Shava Tova

We were hoping to write something about the Trachtenberg report but the need to tie up loose ends at work before Rosh Hashanah has prevented that.

Shana Tova to all lovers of freedom.

Is the Welfare State Really for Us ?

Merav Arlozorrov has a nice analysis of Israel’s situation and choices after the “social protests”.  I don’t agree with her that the protests prove that the Israeli public has chosen the Scandinavian over the Swiss-Australian models of the welfare state, but that will be proven in the next elections.

Read the whole article (in Hebrew) but I would like to translate the last paragraph for you.  She writes:

A welfare state demands that the individual sacrifices for the general good – if it relates to taxes, salary, work rules (and strikes), the willingness to cede a higher current standard of living in order to invest in the future ….  In a country in which medical interns threaten to destroy the public health system because not all of their salary demands have been met, where trains strike more than they go, where most think that tax evasion is the norm and everything dealing with long term planning is foreign  - it is worth asking ourselves if a “deeper welfare state” is really for us.

It has always fascinated me that we in Israel are completely opinionated and stand by our every right to privacy  and freedom - yet we are always so willing to cede our individual liberty to the country’s “experts”, politicians, rabbis, professors and union bosses.

Modest Suggestions

Some suggestions for the Pyramids:

The one’s in Israel that is, not Egypt.

It is a understood that the two things that must be fixed in order to prevent a slow or not so slow descent into the serfdom of the twin brothers, socialism and crony capitalism, is to deal with government regulations and the Israeli conglomerate (see below for the third reason).  This is not to bash our (much) wealthier brothers but the fact that your father made a lot of money (Dankner - take a look at his "positions") does not mean you can manage multiple businesses in multiple sectors.  And the fact that you are a self made man (Teshuva - this is a man I respect but even so...) also doesn’t mean you can manage companies as diverse as retail sales of automobiles and drilling for natural gas.

Let’s face it – for the good of freedom and the good of our prosperity something must be done.  As for regulations, there are volumes that need to be written and we will deal with that in time.

Here are some modest suggestions regarding the crony capitalists (besides the already proposed separation of industrial from financial companies):

1.        Define a Holding Company in law as one that cannot hold other holding companies.  No more grandchild companies and certainly no more great-grandchild companies. 

One of the main problems with these multi-level corporate structures is that it takes away from the competitiveness of the company and therefore hurts both the minority shareholders as well as the consumer. 

2.       Change the bankruptcy laws to include “Chapter 11” type laws and to give bondholders primary access to assets before, or at least equal to banks.

Currently, bankruptcy laws lack a “chapter 11” equivalent meaning that companies either close or disappear.  There is no chance for it to work out its problems and emerge from bankruptcy.  There reason for this leads us to the second problem – that the banks have primacy in all bankruptcy dealings.  They must get paid in full before any other creditors are dealt with.  This puts bondholders at a clear disadvantage when dealing with the debtor.  We have seen this clearly in the past few months as Ben-Dov has manipulated these laws to hold onto a company that is no longer rightfully his. 

3.       Don’t let pension funds agree to bond “haircuts” unless 2/3 of the pension owners agree in a proxy vote.

This works only after our previous point is taken care of.   The market in Israel is too small and too close to allow the fund and money managers this much power.  They are often good friends or even employees of the very corporations that ask (demand) these haircuts and the actual beneficiaries of the pensions should have to approve these deals.

4.       Don’t allow the purchase of more than 5% of any publicly traded company with debt.

This goes totally against my grain.  I don’t usually see a problem with (well managed) leverage in making large purchases.  However, it is pretty clear that the purchase and sales of companies in Israel by the conglomerates is more of an ego game than a business decision.  And if someone wants to play games he should do it with his own money – not those of my pension.

Next …. The third leg of high prices and government inefficiency – the unions.

Business over Puzzles

When you speak about pyramids in the middle-east you are usually talking about ancient tombs in the Egyptian dessert.  But here in Israel, we are talking about the favored business structure of Israel’s old business elite.   Israel’s most successful actual companies – Teva, Iskar, Checkpoint, Amdocs, Strauss are real companies that do real things.   But Israel’s old line businessmen like putting puzzles together with other people’s (i.e. our) money and give jobs (“job-im” in Hebrew) to their buddies and relatives. 

It is this ability and joy in spending  other people’s money that makes them the favorites of our politicians. 

Some of that might come to an end though.  Netanyahu’s “Competition Committee” has issued recommendations that will start us on the road to freer and more open markets.  While my first inclination is less regulation and less government rules in this case the pyramid structure of our largest corporations lead to markets that are less free and more highly regulated.   The breaking apart of conglomerates that fund their own activity with the banks and pension funds that they themselves own will free up capital for more productive use.

For those of us who have some of our pension money in Clal Insurance for example, it will be nice to know that the Dankners can’t count on them to buy their bonds because they own them.  The same goes to Teshuva’s Delek Group and their control over Phoenix Insurance and Excellence Investment House.

We could go on and on… but we won’t.  See here for the corporate structures just two of our largest conglomorates (make sure you are sitting, it will make you dizzy):

IDB, Delek.

If these recommendations actually make it through the Knesset – and that is not a sure thing – we may be able to build corporations that will actually do things other than put together puzzles. 

High Cost of Low Standards

Over the last few days, Merav Arllozorov – one of the better business journalists in Israel -  has had a series of articles highlighting the regulatory nightmare that accompanies all Israeli importers (Hebrew links).  She has highlighted the monopoly of the Orwellian named “Standards Institute” which is supposed to “protect” Israeli consumers from the shoddy production standards of countries like Germany, Canada, United States, Japan and other countries well below our standards. 

She has also written about the high cost of the ports (again a government mandated monopoly) as well as the various taxes that are also a main reason for the high cost of imported products.

These are some of the things she has listed:

-          60% of imported products need to pass two tests by the “Standards Institute” .   The first approves the individual model and the second for each shipment that arrives at the port to make sure that it is the right model.  She compares this with having to get a driver’s license and then having to take an additional driving test each morning before we step into the car.

-          Revenues of this (shoddy) Standards Institute are over 300 million shekel.

-          The time needed to approve a new product for import to Israel:  7-8 weeks.  The cost: 50,000 shekel.  This is true each time there is a small change on the model – for example when Siemens  or Maytag adds a feature to a washing machine.

-          Ministry of Health has extra regulations for “non official” importers.   Only the official importer of Colgate toothpaste can import it.   Yiftach Shaked has tried unsuccessfully to import toothpaste and sell it for half the price of what it currently sells for in Israel.

Of course she is correct and we need to eliminate or at least limit these regulations.  But for a start what if the government just let individuals import products for personal use without the hassle and taxes that we need to put up with now?

Why not allow us to order via Amazon, Walmart, Lands End, Drugstore.com  and other online providers?

Why not allow us to fend for ourselves in the global marketplace instead of having to depend on monopolies and unions so we can buy a shirt or a garden hose or a book?

Why not allow us to order toothpaste, deodorant, dental floss, clothes and have them shipped here without having the hassle of being an “importer”? 

Why not?  Because who will protect us children from ourselves if not bureaucrats, politicians, lawyers and judges?

Power to the People ? Could be....

Is Bank of Israel chief Stanley Fischer reading our blog? 

I doubt it but he has come out in favor of one of our pet peeves that we wrote about a few days ago.

Apparantly the committee dealing with the overly centralized economy will reccomend that banks not necessarily need a "core shareholder" -  a"garin shlita"  - something we said : 

goes to the heart of socialism itself – a distrust of “the people”.  Instead of distributing shares to the citizens of the country the politicians and bureaucrats were convinced that only centralized leadership of the companies in the form of a core, main investor could assure the smooth running of the company.

 In today's The Marker  (sorry Hebrew only) Fischer is quoted as saying that if certain proposed laws pass the Knesset, then "we will feel comfortable if banks and insurance companies do not have a core investor".  

If passed this would be a big step for Israel.    This would not only limit major conflicts of interest, this would be a major "thought" change for Israeli bureaucrats - one small step away from mindset of serfdom.

Whose Committee?

It has been obvious from the start that the Trachtenberg Committee the government appointed to respond to the summer protests was going to give in to all the demands of the most extreme protesters but in a way that would seem “moderate”.  This socialism-lite would never satisfy the radicals but the hope was, I am sure, that the actual people upset with the current situation would be bought off with a few more subsidies. 

And … they are probably right.

The committee itself is filled with bureaucrats and a few academics.  Oddly enough, not one elected representative was on the committee, nor were there any business owners. 

 I have a few candidates of the latter category who would give some good insight into the cost of living in Israel and how to make life more affordable.  The first would be Gabi who, along with his father  owns a fruit and vegetable stand in the shouk in Kfar Saba.  Gabi knows the ins and outs of fresh produce and could give some interesting ideas on shopping. 

Then there is Alex, former butcher and now owner of women’s dress stores and a paper goods store. He has spreadsheets that prove that if you buy your fruit and vegetable in the shouk as opposed to the supermarket on a regular basis you will save 650,000 Shekel over the course of your lifetime.  If you buy meat and chicken in certain stores rather than others – your savings are 150,000 Shekel over ten years (that is a new car every 10 years).  He has other calculations and would be happy to share it with the Trachtenberg committee. 

Then there is my friend Yael.  She is a former analyst at an Israeli brokerage firm but for the past few years she has been advising families on how to save money and mange their household budgets.  She explains the ridiculously difficult bills we get from our cellular companies, bank statements, etc – she empowers people with knowledge and allows them to get their financial houses in order. 

The only problem with inviting these business-people to sit in on the committee is that they are not used to spending other people’s money.  Their solutions won’t allow the government to intrude further into our lives and won’t cost anyone extra money (besides the monopolistic corporations and their government handlers who enjoy the taxes on our overpriced lives).

Who needs businessmen to help us when you have bureaucrats and academics?

Our Task

This summer has been an interesting one in Israel.  What started as a successful consumer protest against the high cost of cottage cheese ended in a group of radical communists manipulating the public’s desire for a better and cheaper standard of living. 

The cost of housing, consumer goods, electronics, food, drugstore items and gasoline are high in this country.  Part of the reason is the incredibly high taxes.  We pay 16% VAT on all products and services (with the exception of fresh fruits and vegetables), 120% tax on automobiles and tens of percent on most electronics.  Further, government regulation limiting the import of honey (see the New Liberal Movements lawsuit over lack of honey imports - Hebrew) , dairy products and other basic foodstuffs raise the cost of living.  Another reason is the lack of competition in basic industries.  Two banks (Leumi and Poalim) control over 60% of the banking market.  We have only three cellular phone companies, two internet infrastructure companies, two main supermarket chains.   

The centralized economy is itself a legacy of the socialist way of the past and the socialist mindset that continues to plague policy makers to this day.  When the government privatized and opened up industries over the last 20 years it ended up selling most assets to the same few families and companies that were cronies of the old socialist  leaders of the 50’s and 60’s.  Part of the reason was simply the result of being part of the “good ole boy” network.  Part of the reason though goes to the heart of socialism itself – a distrust of “the people”.  Instead of distributing shares to the citizens of the country the politicians and bureaucrats were convinced that only centralized leadership of the companies in the form of a core, main investor could assure the smooth running of the company.

The enemies of the free market in Israel are not only the radical socialists of the upper middle-class protest movement but the owners of the big conglomerates (who the press love calling the “tycoons”) who made and make much of their money off of government regulation and monopolies.

Our task here then, is to expose the opponents of free markets and free people and to help our policy makers, journalists and citizens  realize that free market capitalism is not only economically superior to socialism and crony-capitalism, but it is morally superior, too.