Aspects of the Economy for Non-Economists

Amnon  Portugaly
Translated by: Margalit Rodgers

We must lay hold of the fact that economic laws are not made by nature. They are made by human beings(Franklin D. Roosevelt)

1.

What is happening in the world? We’re told that many countries cannot repay their debts and are in danger of bankruptcy. We’re told that Europe’s economy is collapsing, that unemployment around the world is higher than ever, and thatIsrael’s economy is at risk. Yet at the same time, tens of thousands of people are spending vast sums of money on travel and to purchase tickets for sport events, and spending their money on tourism and annual vacations, economic conferences and exhibitions are reporting full attendance, the restaurants in the big city centers are full, people are happy, and families are spending their money in shopping centers. And not only are the stock markets not collapsing, some of them are actually rising.

According to conventional wisdom, we’re in a deep economic crisis, or in a recession, or in danger of recession, yet we continue to behave as if we’re richer. According to conventional Israeli wisdom, we don’t have money for housing, health, and education, but the horn of plenty is always available for the Jewish settlements and the sectors whose support and votes the prime minister wishes to cultivate. How is this possible?

The answer is that inIsraeland the West there are, roughly divided, two populations: the ‘connected’ and the ‘disconnected’. The population that is protected from the crisis, and the one that has been or is likely to be adversely affected by it. The ‘connected’ who live the good life, and the ‘disconnected’ who live in constant hardship. The first are protected from economic crisis, and the latter live in its permanent shadow. The ‘disconnected’ do not have sufficient funds for housing, health, or education, but for the needs the government desires, for the connected, there are sufficient budgets.

Similarly, in the Great Depression of 1929 unemployment stood at approximately 25%, and that percentage of the population, according to the prevailing social-economic perception in theUSat the time, were condemned to starve or lose their homes. On the other hand, at the height of the crisis, all the rest, 75%, employees and self-employed people who worked had good incomes and lived well. To them must be added the wealthy and the top decile of self-employed people who have not only managed to protect their property from the crisis, but even enjoy and profit from it.

What happened and is still happening in Israel is the collapse of the ‘disconnected’; the first eight deciles, the impoverished, the middle class, junior employees, and small self-employed business owners. Guy Rolnik describes this articulately in an article entitled “Meet the Well-To-Do, the Connected, and the Disconnected”. Today, a ‘normative’ family in the first eight deciles is unable to pay for its children’s education, pay the rent or mortgage on its home, or receive adequate health services. In the not too distant past these were services we all received at an affordable price and took for granted. Today the government tells us there isn’t enough money to provide an appropriate education for our children, there isn’t enough money for health services, there isn’t enough money to pay employees a living wage, for a safety net for the poor, pensions for the elderly, and the list goes on. And only a small proportion of citizens, the wealthy, and the ‘connected’ can afford to receive and pay for these services.

2.

The past decade has witnessed a palpable decline inIsrael’s economy, the concentration of capital and revenues in the hands of a few, and a rapid increase in inequality.Israel’s economy has grown in recent years, but the overwhelming majority of the fruits of this growth has been raked in by a very small class, the top percentile, whereas the middle class has had to make do with crumbs, and the situation of the lower deciles has declined. As a result, the middle class is collapsing, and the welfare state has been destroyed. The decline of the middle class stems primarily from the increase in its expenses, from transferring the burden of paying for services the government no longer provides or has privatized, to households.

This has not always been the case. Thirty years ago, when the State of Israel was a welfare state, a single income was sufficient for a family to make a decent living. Today, high indirect taxation and unreasonable prices for housing, health, education, fuel, food, and water make it impossible to make a decent living even with two incomes. Middle class families in present-dayIsraelare hanging by a thread without a safety net, and their economic situation is far more unstable compared with the average family just one generation ago. Although we are ‘richer’ today, we live in constant economic instability.

Euphemistically speaking, what happened in Israel is the massive transfer of wealth to the top percentile, or in other words, organized government-sponsored robbery protected by law of national wealth in general, and that of the middle class in particular, by the top percentile. The result of this transfer of wealth is visible to all. The top percentile inIsraelnow holds a substantial proportion of the country’s wealth.

According to State Revenue Administration data for 2010, the top percentile, which comprises some 32,000 people whose average (standardized) monthly income was approximatelyNIS139,000, received 14.1% of the total gross revenues inIsrael. Within just five years, from 2005 to 2010, the top percentile’s share in national revenues grew by 43%, which constitutes a huge increase in the concentration of wealth and power in the hands of the top percentile.

The transfer of wealth was effected by means of direct tax reliefs, especially for the top decile, significant corporate tax cuts, tax and other benefits for corporations, turning a blind eye to creative tax strategies, increasing indirect taxation, and imposing a constantly growing portion of payments for health and education on the country’s citizens. Perhaps what chiefly symbolizes the preferential treatment of the wealthy are the capital revenues and gains taxes, which are considerably lower than income tax. TheUSis possibly the most radical example, where there is a political party whose main agenda is not to tax the wealthy.

One of the graver outcomes of current economic policy is the picture of the economy in areas that have a long-term impact: decline in the quality of education, inability to fund higher education for children, and deterioration of the health services. Weakening the earning power of employees and the self-employed, and the subsequent decrease in their disposable income, have dire implications for the stability of the economy and the state. The writing is on the wall for all to see, but Netanyahu and his people in the Ministry of Finance aren’t reading it.

3.

Neoliberalism is the name of the social-economic outlook of the Right inIsrael, in theUS, and the world. The cornerstone of neoliberalism is the belief that the state’s and the government’s sole legitimate objective is to protect citizens’ security, freedom, and property, including extensive private property rights. This leads to the conclusion that any action taken by the government beyond this objective, such as providing assistance for the weak, is not permissible, and that the government’s activity should be minimal and drastically reduced.

Another characteristic of the neoliberal social-economic outlook is the belief that market mechanisms free from government interference are the optimal way to organize all exchanges of goods and services. This is supposed to  lead to greater welfare and more efficient allocation of resources. According to this outlook, citizens are responsible for the results of their freely made decisions and choices, and pronounced social inequality and injustice are not morally problematic. On the contrary, a person’s demands for the state to intervene and control the market, or compensate the weak and unfortunate, indicates that he is morally corrupt or undeveloped, and not much different from an advocate of a totalitarian state.

The neoliberal economic approach has become a belief, a theology, and the mantra of a market free from government interference is the prophet. Neoliberal economists blindly believe in privatization and a market free from government interference and control, and from public interest considerations. It is an approach that views government interference in the market as detrimental.

The leitmotif connecting all the Western democracies that have chosen a neoliberal economy is the disproportionate and corrupting influence of the top percentile.  Men of wealth, people with a vested interest, and corrupt politicians, have undemocratically taken over centers of power, and managed to penetrate the government sufficiently to make it protect them against competitors and the public. The new social elite of the wealthy lives its life in security, and has no idea how ordinary people live, or what their struggles and concerns are.

One of the terrible outcomes of this approach in Israelis that in some cases the government acts against its citizens. As Ori Ben-Dov wrote on the J14 movement website, “A state where the welfare authorities are collapsing, public housing has dried up, the Housing Ministry does not assist those who need help, and the legal system refuses to help those who have no money – this is a state that destroys its citizens”. If this seems harsh, we should remember the present government’s priorities on the issue of housing as they have emerged in the course of the past year:

Minister of Finance Steinitz allocates NIS 50-100 million to support Ariel College in its efforts to gain university status, but cannot find money for public housing. The prime minister finds huge budgets to build housing units for Ulpana settlers, but has no money for public housing. And the step that clearly symbolizes public housing policy is the sale in recent years of tens of thousands of public housing units to the tune ofNIS2.75 billion – and despite an explicit government decision to allocate the money to expanding the supply of housing units, nothing has been done. Nothing was allocated to public housing.

4.

Most of us want to believe that our opinions have been formed over time as a result of careful and rational consideration of facts and ideas, and that our decisions, which are grounded in these opinions, are sound and informed. But research reveals that we frequently base our opinions on our beliefs. Our beliefs can dictate the facts we have chosen to accept, and moreover, they can make us change the facts to better fit our prejudices and beliefs.

These studies can help explain why neoliberal economists are incapable of facing reality. They choose only the findings that chime with their belief in neoliberal economics, and ignore other, less convenient findings. These economists act as Adlai Stevenson, the Democratic presidential candidate in the 1952 and 1956 US elections, said: “Here is the conclusion on which I will base my facts”.

Economists who teach the neoliberal approach in universities believe they are teaching an established and scientifically based school of thought, and fail to clarify that it is but one dimension in a multidimensional world. They fail to emphasize the importance of the premises on which the school of thought is founded, and which are required in order to draw the conclusions they are teaching, as well as the disparity between neoliberal ‘theory’ and what is going on in the real world. This lack of transparency is astonishing, and is a kind of ongoing deception of generations of students who believe they have learned some solid insights, when in fact all they have learned is one facet of a multifaceted story.

The real test of neoliberalism should be on the ground. And in this, despite its advocates’ claims, which are disseminated at every opportunity in the press, on the radio and television, the doctrine has failed miserably. Attempts around the world at an economy free from government interference have been unsuccessful to say the least, if not disastrous. Let us recall three cases. The Great Famine inIreland, the Great Depression in theUSthat began in 1929, and the failure of neoliberalism inSouth America.

* Approximately one million people, about an eighth ofIreland’s population, died in the Great Famine inIrelandbetween 1846 and 1851, more (relatively speaking) than most cases of famine in modern times. This happened right next door toBritain, which was the world’s wealthiest power at the time. The Great Famine began as a natural disaster – a potato blight that spread rapidly, but the impact of the disease was exacerbated tenfold by the deeds and misdeeds of the British government during those years. The British government’s deeds and misdeeds were primarily motivated by the free market approach and the laissez-faire doctrine (let  do, and by implication, don’t interfere). The free market doctrine prevented government intervention to stop food exports fromIrelandduring the famine. Even aid to the starving, in the form of soup kitchens, was terminated after six months. The idea of giving free food to a considerable proportion of the Irish population ran counter to the laissez-faire doctrine and the resultant perception of government and society functioning.

* The same free market principles shackled theUSgovernment when the stock market collapsed in 1929. The economists who were in power at the time, who believed in a free market economy, prevented the government from interfering in the market, and thus brought on and amplified the Great Depression of the 1930s. It was only after four years of deep crisis and unspeakable suffering – about one quarter of allUSresidents were unemployed – that Roosevelt was elected president and instigated massive government action, the New Deal, that enabled theUSto emerge from the crisis.

* In the course of twenty-five years (1980-2005), neoliberal reforms were implemented in a large number of South American countries. These reforms proved disastrous and an unprecedented economic failure. The results of the neoliberal ‘reforms’ in most of these countries were a dramatic decline in economic growth rate, and a drastic drop in per capita income. Before the neoliberal ‘reforms’ were introduced, between 1960 and 1980, per capita income rose by 82%, compared with a mere 1% rise in the five years from 2000 to 2005, and a 9% rise in the twenty years from 1980 to 2000 after the neoliberal policies were implemented. Other disastrous outcomes were increased inequality in the population, decline in the improvement of life expectancy, decline in the improvement rate of adult mortality, decline in progress of reducing infant mortality, decline in growth rate of public investment in education, and so forth. This is clearly the biggest long-term economic failure in modern South American history. The results were so severe that most of the Latin American countries renounced neoliberal economics and elected leaders who undertook to oppose this ineffectual policy.

5.

Significant technological revolutions are typified by three stages:

In the first stage we use the new products or services to do what we’ve done in the past, but with minor changes. In the second stage we use the new products or services to do things were weren’t able to do in the past. And in the third stage we change our way of life in order to take full advantage of the new possibilities the technological revolution has opened up to us.

For example, development of the automobile enabled us in the first stage to replace the horse and cart; in the second stage possibilities opened up for long distance travel, which weren’t available in the past; and in the third stage we changed our way of life, the suburbs developed to enable us to take advantage of the possibilities a car opened up to us.

In recent years we are witnessing the appearance of several revolutionary technological developments, which in my view will have a huge impact on world economy and human society. Of these I shall mention the development of technologies that resulted in the mobile internet, and the development of horizontal drilling and fracking technologies that enable economically viable production of gas and oil from deposits that weren’t economically feasible in the past.

The mobile internet revolution has only just begun, and it is interesting to see the change in human behavior it has already brought about. Ten years ago, a person talking to himself in the street and waving his arms would have been considered mad, yet today it is the common sight of a person using a mobile phone. Mobile internet enables virtually all the world’s inhabitants to plug into the world’s information system and enjoy its fruits, and the results cannot be predicted.

Extracting natural gas from shale with horizontal drilling and fracking technologies has already resulted in abundant supplies of cheap energy in theUS, and in a revolution in the global energy market. The most striking change is the reduction of natural gas prices in theUS, from a record $13 per million thermal units in July 2008, to about $2.75 in October 2012. This has led to an increase in use of gas (and a decrease in use of coal) to produce electricity, and a subsequent decrease in the amount of greenhouse gases in theUS. Alongside developments associated with gas, use of these technologies to extract oil from shale now enables the development of vast oil deposits that were not available in the US until now, and help reverse two decades of a downward trend in local crude oil production in the US to an upward trend.

I would note that supplying cheap, inexhaustible energy in the form of oil and coal drove the wheels of the Industrial Revolution and the massive growth in the West in the nineteenth- and twentieth centuries. It can be estimated that oil and gas production from shale will lead to dramatic changes in the coming years, and will have a huge impact on world geopolitics and the global energy market.

Amnon Portugaly is a researcher at the Social-EconomicAcademy, and at theYakovChazan Center for Social Justice at the Van Leer Jerusalem Institute.  Previously, Adjunct lecturer at the Graduate School of Business Administration,TelAvivUniversity’s Faculty of Management.