“It’s the Economy Stupid”-How to Bring Down Prices!

Two years ago, during the summer of protests, a wise friend of mine commented he was worried that if nothing changed as a result of the masses taking to the streets people would just give up. Over the course of the past two weeks we have been reminded of exactly what it means “to give up”.


One definitive reminder of Israeli lost hope was publicized two weeks ago in a series aired on Channel 10, reporting on “the new Yordim”  (Israelis who decided to move to Berlin, London and New Jersey). The second reminder of Israeli despair came this past week. At first, we were elated to learn of a number of “Israeli” Nobel prize winners. Though, it turned out that none of the current winners actually lives in Israel.


Of course, none of this is new. People have been leaving Israel since the First Aliyah– including me twice– (hopefully, the third time is the charm). Some have always left for economic reasons, others for professional reasons. Yet, today the situation is somewhat different. You could always earn more abroad– and the standard of living was always higher in the U.S. (and other countries in the world) compared to the standard of living in Israel. However, in the past, the price of living here was always much lower than in other places. Today, (except for a small circle of people) Israeli salaries remain consistently much lower than they are for the same professions in the U.S. and Western Europe. At the same time, the prices of consumer goods especially food, remain significantly higher. It was the exceedingly high prices on basic consumer items that brought people out to the streets.


Now, over two years later, not a thing has been done to make a change and lessen the price gap. Milk is still 50% more expensive here than in the United States. Frozen vegetables cost 3 times the cost of the same package in the U.S.– even fresh fruits and vegetable cost more here. The list is endless– from a burger at McDonald’s or an ice cream, almost everything, (other than cell service and college education), is considerably more expensive in Israel. That is before we take into account the average purchasing power (cost of goods vs. income) of the overwhelming majority of Israelis– which makes this problem even more dramatic.


On one hand, it seems strange that nothing has been done to address the egregious  price gouging here. After all, here is an issue upon which 95% of Israelis agree. We are not divided on this issue, as we are on what to do about war and peace. This is not an issue of “Dat u’Medina (religion and state). Taking action to bring down the cost of living is something that everyone can agree to implementing– or so one would think.


However, that does not seem to be the case. Finance Minister Lapid was elected as a result of the social protest movement– to defend the middle class. While Lapid may have made some progress at getting the Haredi sector to go to work (not an unimportant accomplishment), he seems to have been convinced by his employees at the Finance Ministry that getting the budget under control was his single most important task. Despite the fact that that was certainly not what his voters elected him to do.


The reason prices are so high in this country stems from a combination of several factors: 1) there is not enough competition 2) there are protectionist import duties on many products. 3) politicians continually claim all we have to do is increase competition and everything will be fine. The belief in a “free market” seems sacred to most members of the current government. Unfortunately, they are mistaken. First of all, you cannot call the Israeli market “free” when there are protective tariffs in place to entitle and protect domestic producers. The tariff on many items (like cheese) are extremely high. The local manufacturers have convinced the government to give them a number of years to prepare for competition.  You also have certain non-tariff barriers, such as ‘Machon Hatkanim’, (The Israeli Standards Bureau), whose thousands of workers seem almost as powerful as the port workers in protecting their jobs– at the expense of the rest of us. The employees of the Standards Bureau act as gatekeepers, adding expense and delaying the import of new products. These distortions to the free market exist in all aspects of our life (e.g. in everything from the ‘Vegetable Marketing Board’ to having only one main AirFreight Terminal) make this anything but a free market. Combine the costs cited above with the role of the ‘official importer’ and it should be easy to understand why prices are so high here.


Interestingly, the price of televisions sets, and other expensive electronics are comparatively cheaper than food products in Israel. This seeming anomaly actually makes sense– when it comes to an expensive items (with larger possible profit margins), it pays for grey marketers to buy the products abroad (through unofficial channels) and force the official importer to keep prices competitive.


These problems are systemic. Our policy makers need to realize that it is impossible to have anything that resembles a free market in a small state, who is physically cut off from nearby markets. Therefore, if we want to lower the cost of goods in this country there are only two possible courses of action; The first option , is to provide the necessary incentives to convince a chain (such as Costco) to open a number of stores in this country. That would have the same effect on the price of food (and some other markets) that Ikea had on the furniture market. Furniture uses to be very expensive in Israel. Once Ikea opened its doors here, some local manufactures did go out of business. However, most adapted, and today the price of furniture in Israel is no higher than in other places in the world. Needless to say, many concessions would have to be made to Cosco in order to get them here. However, the effect would be profound.

An alternative course of action would be to bring back and extend price controls.


None of the believers in the free market will like either approach. The fact is  we do not have a free market in this country. We have classic monopolies at work in almost every sphere. Monopolies must be either broken or regulated. Only the government has the power to accomplish that task. Furthermore, it is important to note that making small changes in the laws  like the pathetic ‘Chok Harekuziut” (Law of Monopolies) that  is currently being discussed in the Knesset will  not suffice. The government and Finance Minister Lapid can continue to ignore the problem and instead attack those who leave- or they can start addressing the issues that brought them to power.  If they ignore the problem in today’s globalized world we will continue to lose some of our best and brightest.


Of course, bringing down prices is only one step. Next week I will discuss the economic successes and failures of Zionism, and what we need to do in light of those realities.


About the Author
Marc Schulman is the editor of Historycentral.com -- the largest history web site. He is the author a series of Multimedia History Apps as well as a recent biography of JFK. He holds a BA and MA from Columbia University, and currently lives in Tel Aviv. He is also a regular contributor to Newsweek authoring the Tel Aviv Diary. He is the publisher of an economic news App about Israel called DigitOne