Daniel Doron - for social & economic progress in Israel

Americans may be wondering why the opinions of a former president of Israel’s Supreme Court may be so relevant to the selection of Elena Kagan as a member of the US Supreme Court, as some of her critics insist. These critics, among them several senators, claim that by repeatedly expressing her admiration for Justice Aharon Barak’s philosophy, even considering him as her mentor, Kagan revealed her own predilection for a radical judicial activism for which justice Barak is notorious.

One important issue that may be affected by Kagan’s admiration for Barak’s often articulated position is the issue of terrorism and the law. Barak and his followers insisted that the fight against terrorism must in no way affect, even in extreme emergencies, a strict adherence to the most liberal interpretation of human rights. Americans may be surprised to discover that an activist Supreme Court that was led by Barak habitually constrained Israel’s military from taking effective measures to protect innocent lives. It feared impairing Palestinian Arab rights to free movement or to a decent quality of life. Changes dictated by the Supreme Court in the security fence have cost hundreds of millions of shekels. Judicial interference in military operational details like the positioning of roadblocks resulted in fatalities, while insistence on Palestinian Arabs’ freedom of movement may have facilitated the penetration several times by suicide bombers.

LIKE ISRAELIS, Americans now debate, following several attempted terrorist attacks, how democracies can vanquish terrorism—and still fully respect human rights. How can democracies win the battle against terrorists exploiting our laws to undermine our civilized order?

Jurists hold two basic approaches on how the law should cope with terrorism: Judicial activists, like Barak and most likely Kagan, believe that human rights are God’s—or nature’s—sacred given rights. Such rights must be defined and strictly enforced by the judiciary even in times of war. Then there are the pragmatists who argue that the right to life of potential victims is no less sacred than the human rights of their assassins. They believe that even human rights must be weighed against other rights and adjudicated case by case.

These two approaches were debated in the recent past by two preeminent jurists, Judge Richard Posner of the Federal Court of Appeals in Chicago, a conservative jurist, and a guiding light of law and economics, and Barak. Barak, an avid practitioner of judicial activism and of the strict application of human rights, insisted that to fully preserve human rights “democracy must fight terrorism with one hand tied behind its back.”

Posner, who “preferred to fight terrorism with both hands,” argued that judges lacked qualification in military matters. They based their judgments on their values, their ideology and on their personal experience. Casting their decisions in terms of human rights was often a cover for imposing their ideology and personal bias under the guise of lofty principles. The rigid application of human rights at almost any cost, Posner asserted, sacrificed innocent lives to protect abstract principles.

Barak insisted that there are universal criteria judges must enforce even if they are not included in legislation because judges “have a special affinity with morality… This vested in the legal system extraordinary powers…”

Posner objected. The claim that everything is justiciable and that everyone can have standing in cases involving human rights upsets a vital and delicate balance between the legislative, executive and judiciary branches of government, setting up the judiciary as the final arbiter. It must lead to judicial despotism.

THE DIVISION between these two approaches has its roots in differing conceptions of human rights. Human rights activists treat rights as abstract platonic universals surrounded by the sacred halo of the law. But such universals, no matter how well formulated, are inevitably vague and therefore require constant interpretation. As Barak conceded the “human dignity and freedom” right is “a complex principle.” But he believed it can be based on “the freedom of each person to fashion his personality.”

No one can define, however, such “freedom” exactly; what are its contents, extent and limitations? Who exercises it and under what constraints? Tomes could be written on what is meant by “personality” and how “to fashion it.” A very complex internal process, it is hard to fathom and impossible to codify. Yet Barak and his followers insisted on making such a complex and vague notion as individual freedom “the principle right” from which all other rights derive.

This very vagueness, however, makes interpretive judges the real legislators of such rights. A dogmatic adherence to abstract human rights enforced by judicial activism therefore curtails the freedom of legislators and nullifies the democratic choice it expresses.

An abstract conception of human rights leads, moreover, to a divorce from reality. A Barak disciple, Prof. Alon Harel asserted that in 50 years people will look back at our obsession with terrorism “as we now look at those who engaged in witch-hunts.”

Terrorism being such a bugaboo, there is no justification, he believes, to deny full protection even to “ticking bombs,” to terrorist suspects who possess information that could help prevent the slaughter of innocents, but would not divulge it unless forced to do so by extreme pressure, even torture.

Even pragmatists like Posner objected to having the law sanction torture. Posner suggested a pragmatic compromise: Prosecutors should sometimes ignore the use of torture by law enforcers if they are convinced that it was the only way information could be extracted that would save lives. “I do not recall,” he said “many people being killed in the last 50 years by witches, but thousands have been killed by terrorists… I am amazed to hear such a dismissal of the danger of terrorism from a professor in a university that was attacked by terrorists. I think it is irresponsible…”

Is this debate between these two schools on how to handle a real terrorist threat relevant to the choice of a candidate to the US Supreme Court who mostly likely embraces the views of the very “liberal” school? Judge for yourself.

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“Yes, break it up!” Ze’ev Jabotinsky, the prophetic liberal Zionist leader demanded in 1922, referring to the Histadrut labor federation monopoly. Under the pretense of securing employment for Jews during the Mandatory era, the Histadrut launched a class struggle meant to destroy the bourgeoisie and establish on its ruins a socialist utopia, as its top leaders openly asserted. It violently denied employment to workers not possessing its red membership card.

Then as now, the defenders of monopolistic practices have been trying to distract attention from the damage caused by their monopolies by character assassination and by incitement to discredit their critics.

Jabotinsky clearly stated that it is the right of every worker to organize and establish unions; that only when such unions become rapacious monopolies, as they are now, and use their excessive power for political control and to destroy competition, they should be broken up. Yet his Labor opponents, including their supporters in academia and the media, knowingly launched the big lie that Jabotinsky, who was a classic liberal, a man who advocated minority and women’s rights very early on (in his Betar anthem he wrote: “There [in the forthcoming Jewish state] shall live in well-being and happiness, the son of Arabia, the son of Nazareth and my son”) simply wanted to destroy any workers’ union.

Jabotinsky was a fascist “following in the footsteps of Hitler,” David Ben-Gurion averred in a Labor Party pamphlet of the mid-1930s. Therefore, Jabotinsky was beyond the pale and should be destroyed together with his party. Ben-Gurion’s followers soon took action and violently attacked Jabotinsky’s followers.

OUR CURRENT oligarchs and their henchmen are restoring to similar tactics to protect their monopolies. The Bank of Israel has just published an astounding document, a courageous analysis of the dangers posed by the concentration of political and economic power in the country. Issued by its Research Department (headed by the savvy Carnit Flug), the report recommends that steps be taken to curb the power of the oligarch-owned conglomerates that dominate much of the economy through their pyramid structure and cross-holdings in real (those that engage in trade or industry of goods and services, not money) and financial firms.

Such cross-holding give the conglomerates preferential access to credit, as well as to a lot of privileged business information that banks routinely receive from their creditors. The pyramid structure of the conglomerates has also allowed the oligarchs to control dozens of other firms. By simply controlling the mother corporation at the head of each pyramid, they control dozens of other companies in which they invested a very small share of their capital.

So with a few hundred million shekels, which they received as loans though their crony connections from the nationalized banks, about 20 families managed to take control of the major business groups, representing more than half the assets traded on the Tel Aviv Stock Exchange.

There is no comparable concentration of political and economic power in any other democratic country.

Such concentrated power led to the very damaging cozy relationship between oligarchs, politicians and large parts of the media – a relationship that has corrupted politics, the economy and public discourse and is damaging democracy.

AFTER THE Bank of Israel report, Prime Minister Binyamin Netanyahu announced that he will take “determined, focused and well-thought-out action” against oligarchic control over these pyramid groups, so as to avoid the danger of a domino-like financial collapse in case one of them gets into trouble, as they have recently.

Immediately, a number of top journalists have attacked the prime minister in an attempt to prevent him from taking action to dismantle the pyramid groups. The assault was led by prominent economic commentators who, for years now, have been trying to protect the bank oligopoly that was eventually partly broken up by the Bachar Commission reform of financial markets.

In their bitter, years-long attacks on the Bachar reforms, these pundits shamelessly spread disinformation, distortion and sometimes even outright lies. During the recent crisis some even tried to incite panic in financial markets in an attempt to destroy the new financial institutions competing with the banks. Now they claim that the prime minister is picking on the oligarchs to distract us from our real problems, the problems of the Negev and Galilee, the problems of poverty and the problems of our deteriorating educational system.

Those who make this spurious claim are aware that the problem of poverty can be greatly reduced within a few years once the conglomerates and their monopolies are broken up. Today, these conglomerates steal about a third of workers’ salaries by inflating the prices of all consumer goods. Breaking them up will lower prices and increase the purchasing power, especially that of low-income Israelis, and lift them out of poverty.

The monopoly defending pundits ought also to know that the Negev and Galilee are failing to develop because the banks have created a decades-long credit crunch, refusing to grant credit to small enterprises concentrated in the periphery. Instead most credit is allocated to their oligarch cronies for speculation in real estate abroad and in foreign currencies.

But they try to distract our attention by falsely attacking the proponents of reform so that we will not support the liberation of the economy. Will we let them get away with it?

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Following 15 years of negotiations, Israel, whose per capita gross domestic product approaches $30,000 (approaching that of Germany), was invited last week to join the OECD’s club of democratic, market-economy countries. After receiving what Prime Minister Benjamin Netanyahu termed “a seal of approval,” Israel is now poised for another quantum leap in its development.

The OECD invitation will make Israel even more attractive for investors and help accelerate the country’s already remarkable growth rates, which in the pre-crisis years was about 5% per annum. Israel withstood the global financial meltdown much better than most industrialized economies, avoiding a recession and the sort of exploding budget deficits we now see in Europe and the U.S.

“This is an important further step in the acceptance of Israel as the advanced economy it is, and of its integration into the global economy,” Stanley Fischer, the governor of the Bank of Israel, told me.

It has been a long haul. Possessing some of the best human capital in the world, Israel was hamstrung from its inception by its Socialist heritage (remember the universally admired kibbutzim, now practically defunct?). Since its founding in 1948, when seven Arab armies attacked the tiny nation of 650,000 at the time, it had to cope not only with several wars and relentless terrorist attacks, with blockades and boycotts, but also with a statist system rife with bureaucracies and monopolies that impaired competition and efficiency. They left the talented Israeli worker half as productive as his American counterpart, and poorly compensated.

Everything used to be nationalized in Israel: land, water, electricity, the banks (in practice), most large industries and businesses, education, and health care. Israelis learned to their chagrin what Americans are now about to find out—that it is sometimes simpler to win wars than to repair the ravages of powerful bureaucracies, especially in education and health care.

In 1984, runaway inflation of an annual 400% and a near financial-market collapse forced Israel to start reforming its anti-productive system. But it was only after the tax cuts, deregulation, and privatization that Benjamin Netanyahu pushed through—first as Israeli prime minister in the late 1990s, and particularly later as finance minister in 2003—that the Israeli economy took off. As George Gilder documented in his riveting book “The Israel Test,” it was then that the country evolved into a “leader of technological progress and scientific advance.” Israeli high tech, Mr. Gilder noted, is the source of some of the most profitable American developments. When you open a computer and read “Intel Inside” it might as well say “Israel Inside.” The most significant innovations of the Intel chip are Israel-made.

Despite its stunning technological prowess that has launched 2,500 startups in a nation of only 7.5 million, Israel was, and still is, inhibited by an anti-productive economic system. Its economy is dominated by about 20 families, who have been able to take advantage of a politicized privatization process and gain control of many of the major assets that once belonged to the government and trade unions. A recent Bank of Israel report noted that these pyramid-style conglomerates control more than half the market assets in Israel. This great concentration of economic and political power, according to the bank, is not only a great impediment to competition and efficiency but may actually expose Israel to extreme risk. A collapse of one of these groups (which was only narrowly avoided recently) might have devastating domino effects on Israeli markets.

The good news is that both the Israeli government and the Bank of Israel say they are prepared to take strong measures to rectify this dangerous situation. These will involve tightening some regulatory practices to make it more difficult for minority owners to gain control of a chain of firms through a highly leveraged pyramid structure. It will also require the abolition of some tax privileges that these pyramid groups enjoy, as well as moves to increase transparency and competition.

The oligarchs will naturally resist with all their considerable might, including help from academic and media “consultants” and from the monopolistic trade union federation. But reformers are determined to continue improving Israel’s economy by further reducing government debt (already cut to 80% of GDP from over a 100% earlier this millennium), cutting taxes, and increasing competition in financial markets.

Joining the OECD will no doubt assist Israel’s development. But it may also put additional burdens on its economy, which is already reeling under the heavy load of welfare costs and transfer payments that consume a third of its $70 billion budget. The powerful Israeli welfare lobby has already announced that it will use the OECD’s comparative statistics to push for increased welfare expenditures.

But generous welfare systems have not worked well for the OECD’s richer members, and have proven devastating for some of its poorer nations, as is evident in Greece. Should OECD “benchmarks” push Israel to increase its high welfare expenditures even more, it will impede the country’s efforts to reduce the already extensive government interference in its economy. We can only hope that Israel’s extraordinary vitality and creativity will again prevail, even in face of such new challenges.

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Israel’s rescue mission in Haiti won universal praise. Most remarkable is the astonishment expressed by the media at how efficient and humane IDF soldiers were.

What? Efficient and humane Israelis? We can accept that Israelis can be efficient. We were told, for years, how adept IDF troops are in fighting terrorists. So it is understandable that they managed to arrive so quickly at the scene of the disaster, even though it is more than 5,000 miles from Israel, and that before anyone else set up even a dingy clinic, they had assembled a state-of-the-art field hospital and were busy saving lives.

But humane? Are these the Israelis who use tanks against children armed with slingshots; an army that everyone accuses of habitually using excess force?

Mon dieu, it could not possibly be that the army of “that shitty little state” is acting with such touching humanity. It is not how we are accustomed to think about Jewish troops.

To those who really know Israel – that is, not exclusively through the distorted lens of the media – the efficiency of its rescue effort and its humanity are not surprising. It’s a country that has had to contend with terrorist atrocities for decades. It’s people’s army is mostly composed of reservists literally defending their homes. So they are strongly motivated to excel in rescue, even at a risk to their own lives.

IDF troops have a lot of painful experience removing the dead, the mauled, the burned and the bleeding from under tons of collapsed concrete and twisted steel in many countries, from Turkey to Thailand. They unfortunately became very proficient in this task.

The country’s citizen army reflects Israeli mores, the good and the bad. The world media does an excellent job publicizing the latter (yes, Israelis are not always as polite and obsequious as the foreign media wants them to be; and yes, they can be rather aggressive; otherwise they could not survive a day in the bloody Middle East).

SO LET us try to slightly balance the picture with a few facts.

Despite the image of Israelis as warlike, intolerant people, the fact is that they are perhaps the world’s most restrained and tolerant..

Ludicrous? Consider the fact that in the wake of dozens of horrendous Palestinian-Arab terrorist attacks on civilians, when the bodies of children, women and the elderly have not yet been removed, Palestinian Arabs whose compatriots and possibly relatives committed these atrocities continued to walk safely in every part of the country.

Sure, the media can always produce shots of small gangs of hysterical adolescents in the aftermath of such terrorist outrages, waving their fists and shouting “Death to the Arabs!” But no crowd actually ever formed to kill Arab passersby. Deeply pained and sometimes very frightened Israelis (you never know when or where the next bomb will strike, since terrorists often plant additional delayed-response bombs to kill those rushing to the rescue, and you never can be certain that your kids, who left for school or to visit friends, will return safely home), nevertheless repeatedly showed an almost superhuman restraint and refrained from discharging their rage on Arab bystanders.

For decades, hundreds of thousands of Palestinian (before the Oslo Accords, and tens of thousands after) found employment in Israel. Except for about three incidents involving mentally deranged assailants, they were never hurt and always enjoyed freedom of movement.

How many countries can boast that their citizens would act with such self-control? That they would, like the Israelis, exhibit extraordinary tolerance and refrain from attacking Arabs whose compatriots just committed acts of great brutality?

Or how many citizens of other countries would tolerate, like the inhabitants of Sderot and other villages bordering on Gaza, years of random and relentless rocket attacks? In most countries, we can assume citizens would put irresistible pressure on their governments to do everything – yes, even retaliatory and targeted strikes against the terrorist leaders – to put an end to such attacks.

Yet Israel did not.

It took Israeli governments more than seven years (!) before they reacted. Is this warlike and aggressive behavior? Is such extreme restraint reasonable under the circumstances? There are many other examples of Israeli tolerance. Just visit any Israeli hospital and you will be amazed at how many West Bank Arabs are there for treatment. They are treated like any Israeli, with not a scintilla of discrimination.

So yes, occasionally what we see with our own eyes is reality, even if it contradicts media-created spins. What we all saw in the reports from Haiti – the remarkable scenes of Israelis risking their lives to save people only because they are fellow human beings – is the true face of Israel. It faithfully reflects the true nature of a people that even under extended, excruciating bloody attack manages to preserve its humanity.

This piece was written in memory of Abigail Radoszkowicz, z”l, a lover of Zion.

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Last November’s Forbes-Gilder Telecosm—a distinguished annual conclave on science and technology—was devoted entirely to Israel. Telecosm is a co-venture of George Gilder—whose global best-seller Wealth and Poverty ushered the era of Reaganomics and its unprecedented economic growth—and of Steve Forbes, the author, publisher and candidate for US presidency who taught millions the virtues of markets and entrepreneurship.

Telecosm’s showcase of Israeli hi-tech followed the publication of the most recent Gilder best-seller The Israel Test. Gilder, a guru of technology and entrepreneurship, claims that attitudes toward Israel are a test case of attitudes toward civilization. Attacks on Israel express “barbarism, envy and death, [a conflict] with civilization, creativity and life.”

Israel and the US are hated “primarily because of hostility toward capitalist creativity,” Gilder adds.

Since the Middle Ages, Jews have been the pioneers in the great capitalist expansion through international trade. They also led its more recent scientific revolution and its astounding technological applications, creating vast improvement in human life. Jews were also central in creating the weapons that crushed evil regimes. In Milton Friedman’s innovative contributions to economics they helped propel 50 years of unprecedented prosperity that spread even to the most laggard economies of China and India.

Anti-Semitism expresses envy and greed, Gilder believes. It is rooted in the Marxist assumption that profit derives from exploitation and that economic creativity is therefore basically sinful. Israel is hated because it is “a leader of human civilization, technological progress and scientific advance,” Gilder concludes. On opening a computer you first read “Intel Inside,” but it should actually read, he says, “Israel inside,” because most major inventions, even of Intel, were largely made here.

IN THESE somber days, it is heartening to get such compliments, especially backed by facts. But we might be dangerously complacent if, when celebrating the extraordinary achievements of Israeli hi-tech, we ignore the serious problems facing it, some general in origin, but many—as is the case with most Israeli economic problems—self-inflicted.

Excessive government intervention caused the recent economic crisis partly by giving free scope to irresponsibility and greed. It choked start-up development even before the 2008 crisis.

“The new [Sarbanes and Oxley] laws and regulations,” a December 2008 Wall Street Journal editorial concluded, “have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the US, cripple the venture capital business and damage entrepreneurship.”

Costing vast sums to implement the burdens they imposed on small businesses and start-ups resulted—according to the National Venture Capital Association—in just six companies going public in 2008; this compared to 269 IPOs in 1999, 272 in 1996, and 365 in 1986. Nurturing start-ups became even more difficult after the financial markets crisis dried up credit and IPOs were restricted to companies with quadruple the annual income than before.

Besides this US-generated problem, Israel has many homemade problems. Though certain improvements were made in the worse aspects of its complex, rigid and costly incorporation and tax laws, Israel is still not a welcoming environment for “garage type,” individualistic start-ups, the kind that have proven most productive. Most capital for start-ups still comes from abroad. Israel’s oligolopolistic banks usually shun small enterprises, and hi-tech was no exception. Local companies tended to make their exits far too early, so that their immense potential has seldom been fully enjoyed by Israel.

IRONICALLY, THE worse danger facing Israeli hi-tech may be the bear hug of the government. Politicians and bureaucrats—chiefly President Shimon Peres, but also some in the Treasury—are so determined to nurture innovation that they may choke it to death. Back in the 1980s, Peres, a true man of vision (who has, alas, the inclination to implement it through massive government spending—a reason the Negev and the Galilee, two regions he repeatedly tried to develop by sinking billions in taxpayer money, remain economically and socially backward), tried to establish a government superfund to plan and rationalize hi-tech investment so as to minimize risk and duplication. Luckily the plan did not materialize.

The billions it would have raised did not end up in politically connected loss-making ventures, as happened so often in subsidized industries. Instead “neglected” hi-tech entrepreneurs struggled through the normal chaos of the market’s process of trial and error. Oblivious to bureaucratic dictates, markets rewarded, as usual, some risk-taking entrepreneurs while weeding out the less talented or fortunate. On the whole, their performance was stellar and will continue to be so if left alone. Yet the lesson apparently did not sink in, and we again hear talk about massive government support and “direction” for hi-tech development.

Israelis believe that the army, a government body, was the chief catalyzer of hi-tech development. While the army’s hi-tech units were an excellent magnet for talent, providing it with purposeful objectives and a can-do attitude, this does not prove that other methods of selection could not have been more efficient. Just note that most known Israeli innovations were not done in the army or in other institutional settings, even those affiliated with our research universities.

This should not surprise those who understand that individual initiative and freedom are essential for creativity, in hi-tech as in all other spheres.

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You could feel right away, in conversation with Rose Friedman—who died in August at 97—that this petite lady with the twinkling eyes and sweet smile was responding to every word. But as she kept interjecting her razor-sharp, yet ever so gentle objections to seemingly rigorous propositions, you were startled by the realization of what a giant intellect this unassuming lady possessed.

It is a tribute to her great economist husband Milton that he treated Rose as his intellectual equal, a true partner, even as he was sometimes discomfited with her insistence on questioning what seemed like self-evident truths. Rose never accepted any assertion, even Milton’s, as revealed truth. This constructive skepticism was no doubt her great contribution to the refinement of Milton’s ideas. Milton seemed to think so.

That Milton’s acceptance of Rose as his full partner was rather exceptional is a testimony to the fact that despite the great advances made in men’s attitudes toward women, women are still not fully recognized as equals (though different, thank God). Rose must have had a strong sense of self, and did not seem to pay much attention to how she was perceived by the public. She fully, if modestly, knew her worth.

USUALLY IT is opposites that attract. But in the case of this exceptional couple, it was the similarity. “Milton has grown up,” Rose related, “as I have, in a small town. He was not exposed to many things that other kids were exposed to. He was more intellectual than I, but not too much… that is what drew us together. We came from the same background and therefore our ideas were the same.”

When they were seated next to each other in an economics class (arranged by alphabetical order) their affinities blossomed into full love. “She is a wonderful person,” Milton said, “very warm and thoughtful, and very much concerned with other people’s welfare rather than with her own.”

This was surprising praise by a thinker who seems to have assumed that people act out of calculated self-interest.

Former secretary of state George Schultz pointed out in one of the last public celebrations of Milton Friedman’s birthday that in our era it was Milton whose ideas had the greatest beneficial impact on the wellbeing of humanity.

His indefatigable and effective advocacy of free markets, his fashioning of the instruments (floating exchange rates) that made free international trade easy, his discovery of the monetary origins of runaway inflation that made it possible to control this devastating plague (in Germany it spawned the rise of Nazism) his ability to convince leaders in American, Britain, China and India (and yes, even in Israel to an extent) that the market economy, despite its obvious imperfections (which, alas, afflict any system devised by homo sapiens), is by far the most successful economic system ever spontaneously evolved by mankind – helped transform the world.

Milton explained that not only is the free market the most powerful engine for the creation of wealth and wellbeing, its incessant innovation and encouragement of competition also resulted in the spreading of wealth and human welfare ever more widely, albeit not equally. Market economics has enabled billions of people, Milton reminded us, to overcome grinding scarcity and hopeless penury. It liberated them from the bondage of material and political slavery. It gave billions their first chance to participate in the pursuit of happiness and to start realizing what is human in mankind.

MILTON HAD a rare gift for translating complex economic issues involving sophisticated mathematical calculations into easily understood (though fiercely resisted) policy propositions. But he could not have made these propositions so widely known and understood without Rose, the co-author of their seminal work Free To Choose (the film series, and the book).

It was this collaboration that enabled their ideas to have a great impact. Milton fully shared the credit for this daring intellectual undertaking that has transformed the economic understanding of billions of people, helped elect Ronald Reagan and consequently brought such huge benefits to so many people, especially in less developed countries.

Gertrude Stein famously characterized “rose is a rose is a rose” uniquely, sublimely, poetically so. This particular Rose Friedman was more than the multi-leaved, many-hued and variously-scented outcropping of bounty that we name a rose. She was a rare amalgam of a quintessentially American optimism, of feminine grace and courage, and of Jewish loving-kindness. It was at the root of everything she did. It showed in her special concern for Israel, and in her affection for the Jewish people.

Perhaps this is why it was difficult to discern her great intellect. Indeed this may also be the case with another star in the firmament she shared with Milton, her outstandingly creative brother, Aaron Director, one of the greater economic innovators of our era that too few appreciated. They both lacked, it seems, a definable academic status that makes for easier recognition.

This did not have the slightest effect on Rose, as far as one could see. She persisted in being a rose, no matter what.

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In the Palestinian Authority’s chaotic world, Nablus, a center of Islamic militancy, has just inaugurated a cinema. Young professionals watch American movies and then crowd into new fashionable coffee shops to discuss business and entertainment.

In relatively peaceful Bethlehem, however, a Fatah conclave attempting to reconcile its warring factions erupted in riot.

Recent reports of prosperity returning to the impoverished West Bank cities were truly astonishing. Arabs usually pour fire and brimstone on Israel when talking to the press. Now they are talking about how a reduction in terrorism enabled Israel to remove barriers in the West Bank and generated a dramatic economic recovery (7% growth!). Well-groomed young Palestinian Arab men, and amazingly also women, fearlessly told Israeli TV how terrific it was to ignore inflammatory politics for a while and enjoy life instead.

But the fights in the Bethlehem Fatah conclave were a reminder that belligerency still dominates Arab politics and may frustrate the yearning for a respite among a more prosperous, younger generation. Unfortunately, the politics of violence is generously rewarded by various “peacemakers” who help foment major crises out of minor issues.

TAKE THE issue of Jewish settlements in the West Bank. They are supposed to be an insurmountable obstacle to peace, choking Palestinian growth. But they occupy less than 4% of the land in a 90% empty West Bank. There is plenty of space there for everyone, and Jews should be able to live there just as Arab Israelis are allowed to live in Israel. Still, even Palestinian Authority Prime Minister Salaam Fayad, a respected economist who understands the crucial importance of peace for development, had to run on an Israel-bashing platform to stand any chance of election.

The Fatah conclave resulted in a takeover by a younger, more radical generation. They unseated President Mahmoud Abbas’s cronies, who lived high on the billions in aid money. These “young Turks” (most are 50 and older) are determined to get their share of this booty, and for this, militancy serves them well. For decades Arab terrorism has kept the UN, the State Department, European chancelleries and legions of “human rights” organizations pushing for a Palestinian state as if it was the only human rights issue in the world, no matter how brutally the PA is already treating its people. No one seemed concerned by the likelihood that an irredentist Hamas-style state will wage a bloody jihad against Israel with Iranian help.

The hope for a quick political fix that more Israeli “accommodations” will produce springs eternal, as the present Obama initiative proves. Most policy wonks seem indifferent to the proven connection between the rule of law, economic development and a less militant political culture. But the fact is that for two decades, from Israel’s occupation of the West Bank and Gaza in 1967 to the first 1987 intifada, the disputed territories enjoyed an intense “economic peace process.”

Israeli occupation maintained a framework of law and order, and the integration of these backward territories with the advanced Israeli economy let them flourish economically and socially. Arab agriculture was revolutionized, employment was full, the population’s standard of living quintupled, while health, education and women’s rights all advanced dramatically.

TRUE, OCCUPATION, even a relatively benign one, will provoke resistance. But could not other creative political arrangements be devised to encourage moderates among the Palestinian Arabs and suppress the radicals and terrorists, so as to permit continued economic growth and the evolution of a peace-seeking civil society? Instead the Europeans, the Americans and, yes, the Israeli peace camp promoted radical Arab factions. The Oslo agreements imposed the rule of a terrorist organization. The disasters that ensued were predictable.

It took decades before the US managed (through Gen. Keith Dayton) to help train Palestinian militias to restrain terrorist activity in the West Bank, because it was impossible to convince Arafat and later Abbas that the West Bank could be taken over, like Gaza, by Hamas terrorists. When Arafat consistently, and Abbas intermittently, did everything to inflame the conflict and encourage terrorism, little was done to stop them.

Pending a political resolution, could an interim cessation of hostilities not have been enforced in the West Bank and Gaza long ago to assure peace-promoting economic development and the creation of a civil society? Would it not be more productive than providing billions to radical leaders, assisting them to build militant dictatorships?

Lasting peace must grow from the bottom up, from an “economic peace process” that proves what advantages peace has to offer on a daily basis. It cannot come from signing peace agreements with radical and corrupt entities propped up by corrupting Western handouts.

Prime Minister Binyamin Netanyahu suggested that Israel initiate such an “economic peace process” to accompany the political one. The Palestinian leadership, habitual naysayers, responded with contempt. They obviously prefer their masses to be miserable so they can exploit their rage for a jihad against Israel.
But even some less-opinionated politicians and pundits accused Netanyahu of using the economic initiative to delay instant political salvation.

Perhaps the young Arab men and women interviewed recently on Israeli TV had a message for them that should be taken seriously?

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The film The Scrambled System (Shittat Hashakshuka), recently aired on Channel 1, has provoked a stormy debate around a vital issue: the close connections between our oligarchy, the dozen-and-a-half families that control Israel’s economy, and our top politicians and bureaucrats. The media generally deals with this sensitive issue only episodically, in generalities, without naming names or exposing concrete instances.

Miki Rosenthal, the maverick producer-director of The Scrambled System has focused on the Ofer brothers, among Israel’s greatest oligarchs, and their relations with the government. He has done so with great courage but in the worse possible manner. Once the scandal his film unleashed will subside, all will be quiet again.

The Scrambled System paints a simplistic world view (the film’s name reflects a quote from one of Israel’s top lawyer-”machers”, who describes how when negotiating with government officials on behalf of his mogul clients, he “scrambles all the offers together and gets a sort of an average, usually slightly favoring his clients,” he boasted).

On the one side are the good guys, justice-seeking fellows like Rosenthal’s late father who allowed his carpentry business to go bankrupt because he would not fire workers during a recession (he subsequently died of a broken heart). On the other side are the bad guys, all the money-grubbing businesspeople, who cheat, exploit and even endanger consumers’ lives in their obscene pursuit of profits.

The world of creative enterprise, of millions of devoted hard-working entrepreneurs and workers who sustain the phenomenal advance in the well-being of billions of people, is entirely absent from Rosenthal’s Manichean world. They simply do not exist in a world fashioned by the Marxist pornography that most Israelis still endorse. Israelis believe that profit inevitably comes from exploitation. Therefore money-making is born in sin (Marxism has embraced this Christian belief and dressed it in pseudo-scientific terms). The mere fact that someone is making money is proof that he is evil.

This is, of course, a self-fulfilling prophecy. If one believes that business rests on fraud and exploitation, one will act so, as some Israeli businesspersons and oligarchs indeed do.

Rosenthal’s film therefore perpetuates very pernicious prejudices about business. Such attitudes prevent us from addressing this serious problem of collusion between capital and government. Few bother to ask how the situation arose that politicians and a bunch of government bureaucrats, high and mighty as they may be, can dispense with properties and privileges worth many billions? How is it that they are allowed to allocate huge benefits in monopoly rights, tax exemptions and such, to the politicians’ cronies at the taxpayers’ expense?

It was not by accident, of course, that our government and the Histadrut Labor Federation possessed all those huge assets that were “privatized” in bargain fire sales to well-connected oligarchs who paid for them with credit they received from our nationalized banks. It was the inevitable result of the huge concentration of economic power in the hands of government and the Histadrut that was created by almost a hundred years of Socialist dominance of the Israeli economy. It was this huge concentration of economic and political power in the hands of politicians and oligarchs that caused the corruption both of our politics and our economy.

It was also not by chance that true privatization—which means a decentralization of ownership and the enhancing of competition—has never happened in Israel. It was not by mere chance that most of the “privatized” government or Histadrut enterprises were “sold” to cronies at bargain prices and that as a result the concentration of assets increased in the hands of the few and competition was stifled. Nor was it by chance that big business has been winning most government tenders by offering very low bids, and then, after winning the tender, employing a battery of lawyers and accountants to jack up the price of the project for which they bid.

Is it, furthermore, just a coincidence that almost all former Bank of Israel bank regulators are now working for the banks which they earlier regulated; that they help them maintain their rapacious oligolopolistic practices under the pretext that it helps “bank stability”? Is it only a coincidence that many former high government officials are hired by our monopolies and paid fabulous salaries and perks to help them exploit the poorly paid Israeli consumer by overcharging them on practically everything they consume? Is it by chance that in an economy whose labor work rules have been dictated by the Histadrut—the workers federation that represents mostly public monopoly labor unions—a “work ethic” was created that makes the capable Israeli workers produce about half what an American worker does, with the result that Israeli workers are paid shamefully low wages that do not enable most families to make ends meet? No, it was not by accident that the huge Workers Enterprises Union (Hevrat Ovdim) as well as the kibbutzim and moshavim were first to go bankrupt despite the huge privileges they enjoyed.

In the childish dichotomous world of The Scrambled System there are only evil businessmen versus virtuous workers. The corrupt political system that is crucial to promoting a collusion of government with the oligarchy is neither explained nor analyzed. This is why the film is part of the problem and not of the solution.

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Everyone lost in the recent budget struggle. A heavy economic toll will be exacted from the public.

Prime Minister Binyamin Netanyahu and Finance Minister Yuval Steinitz paid a heavy political price for giving the Histadrut much without receiving much in return. Does anyone believe that after getting more than it expected, the Histadrut will still help implement difficult reforms in the Israel Lands Administration, the Electric Corporation and the ports, as it presumably promised to do?

Ehud Barak’s support for Histadrut boss Ofer Eini’s outrageous demands exposed his weakness in the Labor party, where Eini is dominant. Eini acted just as any union boss dependent on the militant unions of public sector monopolies would. He extracted on their behalf concessions worth billions of shekels by nixing the government’s intention to impose a wage freeze on public sector employees.

Even worse are the changes in employment law that the government conceded. If enacted, they will make the already sclerotic labor market weaker still, at a time when an employment disaster is looming large. It is hard to imagine what could be worse for workers than greater rigidity of the job market – except for higher taxes, and we got them too. The highest price for all these distortions will be exacted from the low-wage earners, those whom the Histadrut repeatedly claims it wishes to protect.

As for the Manufacturers Association’s chairman Shraga Brosh, he simply exploited the crisis to get more handouts from the government for his constituency – the biggest firms in the country – at the expense of medium and small businesses. That is how the Manufacturers Association traditionally behaves: It works on the line to Jerusalem seeking government handouts, rather than on the production line.

NETANYAHU APPARENTLY decided that he must focus entirely on the existential problem of a nuclear Iran. He announced before the elections that he would spare no effort to create a wide coalition, including Labor. In a crisis situation it is desirable that the nation know its government takes into consideration diverse viewpoints, and that leaders with Barak’s military experience participate in deliberations. It also helps that foreigners – friend and foe alike – know that the prime minister enjoys a broad basis of support when he makes tough decisions.

In our chaotic politics, Netanyahu was forced to pay a heavy price for his less-than-ideal coalition and his desire to pass a budget in time. His “partners,” mainly Barak and Eini, understood how much he needed them, so their demands knew no limit. They ignored how badly their bargaining tactics, bordering on blackmail, reflected on our politics. They tried to fool the public by describing their harmful sectoral demands as being in the general interest. The huge budgetary overspending they got will exempt privileged overpaid monopoly workers from doing their share of belt-tightening. It will cost some NIS 5 billion a year in additional interest, mandating cuts in welfare, education and security. This is how “they protect the weak” and help the economy withstand a dangerous crisis.

THE LITTLE GOVERNANCE ability left in governments was badly damaged as well. The Treasury’s Budget Department, a bastion of fiscal responsibility, was not creative enough to offer any growth-oriented measures, any positive vision. It stuck to its focus on securing the government’s take from taxes, as if it was sacrosanct, as if profligate government spending justified imposing on an already exhausted public and business sector (the politically weaker small and medium enterprises – big business gets many exemptions) ever more punishing measures.

The unbelievably brazen behavior of some of our oligarchs toward Bank of Israel Governor Stanley Fischer, a stellar public servant, also indicates lack of governance. They have contemptuously rejected the demand by Fischer that they take responsibility for almost bringing to ruin the country’s second largest bank and resign. They outrageously accused the governor of McCarthyism and of lying, while calling for “restraint and level-headed thinking.” These oligarchs acted so because they believe that, as in the past, their highly paid lawyers, their costly lobbyists and their supporters in the media and the government will help them intimidate anybody that dares cross them and call them to heel.

BUT WE MUST not get enmeshed in the past. We must urgently prepare for an uncertain future. The global economic crisis is not over yet and may erupt further in immense force and unpredictably. Only economies which are efficient and resilient will be able to weather the storm without extensive damage.

Netanyahu can rehabilitate his political standing if he courageously reduces taxes, recently recommended by the distinguished economist Martin Feldstein as the best antidote to the crisis and a stimulus for growth. Netanyahu could also abolish, with help from Steinitz, the monopolies whose huge “monopoly tax” on consumer goods make them so expensive. By introducing competition, prices could be reduced by 25 percent, increasing the purchasing power of low-earning families in particular – even raising many of them above the poverty line. This would save billions in government aid to the needy and ease the grave budgetary deficit.

Forge ahead then, Netanyahu.

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Binyamin Netanyahu’s recent economic plan has great promise. But it faces obstacles that may undermine its success. Israeli governments have serious governing problems; 75 percent of their decisions are never implemented (perhaps mercifully, since those that are create enough mischief). Netanyahu’s extra large government makes governing more complicated, especially since some key ministers have little experience.

The country’s monopolistic system creates even greater obstacles. Powerful vested interests, oligarchs, monopoly unions and bureaucrats control the economy. Aided by a media mostly hostile to anything Netanyahu does, they will fight reform ferociously, especially if it threatens the “system” that they so profit by. Unless they can be neutralized, they may defeat necessary reforms.

The reforms’ success depends heavily on Netanyahu’s unusual (among politicians) economic understanding, and on his even rarer willingness to pay heavily politically to implement them. Past experience teaches, however, that despite his extraordinary achievements as finance minister—Netanyahu saved the economy from an Argentina-like collapse and changed two decades of no growth and deep recessions into five years of spectacular growth—his rivals did manage to prevent the completion of his reforms.

Key media outlets framed him, in a total reversal of the truth, as cruel to the poor and as ruining the public’s pensions, when he actually saved the poor and saved Histadrut-run pension funds from bankruptcy. Many also caricatured him as the champion of the rich when in fact he was the only politician who dared challenge their banking duopoly and broke it. Consequently reforms in financial markets and in the ports were not completed.

The Histadrut still fights to squelch the little competition introduced in the ports, and the bankers, with media support, try to reverse the financial markets reforms and to do away with essential boundaries erected between banks, insurance companies and other financial institutions. As the recent collapse of CitiBank and AIG insurance teaches, the absence of boundaries allows serious conflicts of interest and the spread of the crisis to various financial sectors, creating a fearful domino effect.

The global economic crisis is not over yet. Attempts by the American government to restrain it at a huge cost and great risk have not been too successful. The crisis may erupt again at any time, and in an unforeseen manner and scope. Only strong, resilient economies will weather it. Our economy has been spared the worse so far, but it is neither that strong nor resilient.

HOWEVER, THE CRISIS is also a historical opportunity to reform the economy.

Financial markets, especially banks, are still not competitive or efficient. It is vital during this crisis to expand credit, yet it is doubtful whether government guarantees and cash injections will help so long as bankers doubt the ability of their greatest creditors, the oligarchs, to repay their debt; bankers are justifiably worried about the adequacy of their capital base. Only a major efficiency drive can secure the banks. But the bankers and the bank workers union resist it. The government must therefore condition any help for the banks on their becoming efficient and on their helping to complete financial markets reforms rather than obstructing them.

Mass unemployment is another serious danger. Fortunately Histadrut chairman Offer Eini seems like a smart and pragmatic man. He must understand that he can’t protect jobs without massive government assistance. In return, he should help with eliminating monopolies and distortions in the labor market, especially in the public sector.

True, monopoly unions control the Histadrut. Yet who but Eini could convince them that it is impossible, during a grave crisis, to preserve a distorted labor market without paying a heavy price in employment and wages. It is also impossible to secure the “social justice” that the Histadrut preaches by discriminating against weaker workers and protecting costly tax privileges for so-called “advanced training funds.”

THOSE NEEDING further proof for the severe damage inflicted by our bureaucracy should read the sensational revelations in former accountant-general Yaron Zalika’s book The Black Guard. Zalika details the depth and scope of the problem of bureaucracy – its many billions in waste and damages, alongside its strangulating effects. The venomous attacks on Zalika prove that he hit a very sore spot.

Unless our bureaucracy is curbed, it will continue to economically lame us. Instead of devoting their energy to increased production, Israelis will keep spending it on struggles over government hand-outs. Time will tell whether the very intelligent Finance Minister Yuval Steinitz will have enough political clout and experience to control this plague.

Zionism’s vision of making the Jewish people productive has faltered in part because our media, part of our left-leaning elite, constantly foments the politics of envy and the culture of “you owe me.” It is obsessed with who should get what from government. Public broadcasting is controlled by a sect of economic ignoramuses who deny freedom of speech to anyone who differs with its regressive government hand-out ideology. It had the temerity to cut the prime minister in the midst of his economic policy presentation and insert its biased commentaries, showing its habitual contempt for the public’s right to know the facts first.

The government will not be able to implement crucial reforms without public support. Failure to address resistance to its reforms may result in their defeat and weaken the economy in times of crisis and beyond.

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Is Binyamin Netanyahu’s government too big? Yes. Is that good? No. So why would Netanyahu, an experienced politician, create such an unwieldy beast? He and his government face two historic challenges: an economic crisis that has yet to fully unfold, and a nuclear threat from Iran.

We all want a government that can face these challenges. Could Netanyahu’s critics suggest a better alternative to the coalition he managed to form, considering the sanctimonious refusal by Kadima to join a wider coalition?

Netanyahu would probably prefer a more compact government. No one has suffered more from coalititis—the disease afflicting our body politics—than he.

When previously prime minister, he had to devote most of his time to political survival, fending off his many adversaries from the Left and Right. They so exhausted him that he was unable to carry out most of the excellent reforms he had planned.

As finance minister, Netanyahu proved exceptionally able to push through crucial reforms when given a chance. When he enjoyed the backing of prime minister Ariel Sharon, Netanyahu exhibited not only an ability to frame and execute major reforms, but also a willingness—so rare among politicians—to pay a heavy political price to get them enacted. He succeeded in saving the country from an Argentina-like collapse, and in transforming 20 years of no growth and deep recession into five years of spectacular growth. But he paid for his boldness and determination by losing an election.

SO YES, Netanyahu’s first task was to establish a (relatively) stable government that will allow him to handle the challenges facing the country with a modicum of a national consensus. This required as big and as varied a coalition as he could get. In politics, especially in our politics, there is no free lunch, so Netanyahu had to pay with a large and costly government. However, should Netanyahu—as he probably intends—manage to use this wide coalition to push through even some of the reforms he spoke about, especially in land use and education, the savings from these reforms, the bureaucratic waste they will cut and the efficiency they will generate will pay in spades for the additional costs of his big government.

So what some condemn as wastefulness may turn out to be a wise investment in facilitating basic reforms that have enormous potential returns.

IF YOU WANT to appreciate how intense is the personal and ideological animus that certain critics in politics, but especially in the media, have toward Netanyahu precisely because he is not part the cabal that dominates both our politics and our economy, precisely because his reforms are the only real challenge to the corrupt system of spoils that enrich them, just examine the maelstrom of criticism that greeted his appointment of Yuval Steinitz as finance minister.

True, it may have been better had Netanyahu found an accomplished economist to serve as finance minister. But a good finance minister needs qualities even more rare than a knowledge of economics (which Steinitz, a very capable man, can acquire in a reasonable time). Steinitz certainly has integrity, a keen intelligence, a good temper, a knack for teamwork and loyalty to his mentor, Netanyahu. Above all, in contrast to almost any economically savvy candidate for the job, and certainly any candidate with former economic or business experience, the very fact that Steinitz does not come from such a background may prove a refreshing guarantee that he is neither tainted by nor beholden to any of the vested interests that dominate the economy.

I invite our readers to list those they consider qualified and experienced candidates for finance minister, and to find one who would not come loaded with baggage and representing vested interests. A clean slate can have immense advantages.

MOREOVER, UNTIL he learns the ropes Steinitz will be helped by a prime minister who, unlike most politicians, has an excellent understanding of economics, and of how vital a healthy economy is for the survival of a country. Netanyahu also knows what must be done to assure that the economy gets well.

Steinitz will also be helped by an excellent professional team, the “treasury boys” as the enemies of reform often refer to them. Last, but certainly not least, he will enjoy the advice and backing of our exceptional Bank of Israel governor, Stanley Fischer, a top-notch economist of international fame. Steinitz will not be facing the crisis alone.

Yes, it would be great if circumstances had allowed Netanyahu to form a smaller, more efficient government based on a stronger Likud. But under the circumstances, he should be congratulated for his determination and skill in forming a government that may yet do great things, especially in economic reform.

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The government must bail out those of our tycoons who cannot redeem NIS 100 billion worth of bonds, several leaders of our economy urged Prime Minister-designate Benjamin Netanyahu recently. Otherwise, they warned, these tycoons will go under and our economy will disintegrate.

A growing campaign, led by seemingly disinterested public figures and prominent media commentators (some known for their consistent advocacy of the Hapoalim-Leumi bank duopoly), are urging the government to spend billions of shekels of taxpayers’ money to bail out some of the country’s billionaires. These “tycoons” financed very speculative, highly leveraged real-estate deals in Eastern Europe and Las Vegas with money raised here. Now that the deals have gone sour, the taxpayer is asked to rescue them.

True, if the tycoons default, the consequences may be harsh, but a massive bailout may have considerably worse consequences.
Spending billions on a bailout will push the government deficit to untenable heights, forcing it to print money and driving up inflation. It would probably lead to stagflation – a destructive state from which Israel emerged in the past only with extreme difficulty.

Another bailout scheme, in which the Bank of Israel buys corporate bonds, is tantamount to government lending money to the private sector. It would also increase the government debt, which already amounts to NIS 500 billion (without counting the NIS 500 billion the government owes for underbudgeted pensions).

Both measures will shift resources from the productive private sector to a wasteful public sector. They will drive up the price of money and credit, making them too costly for entrepreneurs, and will therefore curb growth.
In short, the cure may prove worse than the disease.

SO WHY NOT grab this opportunity to heal the economy by breaking the stranglehold monopolies have over it through the tycoons’ vast holdings? Monopolies and duopolies curb competition, promote inefficiency and raise the cost of doing business. Why not have the tycoons sell shares to repay their bonds, even if this means they lose control over some of their enterprises? Why force the taxpayer to rescue owners and managements that failed so miserably?

Shrinking world demand may have a devastating impact on the export industries that make up such a large part of our GNP. To survive, Israel will have to compete fiercely, and it will not be able to do so unless it becomes far more efficient. To promote efficiency, our economy must be structurally overhauled and the great concentration of economic power (and political clout) in the hands of a few tycoons must be diminished. As Galia Maor, COE of Bank Leumi noted: “Only in time of crisis can one carry out reforms and structural changes… we must seize the opportunity.”

Those calling for a government bailout point to similar steps taken by the US. But luckily the crisis here is different from that in America, where the government is dealing with a deep crisis of confidence that threatened the US financial sector with collapse, as well as the burst of a huge mortgage bubble that saw asset values nose-dive. Nor is it certain that steps taken by the desperate Americans are going to work.

CONTRARY TO WHAT many anti-capitalists in our media, academy and elites want us to believe, the current financial crisis was not caused by the free market and greedy capitalists. Like all major economic crises, it was caused by massive government intervention that perverted markets.

First, the Fed created massive amounts of cheap credit. Then the Clinton administration mandated the sale of tens of thousands of worthless mortgages. It is doubtful that yet more massive government intervention – politically tainted, fumbling and inefficient – can repair the damage done by government in the first place.

There are many voices in America objecting to bailout schemes, though our media do not report it. Recently, 200 prominent economists, including Nobel laureates, took out ads in major US newspapers declaring that “notwithstanding reports that all economists… support a big increase in the government burden, we do not believe that more government spending is the way to improve economic performance.”

These economists cited the failure of presidents Herbert Hoover and Franklin Roosevelt to overcome the Great Depression with increased government spending, and the “lost decade” in Japan caused by a similar failure in the 1990s. “As such, it is the triumph of hope over experience,” they continue, “to believe that more government spending will help the US today. To improve the economy, policymakers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.”

This is even truer for Israel, where such impediments are the rule rather than the exception. Removing bureaucratic constraints on land, labor and capital can create a great spurt of growth. Look at how impressively recent financial reforms affected growth here. Completing the financial reforms and launching more is the best way to handle the crisis. Luckily, there are indications that this is what Netanyahu intends to do.

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Last week, Secretary of State Hillary Clinton told Israeli Prime Minister-designate Benjamin Netanyahu that the US does not want to be restricted by “old formulas” when it comes to the peace process. As she works on a new approach, she may want to ask why costly diplomatic efforts have not led to Israeli-Palestinian peace but to ongoing war.

Though billions of dollars in “aid” have flowed into the Palestinian territories, there is still no Palestinian state, nor security for Israel. With no effective restrictions on this aid, Palestinian leaders used it to bolster terrorist groups and fight Israel, rather than build their society.

In order to succeed—finally—peace efforts need to create positive incentives. An economic peace process can create such a reality, as it has in the past until political obsessions interrupted it.

Following Israel’s conquest of the West Bank and the Gaza strip in 1967, Gen. Moshe Dayan wisely let the Palestinians manage their economic affairs.
His “open bridges” policy facilitated the free movement of goods and people, and brought prosperity to the private sector. Hundreds of thousands of Palestinians were employed in Israel for much higher wages than under Jordanian and Egyptian rule. Living standards quintupled and agriculture, manufacturing, education, health and the status of women and children rapidly improved. Arabs enjoyed freedom of movement in Israel, yet there were practically no incidents of terrorism. Israelis shopped and ate in Arab towns. Their spending provided a lion’s share of a skyrocketing Palestinian GDP.

This informal peace process was resisted, however, by traditional Palestinian elites. Modernization threatened their beliefs and their privileged status. Then, in 1987, an economic recession and harsher interference by Israeli bureaucracy in Arab life ignited an intifada that was taken over and politicized by the Palestinian Liberation Organization (PLO). Yasser Arafat’s PLO killed whatever economic cooperation remained.

Today, many policy makers advocate a total separation between Israel and the Palestinians. But the latter cannot develop a prosperous economy and a viable state in economic isolation. Separation will result in economic ruin, as has already happened in Gaza. Israel and the West Bank are simply too small and too geographically integrated to support two economically divided entities. The fates of Israelis and the Palestinians are economically intertwined.

Jerusalem provides a good model of economic integration. The city has a large population of Israeli Jews and Palestinian Arabs living in close proximity. The latter are ardent Muslims, and most Jews in Jerusalem do not belong to the peace camp. Yet despite strenuous efforts by Palestinian terrorist organizations to inflame the city with repeated attacks, income from tourism has been so rewarding that Jerusalemites coexist without too many problems.

Wide-scale prosperity can come to the West Bank and Gaza by providing direct aid to Palestinian families still living in refugee camps. Unlike previous failed attempts, when aid was given to a corrupt Palestinian Authority, refugee families should get cheap loans and/or grants. Infrastructure construction should be allotted by competitive bidding to small and medium-sized Palestinian firms, not to politically connected mega-contractors. And to further perpetuate economic growth, the monopolies that now strangle both the Israeli and the Palestinian economies (often the same ones) must be broken.

For centuries, civilized Europeans slaughtered one another and political solutions were unable to stop the carnage. Then the creation of a European economic community shifted political priorities and peace came to reign. A similar process can lead, again, to peaceful developments in the Middle East. With no viable alternatives it’s certainly worth trying.

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Prof. Uzi Arad, founder of the Herzliya Conference and the tough former head of Mossad research, is not usually given to soul searching. The audience of VIPs that listened to his farewell speech on leaving Herzliya for a top security job therefore reacted to his public expression of anxiety with stunned silence.

“I lie awake at night,” Arad confided, “fretting over Israel’s mishandling of the present danger from Iran. We have wasted precious years doing little about this danger; many in our political elites are ignorant, are in denial and cynical. They are deluded by a false messianic fervor, an irrational pursuit of peace. This prevents them from tackling the real dangers facing us.”

Unfortunately the media did not even bother to report Arad’s dramatic warning and his assertion that the right steps may still save the day. His assessment that decision makers are paralyzed was given added credence by an earlier Herzliya conference panel devoted to governability.

DEPUTY PRIME MINISTER Haim Ramon, who knows this great behemoth, the government, inside out, opened the session by warning prospective prime ministers that even if they succeeded in climbing the slippery pole of coalition making they ”...could not accomplish a thing… the ability to govern of any prime minister is close to zero, and his chances of surviving long in his job is small.”

Ramon regaled his audience with hair-raising stories on the impotence of governments here. He explained why more than 75 percent of government decisions never get implemented (some would probably add thank heaven, since with the 25% of decisions that are implemented, the government manages to do enough harm).

What Ramon did not explain is why in the many top political positions he has held, he did not tackle governability; why as deputy prime minister he speaks as if he were an outsider critic, when he surely must have had the chance to at least agitate for reform from a position of strength.

A MORE “common sense analysis” of the difficulties of governing was offered by Dror Strum, head of the Israel Institute for Economic Planning. Governability can be first assessed by a formal yardstick, the percentage of government decisions that are implemented, and then by how full and timely the limited implementation is. The government’s ability to govern is strongly limited by external constraints imposed by our political structure, such as the width of coalitions, their cohesion and the accountability of Knesset members. However, these are problems that can only be resolved by electoral reform, Strum noted.

But there are also internal constraints that can be removed. Strum emphasized the overwhelming role of bureaucratic barriers and bottlenecks created by the Treasury and the Justice Ministry, aggravated by the growing tendency to “legalize” every problem. Coordination between the legislative and the executive branches, and establishing greater accountability by mid-level management, could solve some of these problems.

Strum also analyzed some of the conflicting values and principles that bedevil government. Governability – the right of our elected representatives to implement policies – is at the heart of our democracy. Yet it is constrained by conflicts between good principles of management and a restrictive administrative law. Managers cannot set priorities, enforce discipline or reward those who excel. They have no flexibility in using resources and manpower. Critical decisions depend on hard-to-achieve agreement among several bodies, such as the Treasury, the Justice Ministry and various agencies. There is a separation between management and budgetary control and little ability to measure outputs. Administrative law also empowers bureaucrats to decide “the reasonable way” to implement policy, enabling them to finesse ministerial decisions.

The result was no less than administrative paralysis and government impotence. Strum proposed to legally sanction orders of priority and accountability so that bureaucrats could be replaced if they failed to implement policy; to establish a regulatory roundtable entrusted with national decision-making; to require the prime minister to decide in cases of disagreement between ministries; to increase the budgetary flexibility of various ministries.

All these measures would certainly strengthen the government’s ability to govern. However, it is questionable whether such reforms have even the slightest chance of being legislated or implemented. The very barriers and inabilities Strum described could stop such reforms.

THE CRUX of the problem, not even mentioned by the panel, is the government’s huge size and imperial ambitions. No entity in the world – even if it had dream management and bureaucrats faithfully implementing its wise directives – could succeed in the mission impossible called governing here.

There is no way any organization can implement the hundreds of objectives, many of them contradictory, that the government, a body usually paralyzed by fierce political infighting, undertakes. Even the minimal, legitimate role of government – protecting us from internal and external violence and enforcing contracts – is immensely complicated and difficult. So how can we expect that government, disorganized by nature, could succeed in its many undertakings, that it can provide us with security, a good living, excellent education, health services and even manna from heaven.

In fact, as long as we saddle government with such impossible tasks, it will not be able to discharge its legitimate duties. Until we liberate governments from their excessive burdens and allow them to do the minimum required, all of us, not only Uzi Arad, better not sleep peacefully at night.

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Most politicians treat the world economic meltdown threatening Israel as if it is happening on the moon. So it is comforting that the candidates for prime minister recently described what steps they would take to forestall a terrible crisis.

The three agreed that because of the paralysis afflicting financial markets, which threatens to turn a recession into a deep depression, liquidity should be quickly injected into the system and consumer spending encouraged. This requires a significant increase in the government’s budgetary deficit. But the candidates disagreed about how to make use of the deficit.

Both Tzipi Livni and Ehud Barak want government to increase its direct expenditures. Livni is vague about how. Barak wants increased government spending on security, health, education and, of course, infrastructure. Labor and its allied oligarchs have always greatly benefited from government spending, even when it damaged the economy.

The problem is that government is already overspending in all these sectors. More spending would not enhance economic activity, except perhaps marginally. It would, more likely, increase inefficiency and waste, two hallmarks of our bureaucracy. More government spending would help certain favored sectors dominated by our oligarchs, but would lower productivity as more and more resources are diverted to an inefficient and wasteful public sector and monopolies.

It is also doubtful whether an ambitious government infrastructure program could quickly create more jobs. Such projects take years to plan, and government usually implements them with great delays and cost overruns through politically connected contractors who are experts at bilking the public purse.

BINYAMIN NETANYAHU, on the other hand, proposes to create a stimulative macro-environment for firms by lowering business taxes across the board, since sectoral preferences often distort economic considerations. He also proposes lowering taxes to enable individuals to both consume and save more. The advantage of increased individual spending is that it enhances decentralization and competition. Consumers buy from a large variety of manufacturers meeting different needs and offering the best prices – namely, the most efficient. Consumer spending thereby increases economic choice and efficiency.

In contrast, direct government spending increases economic concentration since politicians prefer big business. It enables them to better control the economy and helps them raise campaign contributions. High costs and lack of access further limit participation of smaller firms in government tenders. This is why big business and its many cartels dominate the economy, and the country suffers from a concentration of economic and political power. Concentration leads to less competition, widespread inefficiency, inflated prices and the corruption both of politics and the economy.

A CRISIS CAUSED by a world wide economic contraction leading to shrinking demand will impact harshly on an export-dependent Israel. Therefore, it may not be wise to extend government intervention through yet more direct government spending. It will only make the country even less competitive than it already is, with disastrous results.

If government nonetheless decides to engage in direct expenditure, it should do so only on focused, well-defined projects, such as basic research. Basic research must initially rely on public funds: until it can be incorporated in products, it has little economic value and cannot attract investment. So Netanyahu is right in proposing such government help.

Netanyahu is also right in insisting that emergency government expenditures are not sufficient (as the failure so far of huge US government expenditures to stimulate its economy demonstrates). To enhance economic productivity and competitiveness, Israel must engage in basic reforms in its land, energy, electricity, water and ports, sea and air. All these sectors suffer from gross inefficiencies and low productivity, inflated wages and featherbedding. Their reform will require a brutal political war with the influential politicians who represent our oligarchs and other vested interests, such as the powerful public sector monopoly unions. A rough fight will also be required to complete the the partial (though already most beneficial) reforms in financial markets which bankers and their allies in the media are trying to roll back. It is most unlikely that either Labor or Kadima will combat these powerful constituencies.

THE POLITICAL BATTLE on how to use government deficit spending reflects an ideological battle between the adherents of Keynesian economics and free market skeptics. Keynesians believe that only governments can prime the pumps of an economy in severe recession or depression. Skeptics doubt that governments, no matter how well intentioned, are capable of such action even in a remotely efficient way.

While conceding that tax rebates do not always translate immediately into additional consumption (Milton Friedman demonstrated that consumer spending is based on a notion of “permanent income” and not on changes such as those created by temporarily lowered taxes), market advocates still insist that governments, even if ideally suited for the huge task of priming an economy, are not in reality capable of doing so in a measured or effective manner. Political pressures force governments to overshoot and support inefficient “rent seekers,” such as monopolies and cartels. And indeed wherever Keynesian measures were undertaken, the results (as Noble Laureate Robert Barrow recently demonstrated in a study of the New Deal) were disappointing – even disastrous. They resulted in little economic growth while generating high inflation or stagflation.

This may be because “government” or “public” funds are really private resources taken from individuals as taxes or loans. Their use by government usually means a shift from productive to wasteful and inefficient use.

The results are predictable, and they are usually not good. The policy choice for Israel is clear.

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“Bibi took your pensions away. He threw them into the financial market jungle, ruining your future. He imported a failed capitalist ideology to Israel and destroyed the economy.” So charge Binyamin Netanyahu’s adversaries.

It is legitimate, even desirable, to criticize politicians and policies. After all, even the most gifted statesmen have flaws, as we all do.

But it would help to base criticism on facts, and it seems the latest anti-Bibi torrent is anything but factual.

First, Israel’s pensions are in much better shape then they were in before Netanyahu’s reforms. The worldwide financial crisis has hit all financial institutions, including pension funds. Here, provident funds and executive insurance plans suffered a loss of about 15 percent – low compared with the 25% losses of foreign pension funds. These losses seem even less ominous when we remember that in the last five years these funds gained, even after their recent losses, an annual average return of 5%, which means that the funds are generally ahead.

Moreover, the funds that incurred these losses represent only 20% of the industry. Most Israelis belong to traditional pension funds that were barely affected. The irresponsible talk about the ruin of the pension funds is a lie.

The reality is that between 2004 and today, public assets grew from NIS 1.4 trillion to NIS 1.88 trillion – this after taking recent losses into account. Public assets have grown by a whopping NIS 500 billion, hardly a “catastrophic ruin.”

Those claiming such ruin are also liable to cause a panic that will really destroy the pension funds and financial sector. There is little more dangerous then a spooked public. A general panic in which savers flee the markets could cause an Argentina-like collapse. Thre country could then experience factory closings, spiraling unemployment, an insolvent government and real economic catastrophe.

We cannot expect desperate politicians to be sticklers for the truth. But we must insist that they avoid disseminating brazen lies that can cause an economic collapse. Even politics require some restraints. Our national savings are so far in good shape, and our leaders must face this bitter truth even if it is politically inconvenient.

More facts: Contrary to allegations, pension funds were not first thrown into “the market jungle” by Netanyahu. They were shunted to financial markets by Shimon Peres and Avraham Shochat in 1987. It is the height of chutzpa for them to pillory Netanyahu for a move they initiated, and for which they – justifiably – claimed credit at the time. Peres and Shochat can be proud that “throwing” the pension funds into “the capitalist jungle” has not only brought far higher returns for the funds, but also benefited the economy by steering Israel’s savings into productive investments, creating growth and employment.

Another fact: Massive government interference in the US economy played a huge part in the present financial collapse, precipitating the “market failure” that anti-capitalists blame. The ground for the crisis was laid by the “Fed” when it pumped massive amounts of cheap credit into the US economy after the 2001 dot.com bubble collapse. It was precipitated by the Clinton administration and Congress, which forced two semi-governmental entities, Fanny Mae and Freddie Mack, to grant mortgages for more than $5 trillion to borrowers without valid guarantees. These governmental actions enabled irresponsible bankers and brokers to inflate the sub-prime bubble. Generally, big government plays a crucial role in huge crises such as the present one or the 1929 Great Depression.

But why not exploit the crisis to destroy what little freedom Netanyahu’s reforms brought to the economy? Why care if the country will lose its only hope of deliverance from the economic retardation caused by our statist heritage?

To discredit Netanyahu, our left-leaning media are inventing spins that convert day into night and night into day. They are trying to convince us that Netanyahu – whose reforms in 2003 saved workers from massive unemployment and the Histadrut-despoiled pension funds from collapse – is the enemy of workers and pensioners; that he who broke the banking cartel, the stronghold of our oligarchy, is working for the rich.

They are trying to brainwash us into believing that an economic reform that generated a tremendous five-year rapid growth (5% average), after two decades of no growth and deep recessions, a reform that created 400,000 new jobs and reduced unemployment from 10.4% to 5.9% was “a catastrophic failure.”

The cynical operators who got Ehud Olmert elected have been ruining Israeli democracy by distorting information vital for critical voter choices. They were not even ashamed to boast on camera (in a TV documentary All the Campaign’s Men) that in the last elections they acted “like sharks smelling blood and going for the kill,” that they were determined “to put their foot on their adversary’s throat and press until they strangle him.” Now they are waging a similar campaign on behalf of Tzipi Livni, a candidate who vowed to bring us new, clean politics.

It is scandalous that politicians aspiring for the highest offices, Livni, Ehud Barak, Haim Ramon, Avishay Braverman, Ronnie Bar-On and many others gleefully participate in this culture of lies. Before the term “spin” was born people used to call the distortion of the truth cheating, and “spinners” cheaters. To heal our sick body politic we should return to such simple language.

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The media are replete with predictions about the imminent collapse of our financial system. Pundits warn that unless government bails out savers and savings institutions, we are doomed. Bowing to relentless pressures just before elections, politicians are calling for a “rescue plan” to save our destitute pensioners.

What few consider is that the mere anticipation of a severe crisis requiring a massive government bailout can be a self-fulfilling prophecy. And this is taking place at a time when it is highly doubtful whether there is in fact a serious pension crisis, whether a rescue plan is really necessary and whether, if implemented, it could indeed compensate pension holders for present and future losses without spending such huge sums that there would be little left for security, education, health, etc.

THE “HUGE losses” everyone mourns developed when some provident funds, which are limited-term savings plans, invested in bonds offered by Israeli tycoons. They raised billions for highly speculative and leveraged real estate deals, mostly in Eastern Europe and Russia, but also in New York and Las Vegas. These bonds suffered steep declines when it became uncertain that our tycoons, who have lost large chunks of their assets in the worldwide crisis, would be able to honor them.

Although the rescue plan advocated by many in the media will essentially bail out risky investments made by our banking cartel and tycoons, the pundits insist that it is morally desirable and economically imperative that a government that has putatively pushed savers to invest in a risky stock exchange indemnify them for losses they sustained and even guarantee their future returns. It matters not that such a “rescue plan” will cost many scores of billions which the economy can ill afford, that it taxes poorer pension holders to bail out well-heeled workers and executives who are the main beneficiaries of the hurt provident funds; or that the plan may create a moral hazard, encouraging fund managers to take inordinate risks which will negatively impact future Israeli financial markets at great cost to the economy.

HERE ARE some facts: The “pension crisis” fomented by interested parties and their media advocates concerns mostly provident funds and executive insurance plans, mostly of workers with other available pensions, representing only 20 percent of the pension sector. Most workers who are in government-secured pension plans were barely affected, nor were the hundreds of thousands of public sector employees who receive a non-contributory budgetary pension. Even those 20% who sustained losses this year were “compensated” by strong gains in former years, leaving them with an average yield since 2003 of more than 5.9%, hardly “a catastrophe,” as the panic mongers claim.

The losses sustained by this segment of the pension industry were not the result of the pension funds being thrown into the “stock market jungle” by the financial market reforms which Binyamin Netanyahu launched, as the advocates of the rescue plan claim. The funds were gradually weaned from designated guaranteed government bonds and ushered into the markets in 1980s by no other than Shimon Peres and Avraham “Beiga” Shochat who now use the crisis to pillory Netanyahu.

The losses of local provident funds are far smaller than those of their European counterparts, yet no country in Europe dreams of offering a pension “rescue plan.”

Finally, since 2004, the public’s assets have risen from NIS 1.4 trillion to NIS 1.96 trillion, a stupendous gain of NIS 560 billion – this after deducting the recent losses of about NIS 100 billion. Not a bad result from the highly maligned financial market reforms.

AS USUAL in Israel there is not only a desire to serve the vested interests of bankers and tycoons behind the campaign for a “rescue plan,” but also political motives. To the chagrin of his opponents, Netanyahu and the Likud are gaining strongly in the polls. One of the main reasons for Netanyahu’s gain is the public’s growing awareness that when he served as finance minister, he saved the economy from a catastrophic Argentina-type collapse and catapulted a two-decade recession into five years of amazing growth.

Unemployment fell from 11 percent to less than 6%, with 400,000 new jobs added. The country’s credit rating went up, making it much cheaper to service the national debt. The shekel became a very strong currency. All this was accomplished with extremely low inflation, a small government deficit and a gradual reduction of taxes. It stands to reason, the public seems to think, that Netanyahu could probably save the day again in the present crisis.

Creating an economic crisis may therefore help to discredit Netanyahu, his adversaries seem to believe.

FOCUSING ON a putative pension crisis is dangerous not only because it may precipitate a destructive financial crisis but also because it distracts our attention from the real serious crisis that a worldwide recession is bound to create here. Our economy is highly dependent on exports. A deep world recession that shrinks the purchasing power of our trading partners can have devastating consequences. We must therefore concentrate on making the economy more competitive and productive by breaking up the inefficient monopolies that dominate it and that inflate costs. We must cut damaging regulations, eliminate anti-productive rigidity from our labor markets and reduce taxes and prices – instead of wasting billions on imaginary crises.

This country has many enemies, some very dangerous. It can hardly afford self-created crises precipitated for political gain.

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“It’s sheer greed!” our pundits keep screaming on TV and in press headlines—greed encouraged by capitalism’s cutthroat competition, they claim, benefiting the powerful at the expense of the weak. The free market caused this monstrous crisis, and they hope that this crisis will kill brutal capitalism and replace it with a more humane social democracy in which the government will protect us from the market economy’s wild jungle.

Top economists are agonizing over the question of why the crisis has grown to such monstrous dimensions. But our pundits, not exactly qualified economists—unless being socialists makes them so—know it all. They and their ally politicians not only define the problem but also recommend a solution. As “a chorus that can sing only one note,” as former education minister Amnon Rubinstein once called them, they recommend, almost to a man, that government immediately announce a bailout plan for saving institutions, that it increase its budget deficit to protect the economy from recession, and that Israel should return to being a “social democracy.”

And so Yaron Dekel of Channel 1 practically twists the arm of a cautious Finance Minister Ronnie Bar-On, demanding that he promise, in a live broadcast, that the government guarantee the safety of pension and mutual funds, not only a costly undertaking that may ignite such inflation that the “guarantee” will come to naught, but also a dangerous step. Rather than assuage the public’s fears, it may provoke a panic and a run on the funds and the banks.

MEANWHILE, IN Yediot Aharonot the acclaimed economic commentator Sever Plocker continues his no-holds-barred campaign again the Bachar financial market reforms that finance minister Binyamin Netanyahu had the temerity to legislate against his strident objections. Not worried, apparently, that he may ignite a panic, Plocker issues frequent warnings about the stability of the private funds that the Bachar reform spawned, cajoling savers to transfer funds to “the safe banks.”

Plocker fails to mention that the “failed” Bachar reform saved the banking industry from bankruptcy, that it has generated unprecedented high growth after 20 years of recession caused by the misallocation of credit by the banking cartel. Nor does he mention that as a result of the reform’s increased competition in the formerly very low yielding Israeli savings industry, public savings grew from NIS 1.4 trillion in 2004 to NIS 1.85t (approximately) today, a gain of more than NIS 450 billion. This even after the recent loss of about NIS 80b, not exactly the “unmitigated failure” Plocker claims the reform was.

The assault on the free market is not confined to economics. Predictably, it is leveraged into a vigorous attack against the cruel “Thatcherite” free market putatively instituted here and against “total privatization.” The above have destroyed, these critics claim, the sense of communal responsibility and are undermining Israel’s ability to survive. The country, they conclude, must therefore return to the good old days of “social democracy.”

EVEN USUALLY responsible commentators like Haaretz’s Ari Shavit keep repeating these inventions that have become dogma for most media people.

To call the monopoly-ridden, tightly government-controlled Israeli economy a “free market economy” is an insult to their readers’ intelligence, let alone to the facts. To refer to the plunder of public and former Histadrut assets after they went bankrupt “privatization” is a sad joke. These former government and Histadrut assets that wastefully dominated the economy in its “social democracy” phase, went bankrupt when Menachem Begin’s government refused to continue massively subsidizing them. They were then sold at firesale prices to the dozen or so politically connected oligarchs—with credit they received from the nationalized banks.

Rather than diffuse ownership and increase competition—as true privatization does—this “privatization” concentrated ownership and badly reduced competition. Sixteen or so oligarch families now control most assets in the country, and their monopolies inflate the price of most consumer goods by 30 to 50% above average international prices. Israelis, who are underpaid because of the low productivity, Histadrut-dominated rigid labor market, have to pay an additional monopoly tax on their meager earnings, so that most can barely make ends meet. And this is supposed to be a free market economy?

SOME PUNDITS and politicians also call for a massive government plan to rescue local pensions. Naively believing that governments are capable of correcting “market failures,” they ignore the fact that all major crises, including the present one, are generated by governments. All one can expect is that governments clear some of the mess they created. But since politically-motivated governments regularly fail in their economic endeavors, it is unlikely that they will even clear the mess successfully. It is foolhardy to expect that they can successfully regulate an economy.

And what exactly is this “social democracy” the critics of capitalism prescribe as a panacea? Do they wish a return to the good old Mapai days with its oppressions and corruption? Or are their models the perpetually troubled, high unemployment economies of Germany and France? Or the Scandinavian dream model, that after having consumed the huge reserve of wealth accumulated by its highly capitalist enterprises, squandered it on an anti-productive extreme welfare system and had to backtrack to restore some vigor to their economies?

There is so much sound and fury of vested interests in this raging argument, but oh, so little sense or substance!

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With the unveiling of the much-lauded reform in the fees and commissions charged by the banks, it is becoming evident that the banks—with their powerful lobbyists and guardians in the bureaucracy—have managed once again to sidetrack essential reforms by offering insignificant concessions. As Zvi Lavi of Ynet has pointed out, instead of focusing efforts on completing the reform in the still concentrated banking sector; instead of making the very wasteful management of the banks efficient—the highly touted Knesset reform merely consolidated 198 confusing fees to “only” 72, lowering the cost of very few. The reduction is in marginal fees, while the basic fees paid by households and small businesses are going to rise considerably and so will the interest spreads charged on loans. Some reform.

A sensational expose in Yediot Aharonot’s June 27 Friday magazine charged the banks with fixing the price of their fees, thus extorting from their customers billions of shekels in excessive fees. Excessive fees, however, serious as they may be, are not the root cause of the banks’ troubles. They tell only one-third of the story.

The direct costs of running the banks are a staggering NIS 25 billion a year. These costs are covered by NIS 14b. earned from the inflated fees, about a third of the banks’ profits. The banks make an additional NIS 22b. in interest margins by paying savers less than market interest on their savings and by charging usurious interest to families and small businesses on overdrafts and loans. Surprisingly, this enormous interest income was totally ignored by the Knesset. The low interest the bank duopoly has been paying savers resulted in a huge transfer of wealth from middle-class savers to the few families controlling the banking sector.

The banks employ 40,000 workers at an annual cost of NIS 15b. Average cost per employ is NIS 350,000, three times the NIS 100,000 cost of other workers. These outrageous salaries were extracted by the bank workers union with the help of the Histadrut and other monopoly unions when the banks were nationalized. The banks’ managements cooperated because keeping the workers happy enabled them to take huge salaries and perks for themselves.

The banks have a thousand branches and costly, fragmented information systems that require thousands of maintenance workers. These branches and information systems cost NIS 10b. a year. The banks have to make around 12% return on their capital of about NIS 60b.—an additional NIS 7b. They pay about NIS 4b. in income tax. In total the banks have to make at least NIS 36b. to cover costs. They simply cannot make such profits without overcharging, a fact overlooked by the Knesset.
The bankers and their lobbyists and PR agents managed to focus the public debate and the Knesset’s attention on only a small part of the problem, the excessive costs of some fees and commissions. Even in regard to the fees and commissions attention was focused on the fees for managing a bank account. These fees provide the banks only 3%-4% of their income, but they distracted attention from the much costlier fees and commissions and from the exorbitant interest the banks charge on loans and the low interest they pay, far more important issues.

Some Knesset members believe that the solution to the banking scandal is to fix the cost of fees and commissions by law. Others believe that only more stringent regulation can avert price fixing. These are false hopes. The country already has the most extensive and stringent banking regulations imaginable. They are mostly unenforceable because the regulators lack determination and are politically too weak, while the banks are politically powerful.

The banks employ lobbyists who have great influence on Knesset members dependent on bank loans to finance their primaries. They employ the best lawyers and accountants and many academic “consultants” willing to make their case. Still, the Knesset can help by providing regulators with the effective law helping enforce anti-trust regulations as proposed by Ronit Kan, head of the Anti-Trust Commission.

A basic problem of banking regulation is that the body overseeing bank activity, the Bank of Israel’s comptroller of the banks, defines its mission as the preservation of bank stability. To achieve this admittedly important goal, the comptroller has ignored many of the banks’ offenses. Hoping to protect short-term stability by safeguarding bank profitability even when it has involved anti-competitive practices and worse, the comptroller did not prevent the banks from following, several times, policies that brought them, and the economy, to the verge of ruin. Only the bailout by the taxpayer, to the tune of many billions, saved the banks and the economy from the comptroller’s lack of action.

This is a pity. Many recent studies indicate that competitive and decentralized banking sector can secure long-term stability better than a centralized banking sector with excessive regulation. True, as we witness now in the US, spontaneous regulation by competitive markets cannot always protect them from all government-created distortions and from human foibles. No system can be perfect, so in rare cases emergency intervention is justified. Over the long run, however, markets prove far better at assuring stability than excessive intervention as practiced here.

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The advent of spring and Pessah, evoking the spirit of renewal and liberation, must have stimulated would-be reformers to launch ambitious reform plans for the Israeli economy.

First was the controversial scheme advanced by Shraga Brosh, head of the Manufacturers Association, and Giora Eini, head of the Histadrut Labor Federation. It called for a legislated tri-partite Economic Council comprising of government, The Manufacturers Association and labor. The council would formulate an annual economic plan and propose a government budget. Its initiators propose that its decisions be legally binding, as they claim was the case in the successful Irish model.

Next came “Israel 2028 – A Social and Economic Vision and Strategy in a Global World.” This ambitious plan was formulated by several groups of experts and public figures directed by David Brodet, former director general of the Treasury, and chaired by Eli Hurwitz of Teva fame. Its 20-year plan (remind you of something?) is “a wide-ranging plan for the attainment of national goals, fast and balanced growth and diminishing social gaps… so that Israel will be among the top countries in the world in economic achievements and quality of life.”

WHILE THE first plan was designed to cut the power of a Treasury that stands alone against powerful special interests, such as the Manufacturers’ Association and The Histadrut, the second plan recommends greater government involvement in the economy by increasing the annual rise in the government’s budget from an original 1 percent (heroically instituted by Binyamin Netanyahu when he was finance minister) to beyond the current 1.7 percent, to as much as 5 percent. This will not only make government more meddlesome and destructive but will also further inflate our already bloated and growth-inhibiting public sector.

In “The Model That Was Not” (The Marker, April 19) Nehemia Shtrassler exposes the huge difference between the real Irish model, and the mythical model that Brosh and Eini want us to emulate. He noted that Ireland enjoyed a budget surplus in the last decade—namely, a smaller government. Brosh and Eini push for an increased government budget, ignoring its negative repercussions on monetary stability and on growth. The Irish model of cooperation strengthened its government’s ability to fight monopolies and increase competitiveness, to lower taxes and open labor markets. Brosh and Eini want to limit competition and extend the monopoly power of large business in cahoots with the Histadrut.

A DETERIORATING economic environment due to increased government economic involvement will also result from the 2028 reform plan.

Despite some pious suggestions to break up monopolies, increase competition, and to make government—God help us—more efficient, the concrete recommendations of the 2028 plan require a larger, more involved government and imply more government benefits for our oligarchy. They will perpetuate, alas, policies that have prevented Israel from attaining the high growth that the formulators of Israel 2028 think we must attain.

There are many pointers in the plan indicating what its true purpose is—over and above the outrageous recommendation for a five-fold rise in the annual increase of the government’s budget, a growth that would obviously benefit all those accustomed to government largesse.

There is, for example, a recommendation that the government help large Israeli businesses become major international players. It ignores the fact that government has never had the ability to pick winners, since its choice will always be dictated by counter-productive political considerations.

But perhaps the plan’s formulators had the Teva model in mind. Teva has grown so spectacularly not only because of its audacious entry into the generic drug niche but because for decades it was a granted virtual monopoly status in the importation of drugs to Israel, amassing a great fortune.

‘ISRAEL 2028” fails to even clearly define the major problems plaguing the Israeli economy; its solution are therefore not promising. It correctly states that Israel has a dual economy; its successful, productive high-tech sector and its low productivity traditional sector. It mentions the growing gap in income and the social tensions it generates. It points out that Israel suffers from low growth and laggard response to globalization and concludes by bemoaning the low participation of Israelis in the workforce.

But it mentions only passingly, in later subsections of the plan the major cause underlying all these ills: the incomparable intervention of government in the Israeli economy, choking entrepreneurship and growth; the huge concentration of economic and political power that spawns costly anti-competitive, inefficient monopolies; the huge growth of the anti-productive public sector that employs every third person and squanders over half of our GNP; the welfare regime that consumes a third of the government’s budget, rewarding non-work; and the forbiddingly high taxes necessary to finance all this distortion and waste.

It must be either naivete or cynicism that allows “Israel 2028” to recommend a reform that will make government a larger and a more efficient instrument for economic growth. Its savvy framers must know that an anti-growth government is, under our present system, politically unavoidable. As the numerous failed efforts to reform government prove it cannot be easily changed.

They must know that the only way to get a better government is to drastically cut it and make it manageable. If they still call for enlarging government it must be because they do not really mind the perverse system it spawned.

After all, it has worked extremely well for them, it seems.

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When the subprime crisis turned nasty recently and there was talk that the American financial system and its economy may collapse, Israeli public opinion molders reacted with glee to the prospect of this impending doom—choosing apparently to forget what calamity such a crisis may be for Israel.

Even some of our top economic commentators, who usually understand economics enough to appreciate the benefits of the market economy, seem to have gotten cold feet. They began writing about the deep and innate problems of capitalism that inevitably produce repeated serious crises. This may make capitalism, which they fear destroys social cohesion, unsuitable for a vulnerable Israel, they concluded.

This firestorm of anti-capitalist propaganda generated many distressed calls from graduates of our pro-market university seminars. We had little trouble explaining to them that yes, even capitalism was far from perfect, that any human system reflects not only our strengths but, alas, also our weaknesses.

The same economic system that brought about the greatest advance in human welfare is, nevertheless, subject to serious flaws, some deriving from human imperfections, others from its internal dynamics and from the limitations of knowledge. A system that rewards risk-taking will often reap a rich harvest, but it will also, inevitably, fail—and occasionally in a big way.

After two decades of unprecedented growth in market economies and their surrogates, problems were bound to accumulate. Some are due to the human proclivity to throw caution to the wind in periods of prolonged prosperity, some to simple greed and hubris. Others derived from the impossibility of predicting what unintended consequences and attendant risks are involved in the resort to those daring financial innovations which made this spectacular growth possible.

The extension of features of the market economy—like open trade to dictatorial or chaotic regimes that are not really committed to its disciplines and are only too eager to exploit the trust underlying market transactions—was perhaps the unavoidable price paid for the great benefits of this expansion. These regimes took advantage of loopholes in the system and dangerously manipulated trade flows, like the Chinese did with the manipulation of the yuan’s rate of exchange.

It will take time, we assured our students, but this very painful crisis will be resolved with less pain if governments are wise enough to limit their intervention to only the absolutely necessary prevention of sudden dramatic crises. Otherwise, as in the Great Depression, foolish or malicious government intervention may deepen the crisis and worsen the pain.

As for those pundits who prophesize that the American economy will go into a tailspin and will be overtaken by Europe and the Far East, recall that in the past there were those who prophesized that Japan will overtake America — and look what actually transpired. The more open an economy is, the better it will weather the storm. Market forces will hasten to mend flaws and discard dead wood.

Why are Israel elites, especially the chattering classes in the press and the academy and such, and also those in business, so hostile to capitalism?

Some hostility derives from Israel’s long socialist heritage. It has inculcated the belief that capitalism is a regime of “cutthroat” competition that encourages people to exploit each other. This becomes a self-fulfilling prophecy in the government- and monopoly-riddled Israeli economy where exploitative practices become the norm.

Our universities perpetuate this destructive anti-capitalist lore. Far more than in American universities, their social sciences and liberal arts departments are dominated by post-modernist (namely nihilist) and neo-Marxist professors. Given immunity by tenure they exploit their position for Marxist indoctrination, excluding any opposing ideas from class.

Their influence is such that the Hebrew University has just launched a school for Social Leadership sponsored and directed by an arm of the notoriously anti-Zionist and anti-capitalist New Israel Fund, Shatil. In the Bezalel Art School even art history is taught through the teaching of Marx and Engels.

Hostility toward capitalism has grave consequences. It is responsible for the fact that despite its world-class human capital and huge foreign investments from abroad, non-competitive Israeli enterprises have less than half the productivity of American enterprises, and Israel cannot afford to pay its talented workers more than about $1,500 a month—and prices are often higher here than in New York because Israeli monopolies inflate the price of all consumer goods.

Yes, ideas do matter. They motivate behavior. Hostility to capitalism exacts a great price from the Israeli economy and from its hapless workers. The sooner we liberate ourselves from the grip of anti-capitalist propaganda, the better our chances of survival will be.

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American Jewish support for Israel was essential for the state’s creation and is vital for its future prosperity. The American Jewish community has given Israel not only invaluable moral and diplomatic support, but also the financial resources that helped the fledgling state meet some of its most daunting challenges, from building a strong military to the absorption of millions of destitute new immigrants.

However, it may be time to reassess the efficacy of some of America’s Jewish charitable assistance to Israel. While such charities undoubtedly helped Israel overcome emergencies in its first years, questions arise whether continued aid, dispensed in the same manner, will enable Israel to continue to develop a productive society with a prospering economy.

This question is of utmost importance. Economic prosperity is a matter of survival for Israel, not merely a means to achieve a better standard of living. Without economic growth, Israel will neither be able to provide its younger generations with well-paying jobs that will keep them working at home, nor pay for the country’s growing defense needs.

Early Socialist Causes

American Jewish charitable institutions have traditionally focused their assistance to Israel in three major areas: immigrant absorption, the provision of health services and welfare, and education. Unfortunately, much of the early assistance from the United States served the interests of socialist Israeli political parties and thus unintentionally hampered the healthy development of the Israeli economy. The allocation of this considerable treasure was marked by inefficiency and waste, and often made the successful absorption of new immigrants more difficult.

In the pre-state days, many of the funds donated by American Jews went toward failing socialist experiments, especially in the collectivist sector (kibbutzim and moshavim). It also helped build the wasteful and politicized industrial and financial enterprises of the leftist labor union, the Histadrut, which was similarly unproductive and dependent upon constant subsidies and privileges. Huge sums of money were spent to subsidize banks, industry, and trade corporations associated with the Israeli socialist movement. The nationalization of land and water, and the building of only collectivist settlements, eventually bankrupted the technically-advanced Israeli agricultural sector, and left immigrant development towns a permanent disaster.

In retrospect, some of the early charity projects that financed and expanded Israeli socialism were a major factor contributing to the economic weakness that afflicted the Jewish community in the pre-state era. Similarly, after 1948, these projects kept the Israeli economy inefficient and underdeveloped. The Left’s extensive agricultural sector and its economic empire eventually collapsed in the 1970s when the Left lost its total grip on power and Prime Minister Menachem Begin’s right-wing government halted many subsidies and privileges that had kept them in business for so many years. But even after the decline of this empire, American charitable contributions continued to bankroll a non-productive public sector in Israel, including a huge number of not-for-profit organizations that agitated for a wider welfare state rather than a free market economy, to the detriment of economic growth and prosperity.

The Dangers of Nonprofits

There have been other recent cases of American Jewish charities throwing good money after bad. Vast amounts of money have been raised to help absorb Ethiopian Jews, endow Israeli universities, and reverse the fatal trend of assimilation. All of these causes were worthy ones. However, it is doubtful that many of these American tzedaka initiatives can be considered long-term successes.

Of course, these failures never stemmed from bad intentions. Some of the poor results were probably due to the mismanagement endemic among many charitable organizations that are not subject to the same market discipline as businesses in the private sector. In the business world, when corporations fail to achieve goals, someone is held accountable. This is not always the case among Jewish nonprofits.

The New Israel Fund

One major factor that rendered some of the American Jewish contributions to Israel counter-productive was the lack of sufficient knowledge on the part of donors. Many Jewish American contributors have supported numerous purported “pro-Israel” charities, but have known relatively little about the way their money was spent. Indeed, many American Jews would be surprised, if not appalled, to find that their money was spent on radical leftist initiatives in Israel and beyond.

For example, The New Israel Fund (NIF) launched “The Palestinian Project.” As part of this initiative, self-described anti-Zionist professors from Ben Gurion University and communist members of the radical Hadash party instigated the Bedouins, long loyal to Israel, against the state, calling for “autonomy” and separation. The NIF also created and funded many “social rights groups” (such as Yedid and Kav La’oved) and Arab “human rights groups” (such as Adallah). Yedid and other NIF-sponsored organizations agitate against the liberalization of the Israeli economy, while Kav La’oved and Adallah spread anti-Israel calumnies and encourage boycotts of Israel in the international arena. The NIF has also supported violent protests by anti-globalization, anti-capitalist and anti-Israel organizations. These organizations were among the instigators of anti-Israel activity in the notorious Durban conference in South Africa in 2001 that characterized Israel as a racist country practicing “slavery.”

Many American Jews have been attracted by the liberal-sounding rhetoric of the Israeli Left over the years. But when they fail to understand what is really done with their money and do not demand transparency, they can unwittingly finance organizations or policies that cause great damage to Israel.

Higher Learning

The problems surrounding the charitable funding of Israeli universities are also worth briefly noting. Israeli universities have long been a favorite place for American Jews to give, particularly in light of the strong emphasis that American Jews typically place on education. Israeli universities are widely considered to be excellent institutions of higher learning. However, many American Jews would be surprised to learn that the social sciences and humanities departments of many Israeli universities are often dominated by post-modernist, anti-Zionist, and neo-Marxist professors. In many cases, they are more radical than the Leftist professors at American universities that have received a great deal of press in recent years.

It is difficult to imagine that American Jews would seek to fund this kind of education in Israel, or anywhere else in the world. Indeed, the original intent of charitable giving to causes in Israel is to perpetuate a pride in Israel and a strong sense of the Jewish people. The professors at some of these schools work assiduously to undermine these values.

Learning From The Past

Of course, not every American Jewish charitable initiative was a failure. Many—like Hadassah’s efforts to improve healthcare in Israel or the Taglit project which bring thousands of young Jews to Israel—were great successes. However, few charitable organizations have undertaken a proper accounting of the failures. Few Jewish or Israeli leaders took the time to learn from the failure of earlier absorption efforts. Instead, Israeli immigration services and their charitable partners abroad took decades to correct problems that may well have been solved earlier. This would have helped save time, money and trouble. It might have also prevented many of the social problems that plagued Israel over the years, such as the continued misery of the “development towns,” a failed project intended to help Israel with immigrant absorption that only contributed to immigrant alienation.

It can also be argued that the almost exclusive focus on fund-raising has not helped promote a healthy relationship between America and Israel. American Jewry is rightly viewed as incredibly generous, yet too many U.S. Jews (and increasing numbers of Israelis) feel disconnected and only tenuously Jewish. They do not feel that the community provides them with a plurality of avenues to express and develop their Jewish identity, except in the framework of charitable giving. Over time, this can actually work to undercut the sense of Jewishness originally intended to engender, and even foment alienation among Israelis toward the Diaspora. Indeed, among Israelis a sense is growing that American Jews feel that they do enough by simply giving charity, and that they do not need to visit Israel or establish strong personal ties with it.

This is a great pity. There can be no doubt that Jewish Americans have only the best intentions when they give charity intended for Israel, and that Israelis are deeply appreciative of the support they receive from Jews in the Diaspora. It is also a tragedy, as there is no more worthy and heroic task than working to ensure Jewish survival and revival.

Looking Toward the Future

To correct the problem, Jewish institutional efforts must now undergo a period of reform and greater accountability. Some charitable efforts should be privatized. Individuals or groups of donors must take personal responsibility for specific projects, to ensure that funds are dispensed in a responsible and cost effective manner. Indeed, American Jews should show their sincere care for Israel by taking individual responsibility for the money they give as charity, and by demanding strict accountability for that which they share with their fellow Jews.

The greatest challenge facing Israel—after the challenges posed by threats to its security—is the need to reform the Israeli economy. Israel needs a prosperous economy if it is to continue to pay for its growing defense needs. It must also provide enough good jobs so that its younger generations choose to stay home, rather than seeking more prosperous work abroad.

There is a difficult struggle being waged in Israel between those who understand the desperate need to turn Israel into a productive market economy and the powerful interests who benefit from the government-dominated system, including the advocates of an extreme, anti-productive welfare state. The latter seek to increase the number of Israelis who would live as wards of the state.

American Jews, who have so greatly benefited from their participation in a thriving free market economy, can now serve as role models to Israelis. Indeed, by giving to the right causes, American Jews can help move Israel toward a system that will allow Israelis to realize their tremendous talents and potential.

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The massacre of rabbinical students Thursday at a Jerusalem seminary highlights the failure of the powerful Israeli military to stop the assaults of Palestinian terrorists. It also reveals serious deficiencies in Israel’s strategy and tactics.

These have cost Israel dearly. They also harm the world-wide war on terror, of which Israel is on the forefront.

You can’t stop every suicide bomber of course. But for seven years now, Hamas terrorists have been rocketing southern Israeli towns from Gaza. Israeli governments headed by Ehud Barak, Ariel Sharon and Ehud Olmert have all vowed to put an end to the attacks. Despite Israel’s overwhelming military superiority, its governments have failed to do so.

Israel has scored some impressive victories in its fight against terrorism, especially from attacks originating in the West Bank. Numerous attempts by Fatah and Hamas to dispatch bombers into Israel were frustrated by a combination of excellent intelligence, daring special operations, and the ability of the army to enter Palestinian-ruled areas in hot pursuit or for preemptive strikes. Not so in Gaza.

There, a radicalized population has elected a Hamas government determined to eliminate Israel. After Israel unconditionally retreated from the northern Gaza strip—hoping that the Palestinians would concentrate on state building—the territory was immediately used for attacks on Israel. Why has Israel failed to stop them?

Governments here—behemoths whose budgets consume about a half the nation’s $160 billion GDP—are generally dysfunctional. They are hamstrung by constant internal squabbles and Byzantine bureaucracies. As became evident as early as the 1973 Yom Kippur War, their dysfunction has infected the Israeli defense establishment. In that year, a totally surprised Israeli cabinet and military leadership reacted with confusion and ineptness that almost led to the country’s ruin. The recent Winograd Commission of Inquiry report on the Second Lebanon War indicates that these faults are endemic to the over-centralized yet disorganized Israeli system of governance.

More than in most countries, Israeli politicians are preoccupied with political machinations designed to buy support from powerful interest groups by distributing government largesse. This causes not only the factionalization of politics and growing corruption, but consumes time and energy that leadership should use to address life and death issues. As the Winograd Commission attested, Mr. Olmert’s government initiated the Second Lebanon War without proper discussion or preparation. During the relatively long war government and military leaders failed to define their objectives. They issued vague and contradictory directives, causing repeated failures and unnecessary loss of life. Only the exceptional bravery and tenacity of Israel’s soldiers and field commanders and of the rocketed Israeli population saved the day.

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Israelis—and especially their university-educated elites—seem to have a dangerous infatuation, a puzzling delusion about the capability of their governments to solve almost any problem. Otherwise how can one explain the recent crop of suggestions by ostensibly mature people, holding responsible positions, that government protect them from the vagaries of the dollar exchange rate or from rising housing costs.

For decades Israelis have been taking cruel and usual punishment as a result of their trust in government management of the economy—from runaway inflation to low wages to monopoly-induced inflated costs and the erosion of their pensions. Yet they keep asking for more, at ever growing costs, though it should have become obvious that governments cannot deliver what they expect. Governments can no more control powerful economic forces that change the rate of the dollar or the costs of housing, than they can control the rise and fall of tides.

Israelis should have discovered by now that the more government overreaches, the less it can deliver. In fact governments create, and then aggravate, most of our problems. When governments’ fingers are stuck in every pie, as in Israel, they are incapable of doing anything. They cannot even perform their legitimate tasks, such as protecting the people of Sderot from Kassam attacks.

Without government, society would sink into murderous anarchy. But to fulfill its essential tasks—its “nightwatchman” role of protecting us from internal and external violence and of enforcing contracts—governments must be kept limited and not overly-ambitious and overburdened.

To be effective they must remain small. They can then focus on delivering public goods such as law and order, security and some infrastructure.

Even these tasks may prove daunting for most governments—political bodies whose chief function is the election of the politicians who comprise them.

Liberals who choose to believe in governments’ endless capacity to do good—despite overwhelming evidence that governments are innately incompetent; that they are bedeviled by too many goals (mostly conflicting or confusing); that their executive arm, their bureaucracies, lack the capacity for the efficient execution of policy—should travel from Tel Aviv to Ben-Gurion Airport. From the flat landscape they will see rising a huge mound, the Hiriyah garbage dump, a monument to the failure of 50 years of Israeli governments Left and Right to move this dump from its present location on valuable real estate to the Negev desert. Yet still we expect them to provide us with good education, health care, pensions and whatnot.

OUR GOVERNMENTS have been failing even in their provision of security, internal and external. Their police force has given up protecting life and limb, let alone property. Its performance is reminscient of the Keystone Cops, thought the latter did at least not break the law with impunity nor were tainted by spreading corruption.

As for external security it is puzzling why we need to be periodically reminded by investigative commissions that our highly motivated, powerful and excellent fighting forces have been rendered dysfunctional by an increasingly incompetent and corrupt political leadership and by the army’s own politicized leadership.

The Yom Kippur War, the first and the second Lebanon wars and the many severe security lapses in between should have alerted us to the rot spreading through our political and security establishments.

Our leadership conveniently embraced the stupid notion that terrorism cannot be vanquished by force, though all historical evidence (from the Assassins in the 11th century on to The Arab Revolt of ‘36-’39, Communist insurrections in Greece and in Malaya, the Red Brigades, The Shining Path, The Bader Meinhoff gang and others) proves that only force, mostly the wholesale elimination of the terrorists’ leadership (which Israel has failed to do) is what vanquished them.

Small wonder that when you do not expect to win you cannot put a stop to seven years of Kassam barrages by a couple of thousand ragtag terrorists, or that you fail to cope with the better-trained 15,000-strong Hizbullah fighters.

GOVERNMENTS are innately incompetent. Moreover, they often also engage in pernicious activities presented as a great boon to the people but designed to benefit politicians.

The welfare state, ostensibly meant to help the poor, actually perpetuates and even worsens their plight. Last week the National Insurance Institute issued its semi-annual “Poverty Report”. Few ask why after close to 60 years of spending scores of billions in welfare transfers the number of the poor keeps growing. Most of the growth probably results from the employment of a statistical fraud: the Ginny Coefficient. It is not only a relativistic measurement that increases the number of the poor as the income of those above an imaginary poverty line grows, but is based on a dishonest manipulation of statistical factors, such as the equivalency scale, and on a very questionable income survey. Poverty is a debilitating and serious social ill. We should not tolerate its being manipulated by the social lobby and the “poverty industry,” by vested interests whose welfare and political clout derive from the exploitation and perpetuation of poverty.

We face many serious problems in Israel. They are only aggravated by our blind faith in government, in a bunch of politicians who cynically pursue their own self-interest at our expense.

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At long last our politicians have decided to address the perpetual crisis afflicting Channel 1 television. The station, long mismanaged, has a budget deficit approaching NIS 100 million.

Proposed reforms include some “restructuring” and a cut in the 1,900 workers, many superfluous, whose salaries consume much of the channel’s NIS 800,000,000 budget, while fomenting Byzantine political struggles among its various components.

To defend themselves against such cuts, Channel 1 personalities, during a recent primetime Friday night news program, presented a dramatized skit featuring David Witztum, Ayala Hasson and Geula Even. Dressed in battle fatigues, they valiantly repelled assaults by a formidable enemy, the commercial channels, who were determined “to destroy public broadcasting.”

In contrast with commercial channels that have only profit in mind, Channel 1 would have us believe it represents the public interest: the taxpayers, who generously fund it, and the not so modest salaries of its stars.

Reality, however, is somewhat different. True, public broadcasting, say in America, while liberal-left like most university derived enterprises, tries at least to be pluralistic and fair-minded because it is funded mostly by contributions.

Our “public channel,” funded by a compulsive tax, does not need to be pluralistic or even-handed, nor does it provide services not available elsewhere. The public has nothing to say about the way it is managed or what contents it offers. Like other public institutions that lack well-defined ownership, Channel 1 has consequently been taken over by bureaucrats and by undemocratic workers’ unions, who, in cahoots with the politicians who provide them with their profligate budgets, follow their own political agenda.

They constantly struggle for power, resources, jobs, influence and control of our public discourse, promoting mediocrity. They force out independent-minded creative talent. Their power struggles, based on featherbedding, cause waste and dysfunction. This has caused Channel 1 to disintegrate from within.

Outside competition only aggravated this process by applying added pressure on an organization that is already disorganized and losing its credibility and its audience (ratings), its ostensible raison d’etre.

CHANNEL 1 has become the mouthpiece of an ideological cabal that prevents a plurality of views. Take, for example, its coverage of economics, a system that has great impact on our lives.

You would expect a public station to present a full, multi-dimensional picture. Instead it mostly promotes the views of commentators hostile to market economics and favoring government intervention. It has featured—an astounding 73 times—Prof. Danny Gutwein (a historian, self-described socialist and enemy of privatization) and Momi Dahan, Arie Arnon and Shlomo Svirski, all economists who essentially share Gutwein’s attitudes. They were never once challenged or asked any difficult questions. Their leftist opinions obviously pleased the Channel 1 journalists.

Compare the wide exposure given to these academics to the near-zero times Israel’s leading economists have been asked to comment on economic matters—top, internationally recognized economists like Prof. David Levhari, or the late professors Marshall Sarnat and Haim Barkai. Clearly, those who support a market economy and less government involvement, even if top in their field, have no chance of airing their views on Channel 1.

Their position is obviously anathema to the leftist clique that has taken over public broadcasting and exploits it to promote its regressive agenda, inflicting great damage on Israel by undermining support for badly needed reforms and by promoting wasteful policies that cost billions while harming the very poor they were supposed to help.

CHANNEL 1’s economic desk has focused for years now on the shrill repetition of mantras about how the poor are being exploited and the rich pampered by a capitalist, “Thatcherite,” cruel economy ostensibly created in Israel by the reforms designed to liberalize the Israeli economy and reduce excessive government interference that strangles growth.

Its reporters know better. They are not so ignorant of economics not to realize that the economic system prevalent in Israel is anything but capitalist: namely, a competitive, open-market economy. They know full well that it is rife with anti-competitive monopolies controlled by oligarchs, bureaucrats and unions. They have come to dominate our economy because the great concentration of economic power created by Israel’s 50 years of socialism and statism facilitated the transfer of such concentrated assets into their hands via a fake process of “privatization.”

STILL, THEY keep repeating their incendiary populist nonsense, rejecting from public broadcasting anyone who does not support their pro-government-intervention propaganda. When politically weak reformers were struggling against our politically powerful monopolies, especially the banks, public TV never gave them a voice. It never once devoted a program to expose the exploitation of consumers, especially the poorer ones, by monopolies, depriving them of about a third of their measly income. They actually helped undermine policies meant to break monopolies and promote growth, the chief way to help the poor.

The same un-pluralistic approach that governs TV’s presentation of economics is maintained in its treatment of politics and culture. Public TV is monolithic. But that was not mentioned in that Friday night skit defending our putative “public broadcasting.”

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“Only if a thinker’s work is still relevant several decades after its completion,” Nobel laureate Milton Friedman once remarked, “can it be said that his work has been really significant.” By this measure it is, of course, too early to gauge Friedman’s legacy. He died just last November 16.

Fortunately, there are other criteria by which we can already measure the extent of his influence. By these measures, Milton Friedman—in the words of his friend former US secretary of state George Schultz—had the greatest beneficial impact on humanity as a whole than any other person, including political leaders and intellectuals.

Friedman’s educational endeavors, in which his wife, Rose, herself a distinguished economist was full partner, and the economic policies he developed, made the reforms of Britain’s Margaret Thatcher (continued by Tony Blair), president Ronald Reagan (continued by Bill Clinton), and (partially, at least) of many other world leaders possible.

These ideas were the driving force behind the amazing spurt of economic growth in the last decades.

Economic growth has not only raised the standard of living in developed countries to unbelievable heights and lessened dangerous social and national conflicts. (European peace was finally established after centuries of bloody conflict not by a “peace process” but by economic cooperation and betterment.) Growth has also dramatically changed for the better the lives of billions of desperately poor people all over the globe, and in developing economies such as Ireland’s, India’s and China’s.

True, by Western standards all this took centuries to achieve; many Chinese, Indians and others are still dismally poor. Opponents of the market economy constantly remind us that economic development is not equally spread—how could it be?

What they neglect to appreciate, from their full-bellied position, is that for the poor of the world the advance from starvation, and the realistic hope for continued progress, is indeed a great miracle, even if they do not immediately attain the hard-won standards of developed countries. Even a little progress beats hunger and hopelessness, and the situation will get better.

WITHOUT Friedman’s courageous battles to free markets from government-imposed disabling restraints, distortions and waste, without his innovative thinking about exchange rates and his tireless and effective advocacy of free internal and international trade, the dramatic increases in productivity, trade and economic growth that enabled humanity to make such great gains would not have materialized.

Without the economic strength induced by Friedman’s teachings, the United States could not have commanded the resources to launch its successful Star Wars missile defense program that contributed greatly to the economic disintegration of the Soviet Empire and to the freeing of its long suffering millions of slaves.

What greater achievements could a man—whose only weapon was his wisdom, moral courage and tireless dedication—hope to achieve?

In Israel, Friedman’s ideas met perhaps the stiffest resistance, even among economists, whose economic lore was shaped by Prof. Don Patinkin, a Keynsian who believed in the government’s ability to fine-tune the economy. Patinkin did not foresee the forbidding costs such government intervention was bound to exact: years of near-economic stagnation.

More recently, despite the spectacular growth achieved by the Israeli economy in the past five years thanks to Friedman-inspired reforms undertaken by finance minister Binyamin Netanyahu, Israelis are still not quite convinced that a free market economy is a matter of survival for Israel. It is, in fact, our best chance of keeping talented young Israelis in Israel and of paying for the country’s growing defense needs.

AFTER ALMOST 70 years of a socialist and then a statist economy, and the continued domination of the educational system, especially the universities by the various mutations of socialism, neo-Marxism and post-modernism, our university educated elites have developed a self-defeating animosity toward capitalism and the market economy. They consider capitalism rapacious, exploitative and unjust to such a degree that some are ready to forgo economic growth lest it increase a putative inequality and a growing income gap.

It’s been galling to these types that Friedman could transcend “absolute forces” and make a historic difference in human development. And he did so without attempting to ruin the existing order and fomenting bloody revolutions (even as their hero Che Guevara has mostly left his mark on T-shirts worn as protest by surly adolescents).

It is just plain hard for collectivists—of all types—to trust people, to rely on their potential for good when given freedom to choose and to act.

It is for his deep belief in humanity’s potential and in the benefits of freedom that collectivists so hated Friedman and tried to defame him. But it was precisely this faith of Friedman in people and their ability to make wise choices when given freedom that he became such a harbinger of good things, now and to come.

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Whether the sensational story on Channel 10 claiming that the teachers’ strike is politically motivated is right or wrong, politics have been a major factor in the deterioration of the Israeli educational system.

Channel 10 reported that reliable witnesses overheard Ran Erez, head of the Secondary School Teachers Organization, telling Menachem Cohen, deputy director of the Ministry of Education, that the chief purpose of his uncompromising strike was to expose Minister of Education Yuli Tamir as a failure so that she could be replaced by Ami Ayalon. The move, Erez claimed, enjoyed the blessing of Defense Minister Ehud Barak and of Prime Minister Ehud Olmert. Promises had been made, he asserted, that after Tamir’s removal the union’s demands would be met.

“I am leading a social revolution in Israel,” Erez boasted. “I convinced my teachers that they are downtrodden, hungry and discriminated-against, and that they cannot back off… under no circumstances will I permit a reform in education.”

THIS STORY of political cynicism sent shock waves through the political system. Yet as long as education remains a government monopoly, it is bound to function like all other government monopolies—just like the Israel Electric Corporation or the Israel Aircraft Industry—where union bosses fill the vacuum that lack of defined ownership creates, and monopoly power allows them to blackmail the public.

The teachers union wants as many teachers as possible as members; they have no interest in seeing incompetent teachers fired. Indeed, it is they who are most dependent on the union bosses. This also explains why the union resists any attempt to pay teachers by achievement, thereby making it impossible to reward good teachers.

NONE OF the teachers’ justified demands for decent wages and working conditions can be met, however, as long as the huge sums paid by the taxpayer for education—higher rates than in any Western country—are being squandered on the ministry’s bureaucracy, and on the salaries of hordes of incompetent teachers. More money will only lead to further deterioration, as it has during the recent decades.

But don’t look to academia to lead the way. Three recent articles by prominent Hebrew University of Jerusalem political science professors dealing with the educational crisis illustrate the academy’s ideological resistance to reform.

While attacking “a cynical and indifferent government that has no interest in improving education,” Prof. Yaron Ezrachi also lashed out at attempts to institute economic criteria of cost-effectiveness in education because he deemed market forces as anathema to educational “values.” Ezrachi forgets that the best universities in America are private and competitive, and that in Israel private schools manage to achieve high matriculation rates for failing high school students.

His colleague Prof. Itzhak Galnoor raged against differentiated wages for teachers based on accomplishment by warning his readers “not to be seduced by the siren song of Prof. Milton Friedman’s disciples.” Galnoor admitted that many professors get salaries for doing nothing, but he is still convinced that competition and achievement are ruinous.

And Prof. Ze’ev Sternhal averred that a “ruthless neo-conservative revolution” is the cause of all our ills, including in education. He is in denial of the fact that socialist and statist policies totally dominate the Israeli public sector, and that the educational crisis they have perpetuated precedes the advent of neo-conservative ideas to Israel.

WHAT CAN be done? No system, not even education, can become efficient without competition.

Allocating the taxpayer’s money to schools not through the central bureaucracy but through parents, who would receive educational vouchers which would enable them to exercise choice among schools, would introduce such competition. Higher vouchers could be given to less affluent families. Competition among schools would force them to create a variety of educational approaches, and to strive for excellence. For schools to compete they would, however, need to be allowed managerial flexibility and differential pay for teachers.

Yuli Tamir visited Singapore recently and admired its competition-driven achievements. Will she have the political will and clout to introduce competition to the Israeli system? Not likely, unless parents finally wake up and demand a fair return for the huge amounts in taxes they pay for education.

Finally, beyond funding, a major problem that bedevils universities – and to a lesser extent high-school education – is what is being taught.

The system does not deliver basic knowledge and skills such as a rudimentary knowledge of history or culture, or the ability to write cogently.

Instead it inculcates in students a paralyzing left-wing ideology that insinuates, in accordance with Marxist dogma, that enterprise and profit are basically rapacious and exploitative, unworthy of a decent person. It cajoles them to pursue instead a life of virtuous social “activism” in the public sector, in political struggles over government benefits – the pursuit of so-called social or distributive justice (whatever these terms mean).

Genuine reform will have to begin with our leftist universities, which have helped to create our dysfunctional, politically-dominated educational system.

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If, in the wake of the Second Lebanon War, there is a silver lining in the political cloud enveloping us, it is that people have learned not to blindly trust the government or its politicians.

The war finally revealed – and at what terrible cost – that our politicians are neither saints nor even caring “parents,” whose chief concern is the welfare of their children, the citizens. Government was exposed for what it usually becomes, when left unchecked: an unstable and harmful institution, a coalition of convenience among quarrelsome self-serving cynics, some corrupt. They exploited our childlike trust in their ability to deliver on pre-election promises, instead wasting our hard-earned (and heavily-taxed) money to bolster their power and privilege, sometimes at the cost of our ruin.

SHOULD THIS sea change in public perception and expectations of government gain strength it might finally liberate us from years of indoctrination in our universities by post-modernist and neo-Marxist professors. They made our elites believe in ill-defined and ill-conceived utopian ideals, and inculcated them with intolerance for alternative views. Consciously and subliminally our elites were made to believe that government is the sole vehicle for messianic social transformation, for the attainment of “social justice” and the quick elimination of poverty.

Perhaps the deflation of such false expectations will make us wary when types like Ehud Olmert, Haim Ramon or Ronnie Bar-On, with their facilitators and spin-doctors, try to sell us peace plans or welfare programs whose consequences can prove as dangerous as their past records indicate.

Healthy skepticism may immunize us to the poison spread by the spin-doctors. Their lies and innuendos have been destroying the little good that remains in public life, so that no alternative survives capable of defeating the dastardly candidates the spinners manipulate like marionettes.

These spin-doctors are already sharpening their knives in preparation for the next elections, when they will again “try to murder” – as they put it in the eye-opening documentary All the Campaign’s Men – any decent candidates who stand in their way.

OUR NEW-found skepticism may also help the public dismiss the preposterous claims of Olmert, former finance minister Avraham Hirchson, and current Finance Minister Bar-On that they are the ones responsible for current economic prosperity.

We remember how these politicians did everything in their power – the full story is yet to be told – to undermine the bold financial market reforms then being launched by finance minister Binyamin Netanyahu. Since we now know how trustworthy they are, we have reason to be wary of their promises to foster peace and eliminate poverty.

Their peace moves have so far resulted in the abandonment of the citizens of Sderot. The peace talks they advance, with no real mandate from the people, seem like PR exercises designed to bolster their dismal public standing, even at very high cost to Israel’s security.

Their anti-poverty programs and the Negev and Galilee development schemes they hatch have in the past funneled billions into the pockets of corrupt politicians and their constituencies. They have enriched the cabal of families whose monopolistic firms dominate the Israeli economy, pillaging the Israeli consumer. After wasting billions of taxpayer shekels, these schemes have done little to improve the lot of the periphery or of poorer Israelis. They have arguably made it worse.

THERE IS hope that the phenomenal performance of the economy will finally make Israelis realize the crucial role it plays in their lives. Once this is internalized, they may vote next time, not for another Mr. Security father figure, but for those who will continue vital reforms that will have a dramatic effects on public and private life.

Our next elected representatives had better be good. Formidable tasks face them. Financial markets – whose partial liberation from the ruinous bank duopoly delivered such spectacular growth – will have to be protected from the bankers’ incessant attempts to whittle them down. At least two other major factors in the Israeli economy, land and labor markets, will also have to be reformed.

The government’s land monopoly and the monopoly of the regulating authorities and of the building industry are not only cesspools of corruption. They are also major drags on economic growth. They delay by years, and make extremely costly, not only housing but also industrial construction. They impoverish young Israeli families who have to mortgage their life-savings to buy a small apartment.

Talented and dedicated Israeli workers cannot manage to raise their productivity above half that of American workers, or get paid a decent wage, enabling them to make ends meet. Productivity and wages are so low because our labor markets are perverted by a Histadrut representing voracious public monopoly unions who enjoy inflated salaries and huge perks at the expense of all other workers and the unemployed.

So if we manage in the coming year to use our new-found skepticism to good purpose and tackle these iniquities, the year to come will indeed be a happy one.

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A recent Merage Foundation conference gathered some major industry and academic players with the goal of helping Israel’s hi-tech sector grow and enhancing “its contribution to increased economic opportunity for all Israelis.” The participants offered many important insights, but they mostly proposed improving government policies to help better hi-tech performance and the MBA programs that underpin it.

But an examination of the government’s record raises serious doubts about its ability to help. Of the government’s approximately NIS 300-billion budget, about a third is committed to paying off debt, another third to salaries and pensions and what remains to defense, education, health care and transfer payments.

This leaves government few free resources, especially since its existing programs and handouts are vigorously defended by powerful vested interests. But even if government had the means, and knew how to help, its track record does not augur well.

Since the conference also wanted to enable “Israel to compete successfully in an increasingly global market place,” perhaps a better approach would have been to focus on policy reforms that enhance competitiveness.

INFLATED COSTS make Israeli firms less able to compete internationally. The conference could have studied which costly government regulations could be dispensed with and also targeted the breakup of cost-inflating practices – especially in financial markets, where accessibility to credit is still a major problem for small and medium businesses, the engines of growth.

The participants could have used their business and organizational savvy to delineate a smaller, more efficient government that encourages economic growth rather than hinders it. They could have proposed tax reforms that would free resources for productive private investment.

The conference could have contributed to the effort to break up land, building material and construction monopolies that double the cost of construction in Israel. It could have pushed for deregulation which would enable small businesses to thrive rather than choke. It could have recommended the removal of trade barriers that make consumer goods and the cost of doing business so high.

Competitiveness could profit from lowering the inflated costs of water, electricity, credit, education and health. Lower costs would also help the poor more than income redistribution. Education could be bettered by the breakup of the degenerating government’s educational monopoly, and by the introduction of economic considerations and competition.

Instead, two decades after the notion of industrial policy had been discredited, calls were heard for more government “direction,” as if government could “assist” hi-tech by reducing risk.

YET RISK and its management are a vital component of healthy growth. Risk-adverse government bureaucrats do not deal best with risk. Only diffused private investment that enhances competition, accountability and better decision-making can help spread risk. Open financial markets also provide better access to capital for smaller firms.

Moreover, all government directions and subsidies result in state employees picking favorites and discriminating against those with less political pull.

Sixty years of massive government intervention and “development efforts” have led mostly to massive failures and waste. Yet, mysteriously, policy makers still insist on increased government spending and budget deficits, and on shifting resources to the less efficient public sector. In hi-tech specifically it is hard to find credible studies showing that government “encouragement” ever played a consistent positive role.

THE CONFERENCE’S concern with policies that could correct putative imbalances in growth was also problematic. Can anyone really define what balanced growth is? Even if we seem to discern imbalances during certain periods, does this mean that we understand them accurately or know how to correct them? The conference’s Overall Mission goal demanding that hi-tech “contribute to increased economic opportunity for all Israelis,” namely, “reduce current income disparities” was also questionable.

It is almost impossible to define what equality really is, unless one thinks of the long-discredited goal of strict equality in wages. Nor is it clear why hi-tech is particularly suited to attaining such a goal. Why would hi-tech people be more qualified to address the complex problems of poverty? Is not running a complex business profitably hard enough, and does it not contribute sufficiently to the general welfare?

Despite all the fashionable talk about the putative “social responsibility” of business, it is not clear at all how narrowing income disparities, rather than enhancing productivity, helps the poor; by reducing envy, perhaps?

TO HELP hi-tech, rather than promote the lost cause of better government “direction” we need to launch reforms that enhance competitiveness and reduce costs. We must also refrain from trying to solve the thorny problem of poverty by trendy but questionable means.

In the past, socialist policies that mutated into statist control of the economy made our industries non-competitive and unproductive, so that despite over $300 billion in foreign aid, our economy cannot provide most of our talented workforce more than a measly NIS 7,000 a month, making so many families unable to make ends meet. Our distributive system is also the reason our political system is so torn by constant strife over the division of government handouts, as well as explaining why growth has been stymied.

So let us give markets a chance to deliver the prosperity they have delivered everywhere, and let us promote more freedom from government rather than more or better government direction and aid.

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President Shimon Peres, we all know, is a man of visions. Some have been better than others. The better ones were those grounded in grim reality—like the project that provided Israel with its ultimate defensive weapon. It could serve as a model for translating seemingly impossible visions into reality.

The less successful ones, that translated into costly, failing and even dangerous policies, were those that denied reality—as when, after repeated failures, Peres kept insisting on “developing” the Negev and the Galilee through massive government “interventions”; or when he tried to enforce his dream of a peaceful Middle East by choosing Yasser Arafat’s master terrorists as partners and executors.

As president, a job not known to restrain the natural hubris of politicians, Peres is beginning to launch a last-ditch effort to achieve formal peace through massive unreciprocated concessions, as he did in Oslo.

This would threaten our security again. Peres may end a remarkable, if controversial, career not with the praise his dedication merits but with the ignominy that inevitably overtakes those who stubbornly refuse to learn from their mistakes.

PERES’S PROCLIVITY for denying reality was already evident in 1988. In May of that year I wrote a piece in The New Republic called “The profits of peace,” based on a February 1988 ‘Post op-ed “An economic answer to the Arab uprising.” They dealt with the economic motives for the first intifada and proposed some economic remedies that could help mitigate the conflict.

When I subsequently met then foreign minister Peres, he was already well into peace processing. I argued that economic development and prosperity can sometimes be more effective in resolving conflicts than political negotiations. For example: After centuries of bloody conflict, peace was established in Europe not through a political “peace process” but as a result of a Coal and Steel Union that made old animosities irrelevant.

Since in the foreseeable future Israel would not be able to accommodate irredentist Palestinian national aspirations, and since the Palestinian political class had a stake in perpetuating the conflict (what else could make their corrupt regime justifiable?) the only way Israel could ease the conflict was by providing Palestinians with better livelihoods, and by treating them with dignity. Through economic prosperity Israel could encourage the emergence of a civil society and of a leadership that would have a real stake in peace.

DIGNITY DEPENDED on security of self and of property, and on respect for the individual by the authorities. As the (then) occupying power, Israel had the responsibility to maintain law and order and to treat the inhabitants humanely with minimal bureaucratic harassment (two tasks, alas, that Israeli governments find impossible to accomplish at home).

Israel should not have tolerated, as it has, the abuse of human rights by PLO agents and proxies who were terrorizing the Arab population and directing their frustration and anger against Israel.

For the masses of Arabs then working in Israel, dignity meant not having to wait many hours in daily security checks. I mentioned the recently invented magnetic cards and suggested that instead of having gruff, exhausted reservists staff the checkpoints, they should be handled by professional security guards. This would probably reduce the waiting time.

As for a livelihood, instead of only bussing Arabs in to do menial work in Israel, why not open Israeli markets to their products, enabling them to utilize their relative advantage in labor intensive production, in agriculture, building materials, footwear and textiles to generate economic prosperity and high employment in their own areas?

Where competition could harm Israelis, as in agricultural staples and textiles, the government could help secure transition loans for the Israeli producers so they could move to the capital-intensive high end of the market, like the production of exotic and out-of-season fruits, vegetables and flowers, boutique wines, goat cheeses and condiments, high-fashion apparel etc. (the market eventually induced such changes anyhow).

PERES WORRIED that this would make the Arabs “hewers of wood and carriers of water.” He could not fathom that in a thriving economy people rapidly climb the occupational ladder and that at least some of the skilled and hard-working Arab laborers would soon become independent entrepreneurs, as indeed has happened despite much harsher circumstances.

Such humble steps having to do with the daily life and welfare of Arab laborers did not seem to catch Peres’s imagination. He wanted to discuss his vision of making the desert bloom through the harnessing of atomic power for huge desalination projects costing billions.

Peres’s penchant to go for grandiose schemes, while neglecting simpler realities, has become evident recently in his ambitious plans for Galilee and Negev development. Immediately upon his being named the government development czar, Peres resurrected the huge—and questionable—project of connecting the Gulf of Akaba to the Dead Sea and announced a massive government effort to make the Jordan rift area blossom. As if one Negev experiment wasn’t enough.

Negev and Galilee development needs less vision and more reality. These areas could have been immediately helped by assuring, for example, that a banking monopoly did not choke them by denying small businesses credit. Peres could have also helped by instituting a market-oriented land policy, by cutting impossible red tape and by lowering confiscatory taxes.

But for this to happen he must understand dismal economics and not simply indulge in baseless rosy visions.

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What a tragedy that Theodor Herzl’s successors, especially Israel’s first president Chaim Weizmann and his socialist allies, deserted Herzl’s plan to build a Jewish national home in which a prosperous market economy would guarantee its social cohesion and political strength.

Instead they replaced Herzl’s vision with socialist fantasies and programs that impoverished the Zionist enterprise demographically, economically and socially, as prominently occurred in the kibbutzim. Had the Zionist enterprise implemented Herzl’s vision, it might have grown strong enough to have saved more European Jews and secured a safer transition from the yishuv to an independent state.

Unlike most other Zionist leaders who were raised in an oppressive, virulently anti-Semitic and parochial tzarist Russia, Herzl grew in Vienna, the tolerant and liberal capital of the multi-cultural Austro-Hungarian Empire.

Herzl described the younger Zionist leaders as the flower children of their time; shiftless intellectuals who scorned their parent’s wealth because they accepted the anti-Semitic calumny that Jews were exploitative capitalists (when in fact most were very poor). They expressed their adolescent rebellion by embracing socialism or communism and by advocating a romantic return to agricultural labor to purify the Jewish soul. Since in Germany, as in Russia, the state was worshipped, it seemed natural for these young firebrands to accept socialism’s implicit assumption that the state must totally dominate the economy, even by abolishing all private property rights.

VIENNESE INTELLECTUALS were not in such awe of the state. Rather, they were inspired by Adam Smith’s market economics and by the successful model of the British Empire that thrived on minimal state intervention and on free trade.

When Professor Karl Menger promulgated what became known as the Austrian school of market economics it became an intellectual sensation and Menger was appointed personal tutor to the Crown Prince, the Archduke Rudolf Von Habsburg.

Herzl’s programmatic book Altneuland, his intellectual last will and testament, charts the future development of the Jewish home. It fully embraced the basic premises of the Austrian school, including what was considered its radical support for the issuance of competitive currencies by private banks. True, in earlier stages of his ideological development Herzl also flirted with socialist inspired cooperative ideologies, just as at an early stage he thought of solving “The Jewish Problem” by the mass conversion of the Jews.

True, after contemporary Jewish capitalists like Baron de-Hirsch and the Rothschilds rejected his vision and even militated against it, Herzl bitterly accepted some of the largely anti-Semitic prejudices against (Jewish) great capital and its inordinate political clout. As a fervent humanist Herzl was also appalled by the prevalent dismal poverty and was attracted by communitarian and mutualistic ideologies.

Nevertheless, in his well considered judgment formulated in Altneuland, this is what he put in the mouth of his model new Jew, David Litvak, the moving spirit in The Company charged with building the Jewish National Home:

Money is an extraordinary thing, if it did not already exist we would have to invent it…. No, we have not [followed socialist dogma] and abolished the differences between mine and yours. We are not crazy. We have not thrown overboard the incentive to work, to try harder to invent and to develop. Remarkable talent deserves proper reward, and special effort high recompense.

Wealth stimulates the ambitious and nurtures rare abilities…. Profit encourages entrepreneurship and creates new opportunities… if free entrepreneurs accumulate great profits by honest endeavor it is absolutely Kosher… Our new society did not embrace equality. Each person is rewarded according to their work and effort; we have not abolished competition, though we insist on fair opportunity for all, as in sports…

When it came to practically implementing Zionism, Herzl entrusted the huge enterprise of the mass transfer of Jews and their resettlement in their National Home not to a state or public bureaucracy (“we have no state like the Europeans have” his David Litvak avers, “we are a community of citizens who seek satisfaction in work alone… organized in a novel way), but to a privately held corporation of shareholders and to its executive arm, an investment bank. And he did so not only for reasons of efficiency but from deep moral concern.

THE PURPOSE of this “Bank of Jewish Resettlement,” Herzl explained:

Just as we [Zionists] replaced Zionist pleading with Zionist statesmanship so we must replace in our settlement work the reliance on alms and charity by a strictly businesslike approach. Charity has impoverished both givers and takers. Charity seekers have climbed to the top [of our enterprise] and our work lost what is most essential: individual responsibility. Those who seek help from rich patrons will not build the economic status of the Jews nor improve their moral standing…. [Because] he who receives alms degenerates [and] patrons only create ingrates…

To head the Anglo-Palestine bank, Herzl appointed a young banker Zalman David Levontin, the founder of the successful private settlement of Rishon Le-Zion. But after Herzl’s death, Weizmann and his socialist allies took over Zionism and founded the charity-based Settlement Fund (Keren Hayesod). They undermined Levontin’s support for private settlements and enterprises, entrusting the settlement effort to a bureaucratic Settlement Department headed by Arthur Ruppin, a communist sympathizer, and to other avowed leftists.

This group also directed all of Zionism’s scarce resources to collectivist settlement and to a vicious class warfare against the successful private sector. Rather then develop Zionism through industrialization and urbanization – thereby the sole basis for a thriving agricultural sector – Zionism supported the failed experiments of collectivism that almost ruined it.

Levontin openly challenged Weizmann asking “do you believe you can develop the land through charity or through investment?”

Weizmann’s choice proved tragic.

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