When Netanyahu Met Compassion

Social upheaval in Israel addresses Netanyahu and all conservatives

Israel has just seen the largest demonstration in its history, as more than 400,000 people rallied Saturday night in Tel Aviv, Jerusalem and other cities, capping a summer-long protest that surprised politicians, economists, and journalists in its broadness, diversity, color and impact.

Though the mechanics of the change it will cause have yet to materialize, the protest movement already has effectively carried a message to which not only Prime Minister Benjamin Netanyahu, but all conservative politicians worldwide, had better lend an ear.

Dominated by the chant “the people want social justice,” the protest movement began modestly, when students, fed up with spiraling rents, moved into tents they pitched along fashionable Rothschild Boulevard.
The consequent scene, a sort of backpackers’ Woodstock held merrily and surreally at the foothills of the glitzy skyscrapers where the major banks are headquartered, soon dominated public discourse and shook the political system.
Economically, many of the protesters’ demands are silly, impractical or altogether absurd. There is no way to supply full and free education from toddlerhood to Ph.D., paid maternity leaves can only be that long, rents can’t be frozen by the government, public housing can house only that many people and you can’t squat in abandoned houses and turn them into theaters just because you think that’s what they should be.
And if the demand made by one of the protest leaders – to hike public spending to 55% of GDP from 43% – were heeded, it would be as dangerous to Israel’s economy as Iran is to its security. Such demands will not be delivered, even after Saturday night’s massively attended rally.

Decades of hard work

It took decades of very hard work by a succession of governments to lead the Israeli economy to the unique position whereby its currency is among the world’s strongest, its 5.7% jobless rate is among the world’s lowest, and its GDP growth, 5% during the year’s first half, is among the developed world’s highest, a status it has enjoyed for the better part of a decade.
The fiscal discipline that caused all this was the perfect opposite of the dereliction practiced in those very same years by all the countries that later faced the markets’ wrath, from Greece and Spain to Italy and the U.S. Had it not been for the budget deficit’s trimming, to 0.1% of GDP by 2007 from 5.1% in 2003, and for the national debt’s slashing, to its current 76% of GDP from 99% early this decade, the Israeli middle class would now be fighting not for cheap housing, health care and education, but for jobs, pensions, maybe even food.
Then again, the demonstrators arouse sympathy. Young, idealistic, patriotic, curious and ambitious, they represent Israel’s future, holding in their tent camps daily lectures, discussions and debates about social affairs and economic policy between makeshift concerts and sing-alongs.
Paradoxically, just as they shun all politicians, including the opposition’s, the politicians for their part will do anything to hug the demonstrators, as if craving a measure of their youth, innocence and purity. “Suddenly, people are waking up,” wrote author David Grossman after joining a rally in Jerusalem. “The air,” he said, “contains hints of potential recuperation and correction, and the return to us of that forgotten thing – our self-respect.”
And when a discussion about money gives way to such poetry about dignity, you know that what initially seemed about economics is actually about psychology, namely the middle class’s twin reflexes: mercy for the poor and envy of the rich.

Prospering as never before

Israeli society is prospering the way it never did in its 63 years. People earn and own more than their parents ever dreamed they would, gourmet restaurants are packed, glitzy malls are brimming, and the highways are jammed with the latest German, American and Japanese models.
Still, Israelis rightly compare themselves to their equivalents in London, Paris and New York, and to the newly rich of Tel Aviv, those who made it big in high tech. Seen that way, middle-income Israelis work harder, earn less and are taxed more heavily, which leaves them with less available income, only to go to the markets and learn that the Promised Land’s food, clothing, cars and apartments cost more, not only relatively but also nominally.
This material part of the protest can be cynically portrayed as a petit-bourgeois quest for another bill in the wallet and another tile in the bathroom but in Israel, where people give the country so much, as soldiers and as taxpayers, they now feel underserved. Then again, this more prosaic part of the protest may condemn Netanyahu politically but it vindicates him philosophically.
As this column explained on the eve of the protests, the Israeli premier actually shares the protesters’ claim that something about consumer prices in Israel is wrong – sometimes because of government interference, as in the housing market, and sometimes because of insufficient competition, as in the food industry. And since treating these does not require added spending, the protest movement is likely to prove effective on this front, helping Netanyahu’s quest to flood the market with government-owned land and impose foreign competition on local food producers.
The real challenge to Netanyahu, both fiscally and ideologically, lies in the protest movement’s moral demands.

Demands for spending

Like the American conservatives with whom he has hobnobbed throughout his career, Netanyahu believes that social spending should be kept to a minimum. That is why he cut it sharply during his stint as treasurer in 2003 to 2005.
Now, however, the protest movement is demanding that the government spend more on welfare, raise salaries of social workers, teachers, doctors and nurses, create affordable housing and change the tax regimes so that the rich pay more and the rest pay less.
On this front, the Israeli economy’s high priest of conservatism will have to compromise his convictions. Netanyahu seemed to sense the need in ideological retreat during the 2008 meltdown, when he backed, as leader of the opposition, Ehud Olmert’s decision to temporarily expand the budget deficit.
Yet that was a circumstantial concession, a momentary slide to a 5.1%-of-GDP deficit that was immediately offset the following year to well under 4%. Now, however, with the middle class taking to the streets in droves, Netanyahu’s compromise will have to be much more substantive.
How will he do it?
Changing priorities
The first victim will be the corporate tax, which under Netanyahu’s leadership was gradually reduced from 36% in 2003 to 25% and was planned to settle at 18% by 2016, a level that would have been the lowest in the OECD. Now this process will be halted, to show that burdens are being shifted to the haves, and to fund new social spending.
After the corporate-tax retreat will come the capital-gains tax, which will likely be raised. And then will come the defense budget, whose size, nearly 15% of the budget, is second to nothing in Israel. And finally, income taxes within the highest brackets’ might be raised, albeit moderately. At the same time, the value-added tax, currently at 16%, may be sharply cut.
Netanyahu and Finance Minister Yuval Steinitz are determined not to breach the original budget framework; at a time when even America’s credit rating is lowered, Israel is in no position to provoke global bond markets, and both men understand this well.
However, by changing priorities within the budget they will have enough with which to launch public-housing programs, build rented housing, shrink high-school classes, improve pay for social workers, doctors and nurses, and allocate more funds for single mothers, the handicapped and the elderly, to mention some of the protesters’ more sensible demands.
In heeding such expectations, Netanyahu might feel deep inside that he is sinning to his own conservative faith. He shouldn’t. There is a difference between such gestures and the sweeping tax-and-spend psychosis that became popular in the U.S. following the ‘08 meltdown, and Obama’s election as president.
In this case new social spending would be funded not from borrowing but from existing sources, and it would be launched not in response to financial mayhem caused by shenanigans like subprime loans, but because thousands of hard working wage-earners took to the streets and demanded their slice of the pie.
Now, a marginal budgeting shift from military to social purposes, and a partial shift of the tax burden from the middle class to the richer echelons, would hardly redefine the government as the arbiter of supply and demand that Netanyahu, like all conservatives, insists it should not be.
Rather, it would simply mean that a new commodity came to be demanded, a commodity named social compassion, a commodity that only the public could effectively demand and that only government could effectively supply.

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