Ministers, cuts, and growth

The wildest optimist could not have expected that for two consecutive years Finance Minister Binyamin Netanyahu would manage not only to slash the government budget by very significant amounts but actually shrink our bloated public sector (which employs every third person in Israel) by reducing salaries and eliminating jobs. That Netanyahu has also begun to tackle one of the thorniest economic problems bedeviling all democracies, the bankrupt public pensions funds, and has also vowed to continue privatizing government-owned assets – including the banks, the ports and the electric and water monopolies – shows extraordinary determination and political courage.

All these bodies are expected to mount strong resistance to any effort to reduce their privileges, and Netanyahu is facing them practically alone. Most other ministers are too busy guarding their own turf, the economy be damned, and the prime minister seems otherwise engaged with issues he deems more important than preventing economic collapse and restoring growth.

Unfortunately, even Netanyahu’s best and most successful efforts will not suffice unless he succeeds in initiating growth. No way can the perennial problem of diminishing growth, bringing about reduced government income and a threat of growing deficits – which could run out of control and inflame runaway inflation – be solved except by regenerating economic growth.

Netanyahu’s bold steps have averted calamity. But much more must be done to remove our economy’s structural deficiencies. Netanyahu must also tackle the efficiency- damaging concentration of economic and political power – which brought us to the verge of calamity in the first place – before he can succeed in stimulating growth.

Listening to most ministers you would think they were either unaware of the great danger still threatening the economy, or don’t really care.

TAKE, FOR example, Limor Livnat, who when properly advised did a very credible job at the Ministry of Communication, opening the sector to competition and growing efficiency. In the Ministry of Education, with its huge and bloated budget, she seems to have lost her managerial skills and urge to reform a system so badly in need of total overhaul.

Livnat acts as if she were a captive of the educational bureaucracy; as if her only duty were to defend her ministry’s bloated and wasteful budget and the defunct system it funds. With some effort she could instead save millions by phasing out the seven money-guzzling district headquarters that add another layer of fat to an already immensely bloated Jerusalem headquarters, with its dozens of useless bureaucrats wasting additional millions on faddish programs that reduce the quality of education by the year.

Livnat might also want to take a look at the seminaries that keep churning out tens of thousands of poorly educated teachers at a time when there are no new teaching jobs. A careful examination of her budget may reveal many other such wasteful, indefensible practices that cast doubt on her managerial capabilities.

Or take Health Minister Dan Naveh. Not exactly an expert on the very complicated issues of health policy, it is not really surprising that he has swallowed, hook line and sinker, all the myths with which our failing health bureaucracy habitually covers up its dismal failures and wasteful practices (though even the best managers could not operate the disastrous nationalized health system that yet another politician-maven, the infamous Haim Ramon, bequeathed to us).

Naveh is a shrewd enough politician, however. So it is surprising that he is setting himself up for a failure – which he will blame, naturally, on the Finance Ministry and lack of sufficient funds – rather than do what so many public commissions have repeatedly recommended: reorganize the poorly operated and wasteful government hospitals.

True, this is hard work. It is much easier to try and stave off budget cuts by periodically putting on horror shows in which you claim that these cuts kill people by denying them essential medication, when you know full well that such medication could easily be procured by cutting only a small fraction of the waste in your office.

Scoring media points cannot, however, avert reality for long. When the inevitable bankruptcy of our absurd health system finally occurs because the minister chose to ignore its basic problems, it will not do much to advance Naveh’s political ambitions.

ANOTHER SAD example of political expediency overshadowing economic responsibility is that of Industry, Trade and Labor Minister Ehud Olmert. Known among his US friends and contributors as an eloquent free-market advocate, Olmert – who as minister of health initiated some promising reforms – has in his new job become a lobbyist for handouts to industrialists, requesting hundreds of millions even for a wealthy monopoly such as Coca Cola so it could move its soft drink ‘factory’ from an expensive location to a cheap one.

Olmert is smart enough to know that even a cursory cost/benefit analysis would demonstrate that the hundreds of millions of hard-earned taxpayer shekels given as welfare to the rich under the guise of ‘industrial policy’ were a total waste. Worse, these handouts, usually granted in accordance with political rather than economic criteria, have not only been a resounding economic failure but have created the chronic problem of unemployment in development towns.

When the government stopped subsidizing plants that were uncompetitive – and therefore needed government handouts to begin with – these plants naturally collapsed, leaving behind a few very happy and rich ‘industrialists’ and the scorched earth of poverty and despair for most. For Olmert to keep wasting public money for political expediency is unforgivable.

In short, serious ministers could treat the present budget crunch as good businessmen would – as an opportunity to make their ministries more efficient. But apparently the temptation to make political hay and stick it to Netanyahu is too overwhelming.

BACK TO growth. The steps that could lead to growth are rather simple, but their execution will probably prove excruciatingly difficult due to resistance from the many who benefit from our distorted economic system. Growth can be attained if we:

• Eliminate tax obstacles to economic growth.
  
• Eliminate the present huge government subsidies for ‘corporate welfare.’
  
• Reduce unemployment by cutting government benefits to the able-bodied, especially those benefits that reward them for not working.
  
• Balance the current (or operating) budget of the government and borrow only for investment in assets that promote economic growth.
  
• Introduce competition into the monopoly- ridden and over-centralized Israeli economy, and especially into its financial markets.
  
• Stabilize the shekel to ensure long-term price stability and attract investment to Israel, thus substantially reducing interest rates.