Tuesday, August 30, 2011

Economics 101: When ‘experts’ get it wrong

Daniel Doron

The recent social protests by Israel's middle class, along with tent-dwelling radicals, have prompted a renewed interest in economics. On the face of it, this is an excellent development. Unfortunately, some people are taking advantage of this newfound interest to sell the public illogical arguments that betray a lack of economic knowledge, while others are spouting total nonsense.For instance, on the basis of partial and erroneous statistics, many claim that the voluntary unemployment of ultra-Orthodox men and Arab women is a central factor in retarding Israel's economy.

In fact, most of the employment in these sectors is simply not reported. Even more so than in other parts of society, it is considered perfectly legitimate within these communities not to report income to the government. This results in distorted employment and income figures, leading to demands for expensive governmental programs to increase employment that involve a great deal of bureaucracy but provide very little in the way of results. In fact, anyone who enters an Arab village and sees the amount and quality of construction going on there cannot help but conclude that a lot of off-the-books money is changing hands that must not figure into employment statistics. The same can be said for the ultra-Orthodox sector. Insiders point to the size of dowries as a method of determining the true level of economic welfare there, a level that does not square with official reports of ultra-Orthodox poverty.

An under-the-table economy of this magnitude poses a serious problem. But it is not a problem confined to just these two sectors that people tend to point fingers at. This is why the solution is not to launch expensive government programs to “integrate” the ultra-Orthodox and Arabs into the workforce, which may create a lot of jobs in the Trade, Industry and Labor Ministry but is unlikely to generate productive employment. Besides, our economy lags behind not because certain workers may or may not be absent from the workforce, but because of the low productivity of those who do work. An Israeli worker produces about two-thirds of what an American worker does. If we want to increase our productivity, we need to abolish market concentration and increase competitiveness. This would have a huge macro-economic impact, but it does not get enough attention.

You have to give the tent protesters credit. They seemed to sense that their empty slogans weren't inspiring confidence, so they established a team of economic “experts” to lend some credibility to their ambiguous demands. But since the “experts” they chose are mostly leftist ideologues and not economists, their reform proposals only add to the ambiguity.

Professor Avia Spivak, who heads the team of experts, explained, for instance, that his group would work toward “a broad demand to reshape the Israeli economy so that it serves society.”

Is he capable of defining the “society” on behalf of which the economy must be reshaped, to define its characteristics and how they manifest themselves? Is it possible he thinks that the abstract term “society,” in reference to a collection of people, is enough to unify them into a single body whose elements all have the same goals and the same way of expressing and fulfilling those goals? Isn't it more likely that the ensemble called a “society” is actually a collection of conflicting interests that the enterprise called politics is meant (not particularly successfully) to bridge?

Professor Yossi Yonah, Spivak's colleague, is not an economist, yet has no trouble making economic recommendations. He proposes breaking the budgetary framework, which could have severe consequences for the economy and society. Yonah likes to confuse his audience with the claim that there is a structural opposition between a market economy, the only system that can generate true welfare, and “societal welfare,” as if “welfare” were at all possible in a backward socialist economy like the one Israel had until recently.

Even outright economists like Udi Nissan, a former budgets department head at the Finance Ministry, have conceptual blocks that lead them to make questionable recommendations. “Today people have greater needs and that is why the level of government spending is too low,” he says. Nissan recommends raising taxes. As if the government were the best and most natural supplier of people's needs, and as if increasing its income wouldn't just lead to enormous government waste on failed efforts to provide health care and education.

The newfound popularity of economics in Israel is most welcome. But even economists, and certainly “social justice” experts, can do a lot of damage when they articulate “demands” that are meaningless, defy logic or rely on partial or erroneous knowledge.

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