But Austerity Works So Well!

AP Photo/Michael Sohn, pool

A familiar tale: In a small country on the Mediterranean rim, the government chooses to solve an economic crisis by enacting an austerity budget. Regressive taxes will rise. Aid to families will be cut. Less will be left of the welfare state built decades ago. The novice finance minister promises this will heal the economy.

As the people of that unhappy land say: Happy are those who believe.

The Mediterranean country in question, this time, is not Spain or Greece, but Israel. It is not facing a looming financial meltdown. The crisis amounts to a ballooning deficit—a danger, but not a collapse. Still, Benjamin Netanyahu's recently formed government has chosen a recipe of austerity. The specific ingredients of the Israeli version were chosen by Finance Minister Yair Lapid, the ex-talk show host whose new Yesh Atid (There Is a Future) party campaigned only a few months ago on fervent Facebook promises to protect the middle class.

There are several implications to this story. One is that ideology is more powerful than experience, especially the ideology of small government. Another is that giving to the rich is the prelude to taking from the poor and, for that matter, all the rest of the un-rich. A third is that a shiny, well-packaged candidate with Facebook skills is a poor bet for saving people whose salaries covers less and less of their bills, or for those who have no salary. In politics, organizing is still more important than advertising.

The most immediate, short-term description of Israel's distress is that for over a year, tax revenues have fallen far short of Finance Ministry predictions. With too little money coming in, the deficit is ballooning.

But there's history behind this, explains economist Moshe Justman of Ben-Gurion University. From the middle of the last decade the government cut tax rates. The new tax structure, Justman says, assumed a nonstop boom, with growth of 5-6 percent a year. More recently, growth has slowed to 3-4 percent annually, he says. This isn't a "deep recession," he notes. But the slower economy is not yielding enough taxes to pay the bills.

To fill in even more of the picture, those tax cuts were largely a gift to the highest earners. They fit well with the policy trends of privatizing government services, scrimping on health care and education, and reducing the social safety net. Last week, the Organization for Economic Cooperation and Development reported that Israel has the worst poverty rate among 34 member countries. In the standard measure of economic inequality, it comes in fifth, after Mexico, Chile, Turkey, and the United States.

A couple of summers ago, the downwardly mobile daughters and sons of the middle class surprised themselves when their online appeals brought hundreds of thousands of Israelis to demonstrations. The protests ended even more suddenly than they began. In retrospect, they created no lasting organization that could vote as a bloc or threaten to block the streets. The movement was as ephemeral as a blog post. Several protest leaders joined the Labor Party, which finally remembered its social democratic roots but campaigned poorly. In last winter's election, Lapid was the main beneficiary of middle-class dissatisfaction. He was already a celebrity; he was glib; he had a good website; he communicated with supporters on Facebook; he picked his party's candidates for Parliament himself, not bothering with the old-fashioned machinery of a party.

Yesh Atid won nearly a sixth of the seats in the Knesset. Lapid became finance minister, assuming the obligation to deal with the deficit, gaining the opportunity to reverse the flow of wealth from have-nots and have-somes to the haves-more-than-they-can-count.

Instead, he chose from the familiar list of options prepared by ministry officials who designed past policies. Perhaps the most flagrant measure is slashing the per-child government stipend to parents. The stipends were designed to replace tax deductions for dependents. They insure that parents who pay little or no taxes get help, and the stipends are far more important to the livelihood of low- and middle-income families than of wealthy ones. The value-added tax, regressive in the same way as a sales tax, will increase by 1 percent. Income tax will, in fact, rise—but a flat 1.5 percent on all tax brackets, defying the progressive potential of that form of taxation.

Those changes, according to the ministry's own figures, have an inverse impact: The lower a family's income is, the greater percentage it will lose. To that, add a long list of cuts—in dental care for children, for instance, and in after-school programs that allow parents to work. The new economic plan is long, detailed, nasty, and brutish.

Of course, there are very different options available. Lapid isn't interested. When a TV interviewer pointed out that his policy would hurt someone making $3,000 a month far more than someone making $30,000 a month, Lapid reached into his box of fashionable soundbites: "I'm not a socialist. I don't think we have to frighten the whole business sector. I know the theory that says, 'Let's take from the rich.' … It hasn't worked anywhere in the world." In Lapid's view, higher taxes on the wealthy equals socialism. The list of socialists in history apparently includes Dwight Eisenhower.

Inequity isn't the only problem. The new budget is likely to restrain growth rather than encourage it, as economist Avia Spivak told me. "I would prefer that they spend more and take more taxes," said Spivak, the former deputy governor of Israel's central bank. "The state has to provide services, and Israel's long-term growth depends on investing in education and infrastructure." In the short term, he added, "cutting government spending results in lower growth."

This is a very cautious formulation. Let it be noted that slower growth will reduce tax revenues, which in turn is likely to cause a larger deficit. (This experiment has been tried elsewhere around the Mediterranean, admittedly in more extreme crises; the results are not encouraging.) Unless the ideology of austerity yields to experience, the next step will be for Lapid and Netanyahu to propose new cutbacks.

To be fair, more than an idée fixe is at work. The CEOs of large corporations have no problem getting access to politicians and explaining the damage they believe will be done by changes in their tax rate. College graduates who can't afford the rent are not a powerful political force, nor are parents without daycare for their kids, unless they organize and become one. If Yair Lapid has shown one thing, it is that voting for the smiling, pixel-deep figure on a Facebook page is not enough to change your country's direction. 

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