Capitalism is the solution not the problem

The 2011 Israeli social justice protests took place amidst rising housing and food prices. The protestors demanded and are still demanding a new taxation system with higher taxes for the upper classes, promotion of more government-funded services like schools, public housing and transportation and the termination of privatization of state-owned companies. In my opinion, They got it all wrong – the solutions to the serious and important issues that they raised to the public discourse are the opposite of the steps that are required, i.e. no more government interventions but less, much less.

According to international statistics, Israel is ranked in the 14^th place in the cost of living index. Israel is more expensive than Luxembourg, the United States, South Korea and France but cheaper than New Zealand, Japan, Denmark and Norway.

So, Let’s break it down.

One of the reasons to the high food prices in Israel is the stifling regulation concerning domestic production. The price of Israeli fruit, vegetables, milk, poultry and eggs are determined by a quasi like communist mechanism led by the agricultural state councils (e.g. honey, fruit, milk councils) that decide the quotas and the daily price. These councils are acting as a “legal” monopoly and impose heavy fees on farmers with no real benefits or improvement in service. Another reason for the high prices is the low quotas of foreign labor and the excessive labor laws that hurt the agricultural industry in Israel. The last and perhaps the most important reason for the high food prices in Israel is the high import quotas, for example 170% for cucumbers, 272% for tomatoes and 298% for onions. These quotas destroy any option for foreign markets competing in Israel and consequently lowering the prices. Furthermore, the government regulates the price of basic groceries and some studies show that the market price is lower (!) than the regulated price. These government-led interventions in the market kill any opportunity of competition and distort the basic market principles of supply and demand, increase the food prices and impose a heavy “tax” on the consumers.

What about the soaring housing prices in Israel? 93% of the land in Israel is owned by the state through the Israel Land Administration. Israel is ranked 121^st of 189 countries in the licensing and construction planning index, lower than Sierra Leone, Niger and many more developing countries. As the supply of land is not met year after year because of bureaucracy and state regulation, the prices ascent rapidly. Furthermore, officially it is illegal in Israel to sublet an apartment for vacation purposes without a permit (e.g through Airbnb) this due to an extensive lobbying of the hotel association that pressures the government to stifle such initiatives. Despite this, there are thousands of available apartments on Airbnb in Israel. The current minister of finance, Moshe Kahlon (MK of Kulanu party) was elected for his promise to lower the housing prices. But unfortunately, he promotes populist projects that help just a very small fraction of the population at the expense of the rest of the population and he is unwilling to combat the true source of the problem – lack of supply. In order to do that, Kahlon must massively release lands from the hands of the Israel Land Administration and let the free market lower prices, as happened in the cellular reform in Israel that he promoted a few years ago, in which the government allowed more competition in that market.

Although the high rank in the cost of living index, regarding the cost of rent, Israel is ranked just 46^th in the world and is considerably cheaper than the United States, United Kingdom and much of the Scandinavian countries. Lately, a new trend is getting headlines in Israel – promotion of rent control to lower the prices of rent. This is stupidity in its finest form, and it shows the differences between facts and wishful thinking. As shown in the previous examples, the intervention of the government will lead to shortages in rent apartments and higher prices. Moreover, in every country that rent control was implemented black market behaviors and poor maintenance were the new standard. Regulated rent markets like New York City, Finland and the Czech Republic are eliminating the rent control regime after acknowledging its severe negative effects. There is no example anywhere in the world of the positive achievements of regulation of rental housing. All of this without mentioning the infringement of the landlords’ property rights that has constitutional protection in Israel. Kahlon as usual promotes a populist law to tax landlord with three or more owned real estates without examining the adverse effect of rental prices that already rose during the discussions about the law.

Regarding transportation prices in Israel, the country is rank 48^th of 51 countries in the Transportation price index. Israel’s public transport market is not managed as a free market, but in tight government supervision of the Ministry of Transport, which determines the degree of competition in the industry, offers franchises and licenses lines, determines the routes and stations and the frequency of operation and fare. Furthermore, a cartelized taxi market with deep roots in the Israeli politics is lobbying against Uber operations in Israel. Israeli minister of Transport, Yisrael Katz (Mk of Likud party) is against Uber operations in Israel for political reasons and due to the pressure exerted on him by taxi drivers that are members of the Likud central committee, which is responsible for Katz’s political future.

One more major pressure group in Israel is the largest labor union, the Histadrut, that promotes mainly the rights of the strongest workers. Three major infrastructure state-owned monopolies that stand inefficient are the Israel Electric Corporation, Mekorot water company and the port authority that cannot be reformed because of the Histadrut political pressure.

Can you see an emerging pattern? Pressure groups, among them agricultural councils, Israel Land Administration, hotel association, taxi drivers and the Histadrut combine with stifling government intervention are the main reasons of the high cost of living in Israel. The “social justice” protests have it all wrong – the solution is not the government, it is part of the problem.

The last issue is the tax system in Israel. As in most western countries, Israel has a progressive tax system – the more you earn, the more you pay. But extensive ineffective welfare system and the fact the nearly 50% of Israelis do not pay income tax due to exemptions, harms the Israeli economy and the incentives to promote business initiatives that increases aggregate welfare. To promote the economy, the government should lower taxes, cut tax exemptions and reconfigure the welfare system towards helping the ones who truly need and not the ones who are a burden on the society.

* The picture was taken by avivi. Sharing is accordance to CC BY-SA 2.0 license.