Free Market? Reflections on the Israeli Housing Crisis

“Mom and dad, I think I’d like to spend a year studying in Israel before college.”

“Oh, honey, we’re not so sure that’s a good idea.”

“But...but why not?!”

“Well, we’re a bit concerned with the current socioeconomic tumult in the country. The tent protests are getting out of hand, and besides, the price of cottage cheese is exorbitant!”

Such an exchange has likely never taken place between a high school senior and his overburdening parents, the discussion usually centering on the unspeakable dangers of intra-city taxicab rides and late-night bus travel. But while the world community maintains its focus on the ongoing Arab-Israeli conflict and the implications of the “Arab Spring,” working class Israelis have shifted their focus inward to the domestic economy and sociopolitical structure of the country.

That’s right, Israel has domestic politics like the rest of us. And in recent months, before the skirmish on the Egyptian border selfishly stole back the headlines, Israeli papers and popular sentiment were abuzz with a series of unprecedented national protests. These protests, creative and widespread, were widely attended by young to middle-aged working and middle-class Israelis remonstrating with the Israeli government on issues such as food and housing prices, Israel’s regressive tax code, medical working conditions, and public education. The Jerusalem Post recorded marches of up to 200,000 people in Tel Aviv in early August and tens of thousands more throughout the country to protest the cost of urban living.

Strangely enough, the catalyst for such widespread civil unrest came via Facebook. In June, a Facebook group called “Boycott Food Products” called for a boycott of all cottage cheese produced by the three biggest Israeli dairy producers, Tnuva, Tara, and Strauss. The price of cottage cheese, viewed as a staple in Israeli households, had been climbing at astonishing rates. Even more perplexing was that the Israeli government had deregulated the cottage cheese market in 2008, when the average price of the deliciously lumpy food stood at 4.82 NIS, to encourage market competition. In the three years since deregulation, the price of cottage had risen to roughly 8 NIS.

Much ado was made about cottage cheese until other organized protestors stole its thunder. Thousands of tents were pitched in the major squares in Tel Aviv and Jerusalem to protest the rent being too damn high and the inadequate supply of low-cost housing. Mothers rolled baby-less strollers down the streets of Tel-Aviv to demand across-the-board public education and regulation of diaper prices. Doctors left their posts by the hundreds to demand better hours, better pay, and better facilities.

But underlying these individual movements is a conspicuous undercurrent that should interest not only those in the middle of the fray (or potential Olim), but any student of political economy, history, and Jewish culture. Roaring its ugly head in the middle of the fracas is the age-old confrontation between free market efficiency and socialist equality, rugged individualism and collectivist idealism.

MK Amir Peretz of the leftist labor party has stated, in response to the cottage cheese uprising, “I am opposed to privatization, which has brought catastrophes to Israel, and I oppose imports, which people seem to think is the solution to every problem.” He added, “This isn’t a free market, it’s a jungle.” Shelly Yacimovich, another Labor MK stated, “The current economic policy’s purpose is to shirk the state’s responsibility to its citizens in order to save on the responsibility’s cost.”

Indeed, Israel has struggled in its gradual shift from a pre-1980s socialist state to one that encourages free enterprise and competition. Though the state has transmitted much of its prior holdings in major Israeli industries to the private sector, a great percentage of stock in Israeli industry is owned by a few well-connected family cooperatives, which certainly inhibits competition and evokes the dirty catchphrase “crony capitalism.” In the case of food production, specifically dairy production, the big three dairy producers Tnuva, Tara, and Strauss hold 90.2% of market share according to an August 16, 2011 Haaretz story. This certainly raises concerns that the dairy producers acted as a cartel and jointly marked up food prices to maximize profits on a (no longer) largely complacent populace.

But is the Israeli free market truly a “jungle”? And at what cost should the Israeli government assume “responsibility” for the welfare of its citizens?

If the market is indeed an open “jungle” in which “lions” - dairy conglomerates and housing contractors - prey on powerless, fleeing “deer” - the Israeli working class - to maximize their own welfare, then perhaps regulation would be necessary. But the Israeli economy more closely resembles a perverse zoo, where lions and deer share a cage with no escape option for the deer and no entry for help.

In early August, finance minister Yuval Steinitz lowered import tariffs on dairy products and opened the border to new types of previously disallowed cheese. This type of open border policy should benefit the Israeli consumer, providing an escape hatch from a lion-dominated closed economy. Foreign dairy products will pour into the country, lowering prices and challenging the domestic conglomerates to increase their productive efficiency, further lowering prices. Steinitz seemed to be saying that the Israeli economy was not open enough.

Might the Israeli dairy farmers and producers suffer as a result? Yes. But the benefit to consumers must be taken into account as well, and with the extra savings in their pockets, they will be able to spend more on other products. This increased demand for other products will expand those industries, which will then demand more labor, creating new employment.

In the housing market, too, perverse incentives are partly to blame for the shortage in low-cost housing. Vacant land in Israel is owned by the state, and new housing projects must go through an arduous contracting process, replete with bureaucratic backlog and many seemingly unnecessary fees. At the end of the transfer process, the contractor has generally worked up quite an overhead in terms of time and financial costs, to the point that low-rent housing is no longer a feasible financial option. Also, because land is transferred to private hands so deliberately, supply cannot meet an ever-increasing demand for housing, which drives up its price.

While the protestors cry for rent ceilings and mandated building projects, it is clear that to apply such measures would only superficially address the problem, not cut to the source of the issue: not enough private property to divest on the free market and too much bureaucracy. By holding open auctions for government-owned land (say, in undisputed territory) without the private wheeling and dealing currently taking place between bureaucrats and contractors, transaction costs between state and contractor would be lower, and the price of land would more accurately reflect levels of supply and demand in the market.

These local economic concerns and their greater implications regarding the state of Israeli capitalism also open important questions regarding the relationship between capitalist ideals and Jewish identity. Is there such a thing as a “Jewish marketplace” that demands certain “spirit of the law” considerations in dealing economically with others? Could capitalism perhaps encourage behavior that undermines these Jewish ideals? By opening up Israel’s borders, does the Israeli government risk diluting the sense of intimate, concentrated brotherhood with which Jews view each other in the marketplace? Would free trade open new questions about the system of Kashrut in Israel?

Whatever the case may be, the protests and socioeconomic questions raised over the summer in Israel should open our eyes to a different aspect of Israeli reality. While parents may fret over “tremping” and a weekend spent in Chevron, Israelis grapple with the direction of a first-world economy.

It’s kind of refreshing, I guess.