It’s the Economy Stupid

These past few weeks the Israeli media has been full of stories focusing on “The ‘Milky’ Protest”, a virtual protest movement centered around the fact that the “Milky”, a quintessential Israeli product (the yummiest combination of chocolate pudding and whipped cream) can be bought for 1/3 the price in Berlin, compared to the price it is available in Tel Aviv.

The protesters contend that that is the reason so many young Israelis are choosing to leave Israel for Berlin. Without reviewing all the usual issues involved in why Israelis choose to leave the country, this latest protest highlights, once again, the two major economic problems in Israel – high prices and relatively low wages. Low wages has been an endemic problem afflicting Israel since its founding. In the few areas where globalization has truly made the world one labor market (e.g. software programming) that has changed. Though, for the overwhelming majority of Israel low wages remains a major problem. The wage gap was less of a problem ten years ago, when food and housing in Israel were less expensive than in other major cities in the world. However, in the last decade, the price of food and housing in this country has skyrocketed, while wages have largely remained stagnant. Despite the efforts of the protest movement of three years ago, nothing has changed. Nothing has been done to address the major underlying problems in Israel’s economy.

To provide a solution to the problems of housing and food costs would require bold actions on the part of the government; a government that is truly not know for bold actions – on any front. So, I write these words knowing full well the chance are slim that the government will take the sort of action that could spark a large improvement In any case, here is what I suggest:

Regarding Housing: The problem in the housing market is largely one of supply and demand. There are simply not enough houses being built in the areas where people want to live. The list of reasons for the lack of sufficient housing is long, however, it is primarily a result of the fact that the government controls the land, and tries to maximize its income from all land sales.

I have a radical plan to change that situation, but I will leave that for a later article. Instead, I propose what would once have been considered a modest plan, i.e. build a new city between Herzliya and Netanya for 200,000 residents. That is the area people want to live in; that is the area in demand. One look at Google Earth show you the large area of farmland that exists in this region large enough to accommodate a city even larger than the one I suggest. If you build a city from scratch, you can control the cost. Since the government will provide the land, all of the planning can be done at one time, thereby speeding up the work, and making it possible to bring enough housing into the market at one time to impact prices.

How will that effect currently prices? Only marginally. It might not bring down housing prices at the moment, but it will stop them from rising. If the public knows that a large number of apartments will be coming on the market, at a relatively low price, in a desirable location, then people will not agree to pay ever higher prices. As a result, the current price of housing will be held in check and even drop slowly. As the new city nears completion its impact on prices will grow. Suddenly all of the young people who do not see how they could possibly afford a place to live near where they want to work will have a solution. Yes, this is a big project. There will certainly be those who say we should not convert agricultural land to land for housing. However, in our current situation, only bold projects will make a difference. Additional construction in the Negev will not change the housing calculus in the center of the country – where most people want to live.

Regarding Food: Two things can easily be done the first, unilaterally by the government, to lower the cost of food in Israel. First, eliminate or drastically lower the V.A.T. on food. I know the Ministry of Finance has always opposed that idea, claiming it would be hard to enforce, people will cheat  etc. However, almost everywhere else in the world there is either very little, or no V.A.T. on food.  In the U.S., food is exempted from sales tax in all but two states. The lower revenue can be made up by increasing V.A.T. on other less essential products – and of course, forgetting the doomed effort to eliminate V.A.T. on certain new apartments. This change could be voted on by the government and implemented immediately.

Second, many people talk about increasing competition in the food market (which should be done.) However, increasing competition in this sector is a complicated endeavor. I suggest something simple, i.e. convince Costco (the huge American mega-store chain, that has stores all over the world) to open 6 stores across Israel – from North to South. Allow Costco to use their global supply chain to bring in products and only pay the standard V.A.T. on whatever they  import. If we do that, the same that happened in the furniture industry when Ikea arrived will happen in the food industry here. Initially, everyone predicted Ikea would force all of the domestic furniture producers and distributors out of business. Instead, prices dropped drastically. Israeli furniture producers and distributors were forced to become more efficient, and earn a little less. Today, the price of furniture in Israel is no higher than most other places.

There are many other, even more radical things that can be done to improve the standard of living and quality of life here. Continuing the current situation is untenable. Small changes will have little or any impact. The holidays are over. It is time for Israel to get back to work, it time for the government to find big solutions to big problems.

About the Author
Marc Schulman is the editor of -- 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
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