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Traveling around the United States and Europe, I frequently met young Israelis, many of them highly educated, who were permanently living abroad. Their justification was remarkably uniform. Not the security and the political situation nor even career opportunities spurred their decision. Rather, it was the absence of an economic future—to afford a house, a car, and adequately provide for their children. Life in Israel, they said, had no dignity. More than the conflict with the Palestinians or the threat from Iran, more than the schisms between right and left and religious and secular, the greatest long-term threat to Israel’s existence—so I concluded—was the economy.
This realization was extraordinary in view of Israel’s history and the country I first encountered fifty years ago. From a socialist, agrarian, and far less stratified, society, Israel morphed into a free market, high-tech society with a fifth of the population living in poverty. In the previous decade, alone, the average household income nearly doubled, and per capita GDP has well surpassed that of France, Italy, and Japan. With 6.2 trillion cubic feet of gas reserves, Israel is expected to reap tens of billions of dollars in energy savings, tax revenues, and exports. A world leader in innovation, home to over 550 international technology companies and more start-ups than in all Western Europe, Israel stands to earn countless billions in the coming years. Unemployment, at least prior to the Coronavirus crisis, was negligible.
Why, then, with all these dazzling indicators, is Israel ranked dead last in the OECD in productivity while at the same time leading the list in the weekly number of work hours? Why is the cost of living in Israel 10% higher than in the United States and in a quarter of the thirty-six OECD countries, with Tel Aviv ranked among the ten costliest cities worldwide? Why is the shopping basket the world’s most expensive after Japan’s, with the same box of cornflakes that sells in Poland for $2 costing Israelis 6$? How can a popular Israeli product such as Bamba be cheaper in Los Angeles than in Haifa?
There are several answers to the questions, some of which have already been addressed. Productivity is deeply influenced by the two traditional populations, both exhibiting low educational and training levels and the refusal of most Ultra-Orthodox men and most Arab women to work. Productivity is also impacted by the high taxes in Israel, necessitated by its huge defense budget and universal health care costs, which disincentivize production. Long work hours, on the other hand, is a feature of Israeli culture. France, by comparison, with one of the shortest work weeks in Europe, tops the charts in productivity.
There are no magic fixes here. The cost of living in Israel cannot be reduced without breaking up the one hundred monopolies—the largest number in the West—that dominate our economy. This especially applies to the importers who grossly inflate the price of cornflakes and thousands of other commodities. The banking sector, almost completely controlled by five banks that charge Israelis for services that are free in the United States, must also be opened to competition. Similar cartels gouge prices in the real estate, insurance, and communications markets. Civil society can help fight this scourge, as in 2011, when consumers successfully boycotted the makers of cottage cheese and other dairy products. In the end, though, there is no alternative to effective anti-trust legislation backed by the government and enacting by Knesset.
Prices are also jacked up by far-reaching regulatory policies in all economic sectors except high-tech, in the bureaucratic barriers to opening a business (among the world’s toughest), and the massive tariffs placed on a great many goods. Duties on automobiles, as every Israeli knows, constitute a staggering 85% of the car’s cost. Again, there will be no relief from these restraints on Israel’s growth—and no hope for millions of its citizens—without concerted government action to deregulate and reduce tariffs that are far more harmful than protective.
Many other measures can be taken, from providing free pre-school education for the children of working mothers to instituting a real five-day work week. Training programs in the Arab and Haredi sectors must be vastly expanded and immigration restrictions lifted for non-Jewish engineers and technicians from abroad. As a Knesset Member, I tabled a law allowing grandparents, many of whom are working people in their forties and fifties, to take off sick days to care for their ill grandchildren so that their more-productive parents would not miss work. Even a small step such as that could, I learned, substantively impact the economy.
The steepest challenge, though, and the one that young Israelis care most about, is housing. This was the primary issue addressed by the political party I joined in 2015 and which I represented in the Knesset. Housing, I discovered, is not one but dozens of problems. It begins with Israel’s skyrocketing birth rate and continues with the high cost of building materials, the dearth of skilled workers, endless bureaucratic obstacles, and the limited amount of land, almost all of it state-owned. Monetary policy also played a role in elevating the cost of an average apartment an agonizing 120% in less than a decade.
Again, there is no cookie-cutter solution. While the rate of inflated prices can be slowed, more land distributed, and construction times reduced, Israel’s housing crisis is likely to continue. Israel will still be short tens of thousands of apartments per year, each costing a greater share of the customers’ annual income. The only answer, ultimately, is to alter the way Israelis think about housing. Home ownership is an important part of Israeli identity, particularly for young couples, an indicator of status, and a major source of individual wealth. All that changes, however, by adopting the renter model popular in Germany and in other European countries. In stark contrast to housing costs, rentals in Israel are significantly below both the OECD and American averages. Israelis must be encouraged to rent rather than buy. Doing so will not only stimulate other areas of the economy but, by decreasing demand, lower housing prices. Serious incentives must be offered for renting or buying apartments in the Galilee and the Negev.
Many Israelis denied the ability to make a decent living, to provide food and shelter for their families, will ultimately leave. That is precisely the population that pays its taxes and defends the state. Averting that existential prospect will require historic changes in economic policy—phasing out child and religious studies subsidies while reducing tariffs and taxes, breaking up monopolies and expanding vocational training, investing in mass transportation, and deregulation. The list of reforms is daunting, but all are necessary in order to ensure that the Israel of 2048 is a prosperous state, according its citizens dignity.
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