael Andorn showed the conference two graphs that charted what happened after Israel loosened its social welfare policy in the early 1980s and began handing out jobless benefits worth more, in many cases, than the average Israeli worker’s salary. Predictably, in the last 20 years, the number of Israelis on welfare has exploded, from 25,000 to about 150,000, while the country’s labor-force-participation rate has slumped to just above 50 percent, far lower than the 66 percent U.S. rate.

Netanyahu then argued adamantly that Israel must break this cycle of dependency. Welfare reform had successfully moved millions of the poor in the United States into the workforce, he pointed out, and he hoped that the Israeli economy could someday become a vehicle for promoting economic mobility. But even as he seeks to restrain the budget further in order to cut taxes more deeply, Netanyahu complained, “The Labor Party is demanding bigger old-age pensions for the middle class. We’re being asked to give millions of shekels to pensioners in better situations than the average Israeli.” Talking with Netanyahu later, I found him keenly interested in economic mobility in the United States and in programs to help welfare recipients make the transition to work, like our earned-income tax credit.

The long-term economic woes have begun to have a demoralizing effect on the country as a whole. Rabbi Yechiel Eckstein, president of the International Fellowship of Christians and Jews, blamed the poor economy for the decision of some 100,000 Eastern European Jews—many highly educated—to immigrate to Germany rather than settle in Israel. Netanyahu, an Israeli security hawk, sees the link between economic prosperity and the long-term defense of Israel. His big task now is to make the citizens of a country nurtured on 1930s-style socialism see it, too.

 

 


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