Shaul Amsterdamski, Kan 11 News’ chief economic correspondent, sat down to a long podcast discussion (36 minutes) with Religious Zionism Chairman MK Bezalel Smotrich a month ago, and his first question was: What’s the number one economic advice you give your children (he has seven, kein ein hura)?
Smotrich answered that he wants his children to know how to manage what they have. It’s OK to want to have more, but the biggest problem faced by individuals as well as the state is how to manage what they have here and now. The idea is to do what we can with what we have, and be happy.
Israel is a very expensive country and people often can’t meet their needs and can’t increase their income, noted Amsterdamski.
When you look at the graph, over the past few decades, the quality of life in Israel has risen significantly, Smotrich said. But when the quality of life rises, the cost of living rises, too. In my sector (national-religious), consumption of luxury items is lower, and we take our vacations on the shores of Lake Kinneret. But in general, people need to live within their economic means.
The role of the state is to enable people to raise their income level through education and economic opportunities, he says. Many people whose income is low are stuck there for their lack of education and opportunities and could have otherwise been replaced by machines.
Smotrich earns NIS 20,000 a month as MK. That’s roughly $75,000 annually, a good salary in Israeli terms. His wife isn’t working outside the house. She takes care of their home and seven children. He says he spends close to a third of his income on his children’s education. The rest goes to pay the mortgage, utilities, and municipal real estate taxes (Arnona). And across the board, he gets no breaks on these payments because his gross income is so high relative to Israel, even though his net income is about half of the gross. But he’s not complaining, he is aware of his privileges.
Dream Job: Finance Minister
Should his party win enough votes to justify his demanding a major ministerial appointment, Smotrich says he would ask for the finance ministry. He says he loved being Transport Minister and won’t mind going back there, but if he could, he wants Finance. He served five years as a member of the Knesset Finance Committee.
He believes that, with hard work, it would be possible to bring down the country’s cost of living, as well as solve the housing crisis.
We are in the midst of global soaring inflation which began with the Corona pandemic, said Amsterdamski. There isn’t much you can do about it as a finance minister, but what would be the first two things you’d do upon taking office?
Some 30% of the current inflation has to do with excess demand against low supply, Smotrich started, showing a respectable knowledge of both the theory and practice of economics. No interest rate increase will take care of this problem. The other two-thirds have to do with the fact that the market, especially in the US, was saturated with money following the pandemic.
The rise in demand is coming from a positive place since we have full employment, and consumption is a great thing, it’s the engine that drives the market. Our problem is that the Corona and the war in Ukraine and the consequent rise in energy costs created inflationary expectations.
What to Do about Inflation?
Inflation is the result of expectations, which is a very manipulative thing.
When the Israel Bank raises interest rates, it delivers a message to the market that there’s going to be reduced demand and so it makes sense to reduce consumer prices. Smotrich argues that the government can create similar results through a series of steps that deliver the same message to the market: demand will soon slow down, and it’s time to reduce consumer prices.
For instance, government cancels the cost-of-living increases (the equivalent of the US COLA – Cost of Living Adjustments – DI), which are at the root of the spiral rise in prices: income rises, so costs rise, so income must rise again, and before you know it, you have runaway inflation on your hands.
What if the government acts to reduce the cost of essential goods by reducing significantly the excise tax (“blo”) on gasoline? This would not only make gas cheaper but impact all the other areas of the market by bringing down the cost of production and delivery.
The Israeli economy is facing this inflationary trend at a time when it performs better than most world economies, with an annual growth rate of 5% – unheard of in other countries. We have full employment. We have tax collection surpluses, says Smotrich.
Increased interest rates create recessions, he explains. If we rely on raising interest rates, we’ll end up with both inflation and recession. Meanwhile, there’s no value to cost of living increases in an inflationary economy – they only keep eroding. So, we’ll have a few difficult months when market prices will exceed income, but after we reach a balance, with a moderate raise of the interest rate, the average income will not be eroded, it will retain its value as the inflation rates come down.
Government at the same time will bring down the cost of gasoline, electricity, basic products––the laws that make this difficult to do can be circumvented if there’s an agreement among all the parties in the market––and income’s buying power will actually rise as a result.
Free Market is the Only Solution
Meanwhile, the government must revoke the taxes on sugary beverages and other inflationary means of social engineering, adding buying power to people’s incomes.
Government can reduce taxes in many areas in a way that would affect the cost of production and bring down consumer prices. All these government actions would create an expectation of lower prices and as a result, bring down inflation.
During the months of frozen salaries around the Israeli market, the government must take steps to support lower-income families directly, not through product subsidies but as acts of welfare, as is commonly done before the major holidays.
Smotrich praised Prime Minister Benjamin Netanyahu’s decision to pour billions of shekels into people’s pockets, and into the manufacturing sector too, so that once the pandemic was behind us, the economy could spring back into action quickly. He points out that the fact that Israel was ahead of the rest of the Western economies in coming back made it an attractive target for investments and shot up its annual growth rate.
He believes that using the combination of pay freezes and reduced taxes would get Israel out of the inflationary spiral ahead of other countries and bring in respective benefits.
Smotrich wants to see the government get out of managing prices in the marketplace, including, eventually, essential consumer goods such as bread, oil, eggs, and milk. He proposes compensating needy families directly rather than subsidizing production, alongside a massive reduction of taxes, pushing competition to promote small businesses, and solving issues related to the ports to facilitate the flow of competing imports.
He also proposes taking steps to dismantle the food monopolies in Israel through active regulation. He suggests that when prices are dictated by true market competition, there would be no need at all to control consumer prices of essential goods.
The Next 30 Years
So much for Israel’s short-term problems. What are the country’s problems looking twenty or thirty years ahead?
Smotrich believes that, overall, the Israeli economy is going in the right direction, with an excellent record of debt payments (so much so that Netanyahu was able to solicit loans to be paid over 100 years to infuse cash into the Israeli market). He wants to see fewer limits on imports and simplified regulations. He wants lower income taxes on smaller businesses, pointing out that today it’s the big corporations that enjoy lower income taxes.
In thirty years, Israel’s population will double, which will require new policies in spreading communities around the country, alongside new infrastructures and employment. Today, the economy is centered around Tel Aviv and Jerusalem, but with an additional 9 million Israelis, this will have to change.
Smotrich wants to see fast trains connecting Tel Aviv with Eilat, to compete against the slow and antiquated Suez Canal. He envisions two major cities with millions of residents along those fast train tracks. Each new city will be circled by bedroom communities and agricultural settlements. He envisions a similar plan for northern Israel.
Haredim: If You Treat Them with Respect They Will Come
He sees a major challenge for Israel in the coming years to help the Haredi society become integrated into the country’s economy, based on equal opportunity and incentives. He is very much against forcing change on the Haredi society which, he says, leads to a porcupine-like reaction. Two examples are the fact that Israelis want to encourage Haredi students to enter academic institutions, but as soon as they object to mixed seating and female lecturers the same Israelis take the universities to the High Court of Justice. Likewise, we want Haredim to serve in the IDF, but as soon as they object to being taught by female instructors and complain about kashrut standards on base they are attacked.
In his opinion, Haredi society is well aware of the need to enter academia and the jobs market to facilitate a better quality of life, but they must be supported through incentives and not through punishment. But most important: respect their lifestyle and stop giving them the message that you want to turn them into “regular” Israelis. Smotrich believes that the demographic growth by itself is pushing Haredi society into the jobs market and that Haredi businesses are thriving. The state must not try to engineer this sector, the way Finance Minister Avigdor Liberman tried to kill daycare subsidies for Haredi children and essentially torpedoed the ability of Haredi mothers to seek employment.
The husband would continue to study in Kolel, no matter what the finance ministry did, Smotrich reasons, but what they did was prevent Haredi women from going to work.
He believes the process of ushering Haredim into the Israeli economy must be long in order to be successful, and it must be through respect and acceptance. If we do that, he promises, you’ll be surprised how quickly things will change.
What about the Impending Teachers’ Strike?
Finally, Smotrich was asked how he would deal with the demands of the teachers’ union, which is threatening to delay the September 1 first day of school in Israel’s elementary schools.
Smotrich says he wants to increase in a very significant way teachers’ salaries across the state of Israel. He also wants teachers’ pay to be based on merit. He wants managerial flexibility concerning teachers’ employment. In short, he wants a competitive marketplace in education. He is not against private schools in Israel but points out the fact that in public schools there’s no way to give teachers financial incentives to do better.
As competition goes, he would like to cancel the tyranny of school zones and allow every Israeli student to apply to the school of his or her choice, regardless of geography. He also believes that the recent decision to reduce class hours dedicated to Bible study and other Jewish subjects would create a rush of secular students to the religious schools because parents want their children to know who they are and where they came from.
He wants schools to compete for students through their records of achievements and excellence. He is not a big fan of vouchers and points out instead the success of former Jerusalem Mayor Nir Barkat, who canceled the students’ obligation to attend the schools in their neighborhood. This also entails improving transportation, so that not only rich parents who own cars could drive their children to their school of choice.
He uses this example to illustrate the fact that coalition governments must forge common goals so that the various ministries can aid each other in reaching them. This requires a more homogeneous government, with a prime minister who sets up the goals and demands cooperation from all his coalition partners.