August 08, 2011
It seems that Israeli economy is suffering from the same problem as the United States, the United Kingdom, and the euro zone. It is being steered by people who don’t have much understanding of economics.
Israel actually has been experiencing pretty solid growth for most of the last two decades and its economy had largely recovered from the downturn. However, its government has become obsessed with the idea of reducing Israel’s debt, which stands at a relatively modest 70 percent of GDP, according to the IMF.
This might be reasonable if everything else was going well in Israel, but it isn’t. In the last three decades Israel has been rushing to the top in terms of inequality among wealthy countries. It is now neck and neck with the United States for the top slot, but it is on track to pass us soon. This means that the vast majority of the gains from growth have gone to those at the top, with most of the population having little to show. To make matters worse, Israel relies much more on regressive taxes like value added taxes and much less on progressive income taxes than the average for other wealth countries. (The OECD data refer to pre-1967 Israel for those wondering.)
The government is now faced with protests involving a quarter of a million people who are demanding that it focus attention on meeting the needs of ordinary workers, most importantly for housing. This would be the equivalent of more than 10 million people protesting in the United States.
This is another case where the people are trying to teach the economists who are running the economy. Let’s hope they can learn.
