Its new economic plan is the worst kind of populist drivel

After appearing for the past few weeks to be serious about participating in the national political dialogue as an equal partner once again with the Likud, the Labor party has reasserted its utter irrelevance, unveiling a hopelessly unrealistic and misguided “social justice” economic election platform. The plan, which does little more than rehash virtually every failed social welfare policy of the 20th century, constitutes a virtual thumbing of the nose at modern economics.

Labor’s Deceptive Welfare Game

Like most so-called “social justice” programs, the new Labor-Zionist Camp plan, presented by Manuel Trajtenberg, offers to alleviate cost of living issues not by creating more jobs, raising productivity, or actually reducing the cost of various goods and services but by shifting around the public’s money to reduce the upfront costs paid by consumers on everything from housing to education.

But that doesn’t mean the real cost of anything has actually gone down, it’s just been concealed. In fact, subsidies and other government incentives for consumption of goods and services usually increase the total price, as they tend to increase demand. We all end up paying more for the subsidies when we pay higher taxes or the government takes on an even larger deficit to cover the new expenses.

The gainfully employed will pay a second time as the job market shrinks under the weight of either new taxes or higher deficits, chasing away capital and discouraging investment. And the deficits incurred by the proposed spending plan are nothing to laugh at: about 7 billion shekels the first year alone, increasing the deficit by almost a quarter.

Housing Crisis: Rhetoric versus Solutions

Not satisfied with the traditional problems caused by large welfare systems, Trajtenberg added another dimension of dysfunctional, antiquated public policy into the mix with his proposed solutions to the high cost of housing. On the one hand, the plan includes direct government control over some rent prices, with rents determined by personal income. Subsidized long term rentals and increased public housing are also included in the plan.

On the other hand, however, Trajtenberg also proposes indirect government intervention in the housing market, offering monetary incentives to businesses involved in housing construction. Had the proposal been made by anyone else, it would have been rejected – rightly – by the new Labor alliance as crony capitalism.

Not only are the opportunities for grift plentiful in this proposed arrangement, the more direct governmental controls of price and subsidies offered destroy the incentives on work and personal advancement. If I pay less for rent the less I make, and pay not only more taxes if my income increases but also higher rent for the very same apartment, why on earth should I work harder to make more money?

And what about the long term rentals with fixed contracts? If the rent remains fixed regardless of changes in income, the proposed 20-year contracts will guarantee that large numbers of initially low income renters whose incomes later increased – as they tend to do over time, since income and wealth generally rise with age – will be able to legally bilk the system, getting low guaranteed rents even when they are earning high wages.

Guaranteed or fixed rents also discourage renters from moving – lest they lose their discounted rent deal – making it harder for them to find better jobs, which frequently require relocation. And if fixed long term rents are not retained after increases in income, there’s an even greater incentive not to increase one’s income.

Real Solutions

Trajtenberg’s proposed solutions are, much like Yair Lapid’s recent misguided effort to exempt some new apartments from VAT, fixated on reducing visible costs while raising concealed costs, shifting around expenses rather than actually reducing them. So how can prices actually be brought down and not simply concealed?

The first and most obvious answer is perhaps the most general: create more jobs and thereby raise productivity and income. When real incomes rise – that is, after inflation is taken into account – people can more easily afford all of the goods and services they want. But the cost politically of doing so is high. Government spending has to be reduced so that taxes and deficits shrink, making the country more attractive to capital and job creators alike.

The other solution is perhaps more politically realistic and also directly answers the housing problem. The cost of housing is a result of ongoing high demand due to relatively high birthrates, and tightly controlled supply, limiting the availability of new properties and driving up the price.

At present, two of the three inputs determining supply are controlled by monopolies or de facto cartels while the third is strictly constrained by the government. The supply of land, one component, is controlled by state bureaucracies, which own virtually all land in Israel. Building materials, the second component, is a tariff-protected industry, creating a virtual domestic cartel of producers. The third element, labor, is regulated with minimum wages which increase the cost of manpower. The supply of labor is also controlled via arbitrary limits on work permits to foreign laborers.

The solution, therefore, is simple: reduce the government’s restrictions on supply. Supply will then rise to meet demand and prices will fall.

Bringing Back the Economic Dark Ages

It’s mindboggling that, after the reforms of the past 35 years reducing the reach and size of government managed to pull Israel out of stagnation and helped it become a leader in hi-tech with a thriving economy, some in the country wish to take us back to the heyday of Israeli big government half a century ago. True, Israel is still no paradise, but contrary to sentiments of the “social justice” crowd, real wages and living standards have been steadily increasing over the past decade, with income growth spread fairly evenly across the poor, rich, and middle class. The reality is, while there remains much work to do, life in Israel has never been this good.

My advice to the Labor-Livni alliance? If you want to win elections, don’t offer the country a return to the 1950’s.