This is fine? Wake up and smell the smoke!
"High-tech is not only the engine of the economy - it is also the shield. It is our wall of defense against inflation. It protects the pocket of each and every one of us," writes Shaul Amsterdamski
1. In January 2013, exactly ten years ago, the American web cartoonist KC Green published his most iconic work. It consisted of several comic strip squares featuring a big-eyed dog sitting and drinking a cup of coffee. Around him the whole room is on fire, literally going up in yellow-orange flames, the ceiling is covered in smoke, and the dog is sitting calmly and says: "This is Fine". Then he takes another sip of the coffee. Green created this comic as part of his struggle with depression, but since then its central frame, with that statement, has been posted on the web endlessly, used whenever something in reality goes wrong but people try hard to deny it. This week I remembered him not only because of the celebrations of the decade since its creation, but also because of Benjamin Netanyahu - and because of the Economic Arrangements Law.
At the end of last week, the Ministry of Finance distributed the draft of the upcoming Arrangements Law (actually, only a part of it - there will be more parts) and the financial websites were filled with the usual news. Here is a reform that will require people who rent out and rent apartments to report it to the tax authority. Here is a reform that will require Israelis who drive electric cars to pay a special tax. Here is a new property tax fund that will distribute funding fairly between strong and weak municipalities.
I looked at all this and wondered: What is going on here? What are you talking about? How is the finance ministry working on these reforms as if everything is fine?
The streets are full with thousands of protesters. High-tech workers are striking and threatening to take their money out of Israel. Senior economists, lawyers and government office managers are signing letters that outline an impending disaster. And the treasury? They are promoting a reform to break the monopoly of large importers. As the cartoon dog concluded, “This is fine.”
This reminded me of a previous draft of the Arrangements Law, at the height of the pandemic, between one shutdown to the next. The finance ministry presented the law and was proud of the reforms. I remember the head of the budget department at the time, Shaul Meridor, talking passionately about a cosmetics reform, which was supposed to combat the cost of, well, cosmetics. I couldn't understand. What are you talking about? The whole country is burning, the self-employed are crying for the grants they need, businesses are closing every Monday and Thursday because of the pandemic. How does cosmetics have anything to do with this? “This is fine.”
2. On other days, the Arrangements Law is indeed a cause for excitement in the financial press. Of all the government babble, this really affects our lives. Not everything written in the draft will be approved in the end, but what is will definitely change the economy. Through the Arrangements Law, previous governments raised the retirement age (more than once), opened up entire industries to competition and tried to correct various failures (from the private health market to television broadcasting). It didn't always work, but when it did - it worked.
In the last 15 years Israel's economy has grown a lot. The country is more open, we trade with more regions, the volume of trade has increased, we produce more, invest more in development, our average salary has increased. The standard of living in Israel, as measured by GDP per capita, has increased by approximately 30%.
As a result of the strengthening of the economy, our currency has also strengthened greatly. Since the beginning of 2009, the shekel has strengthened against the dollar by almost 20%. In that period, the euro, for comparison, weakened by 15%.
The strengthening of the shekel was a large part of the explanation for the increase in the standard of living of Israelis. When the shekel is strong, it's easy and convenient and fun to travel abroad. When the shekel is strong, it's easy and convenient and fun to order things from AliExpress or Amazon or wherever it may be. It's true that exporters cry about the shekel being too strong, but what can you do, that's the price of a strong and growing economy, and even the exporters have learned to live with it and buy financial instruments that protect them from the dangers, as far as they are concerned.
Why am I looking specifically at the beginning of 2009 as the point of reference? Because that’s when Netanyahu returned to the prime minister's office. And I know the state of the shekel is one of the most boring topics around, but stay with me for a moment because this is about the only time it's really worth talking about.
3. One of the reasons for the strengthening of the shekel is the growth of high-tech. These are not only the foreign investments in the industry: High-tech does receive about 85-90% of these investments that flow to Israel, but these amount to "only" about NIS 20 billion (approximately $5.8 billion). The bigger story is exports. In 2009, high-tech was responsible for 30% of all Israeli exports. Today it is about half, even a little more, and it is already at about NIS 70 billion (approximately $20.4 billion). The high-tech companies sell their services and products mainly abroad, less here, meaning they sell in dollars, and then convert these dollars into shekels to pay salaries. The result is a significant strengthening of the shekel.
I dwell on this point because this week Shahar Cohen, once a member of the Trachtenberg Committee and now CEO of the hedge fund Lucid Capital, provided me with an insight. We are used to thinking of high-tech as the engine of the economy, and to a large extent this is true, but high-tech, Cohen said, is not only the engine - it is also the shield. It is our wall of defense against inflation. It protects the pocket of each and every one of us.
Why? Prof. Karnit Flug explained it well last September, in the article "The cost of living in Israel - what do the numbers say?". The former Governor of the Bank of Israel showed that in the past decade the cumulative inflation here amounted to 10% (half of that in the last year), while in the OECD countries it was three times that - 31%. One of the main reasons why life in Israel has become less expensive than elsewhere, according to Flug, is the strengthening of the shekel. This is the whole story. High-tech exports huge amounts and strengthens the shekel, manufacturers and importers buy in dollars and sell in shekels, and from our point of view this means that the prices are not racing upwards as they might have raced without a strong shekel, that is, without high-tech.
Netanyahu's supporters are currently busy hating high-tech, sticking to their "no problem, let them go" attitude. In practice, Netanyahu has to be thankful for every dollar they put into Israel, and the last thing in the world he - or we - need now is for the shekel to change direction.
4. Therefore, even if he is not interested in it, Netanyahu needs the high-tech community on his side. Not only the entrepreneurs who will raise investments and sell products and bring in dollars, but also the workers, in all positions. Because happy high-tech workers are the ones who pay taxes. Angry ones, on the other hand, start thinking about what they do with their money, what country they put it in, and if they have a way to create a tax revolt. This is what happens when these people stop saying "This is Fine".
And Netanyahu also knows that it doesn't matter if he is right and everyone else is wrong, or vice versa; What matters is who the markets will believe. And this week the markets already gave a distinct hint of their position. If the markets believe that the legal reform will harm Israel's economy, they will react not for a moment, but over time. And this is not a story of one stock or another. This means that companies will indeed think twice whether to invest here or not, but it mainly means that the shekel will weaken and the dollar will strengthen significantly. We will lose our protective wall, and everything will become more expensive.
Netanyahu understands markets. He knows all this. But right now, in the face of this understanding and all the warnings, he continues to ridicule his opponents, ignoring their warnings, and accusing them of being the ones who are destroying the economy. He continues to make promises that he will have a hard time fulfilling. Either way, the base is on his side.
If he really finds himself with his back against the wall, a committee can always be formed. In the past it was the Trachtenberg Committee, tomorrow it might be the Herzog Committee, who knows. What does all this mean? That at the moment, Netanyahu is the one saying "This is fine".
- "We are sorry the high-tech industry has only just woken up, but we have arrived, and we will do whatever it takes"
- Early withdrawal: Local investment houses sense clients’ fear of judicial reform fallout
- Papaya Global CEO: “We will withdraw all of the company's funds from Israel due to the emerging judicial reform”
5. In the last frame of that K.C. Green comic, by the way, after the dog assures himself again that "everything will be fine," he completely melts.
We don't have to reach that state. As interest rates in the United States continue to rise, the shekel will weaken anyway. And as the fear of foreign investors increases, so will the pressure on the local currency. The result will be rising inflation here. And if inflation increases, or simply does not recede, the Bank of Israel will have to continue to raise interest rates, which could greatly slow down economic activity here, to the point of a recession. I hope we don't get to that, and we don't have to get to that, but that dog didn't have to keep drinking coffee either.
In the meantime, the Ministry of Finance continues to work as usual. It is strange. Are they waiting to become former senior officials in order to then sign a warning letter to Netanyahu, like the one we saw this week? Do the finance ministry officials have nothing to say about the Prime Minister's plans? After all, if the changes in the legal system are the mother of all reforms to strengthen the Israeli economy, as Netanyahu claims, how can it be that the treasury is not part of this game? That they are not part of an economic plan that the finance ministry is leading? And on the other hand, if the plan does harm the economy, how can it be that they are not opposed to it? In any case, their silence is disturbing. There is a limit to how much you can say "This is Fine". At some point you have to go look for a fire extinguisher.
Shaul Amsterdamski is a journalist at KAN News