The 'New' Politics and Economics
by Dan Ben-David Israel
was once a country where three of its first four presidents were leading
researchers in their fields. Today, this is a country where a Nobel
prize-winning scientist from the Technion, whose focus these days is Israel's
existential domestic issues, cannot even muster the support of 10 Knesset
members required to qualify as a candidate. They promised us “new politics,”
and they certainly delivered. We
were also promised “new economics.” What we received is not a new national
agenda, but the invention of new economic principles that run contrary to the
accumulated research knowledge in the field. Intuition, no matter how
well-intentioned, cannot replace basic economics. On the one hand, there are
those who exaggerate the accuracy of economic fundamentals and often view them
as though they were the laws of physics in making precise economic
forecasts. But one should be careful not
to be lured into the opposite extreme and assume that intuition and
conventional wisdom can substitute for basic economic principles and facts. The
excess hyperbole in the public discourse surrounding the recent decision to
reduce housing prices by eliminating VAT on new apartments sold to young
couples has completely obscured the borders between what we think and what we
know. Economics is not an exact science, and a large number of social factors
may cause the proposed policy intended to lower prices to actually raise them,
or possibly lower prices somewhat — but that is not the point. What we do know
with certainty is that this policy is not the most effective way to reduce the
cost of housing. In the short term, the stock of apartments is relatively fixed
— there is what is called in economics an “inelastic supply.” As a result, not
only would a tax reduction increase the demand for apartments, but the benefits
of the policy, paid for by billions of shekels in lost tax revenue, would go
almost entirely into the pockets of building contractors, not those of the
young home buyers. These outcomes follow from the most basic laws of supply and
demand, taught in introductory economics courses. They could not possibly be
what our policy makers have in mind. A
serious solution to the high cost of apartments must be long term: the
provision of the best education in Israel's peripheral areas and the connection
of these areas to the major cities with a rapid, cheap and reliable
transportation infrastructure. After all, this is a small country where almost
everyone lives within what should be no more than a half an hour from a big
city. Cheaper land prices in the periphery would enable young families
currently living in the cities to pay less for more living space without having
to compromise on the quality of their children's educations or on their
careers. And on the way to solving the housing problems of young families, we
will upgrade the education of the children who already live in the peripheral
areas — which will become suburbs — while bringing their parents closer to
potential places of employment. In other words, on the way to a core solution
of the housing problem, we will begin to provide solutions to Israel's core
problems — high rates of poverty and inequality and low productivity. This
might be a new economic policy for Israel, but it is rooted in the most
fundamental economic principles.
|