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contract workers: justice for some is not justice for all (from the Times of Israel)

A few months ago, the Israeli public finally began discussing the issue on contract workers and what it means to work without any social terms or benefits. Weeks of debates culminated in a four day general strike bringing the issue to the forefront of Israeli media with MKs, businessmen, and labor activists talking about the moral, legal and ethical issues of contract work. But what should have been a platform for change culminated in an agreement for only Histadrut workers, leaving the overwhelming majority of Israel’s struggling working class to suffer.

I’d like to begin by explaining what constitutes a contract worker, because most of the media as well the Israeli government seem to have no idea. A contract worker is any worker, whether part time or full time, who works under a contract that circumvents Israeli labor law. Some of these workers receive wages below minimum wage, many do not receive a pension, and nearly all of them are missing out on at least one of their legal rights, including but not limited to reimbursement of transportation, vacation, sick leave and overtime pay.

There is a reason that we have labor laws. Elected officials enact labor laws on behalf of their constituents as a counterweight to a firm’s desire for strict gains. While it may not be desirable for an individual firm to give vacation days or a sick leave policy, we, the citizens of Israel have the right to enact such laws via our representative government and tell firms that if they want to do business in Israel, these are the rules.

Other labor laws serve not only to help workers in the short run, but also to help stabilize the economy in the long run. For example, the mandatory pension law is designed not only to ensure that all Israelis will be able to retire with dignity, but also to enable the government to ultimately cede the task of supporting the poor, a task that it currently does both begrudgingly and inadequately, to the individual workers. By undermining Israel’s labor laws and allowing employees to pay workers without putting money into their pension funds, Israelis risk not only the continued suffering of the elderly, but also the continued collective economic burden that payouts incur.

Finally, allowing employers to write contracts that circumvent Israeli law leads to lazy governance. For example, most people agree that Israel’s overtime policy, where overtime is paid based on hours worked per day, is excessive and unrealistic, as most jobs require and reciprocate with flexibility. A realistic alternative would be to change the law to mirror the labor laws of other countries, where overtime is paid for excessive hours worked per week or month. But since employers usually sign workers onto a contract for a “global salary,” meaning no overtime whatsoever, the matter never came before the Knesset and they never bothered changing the law. Consequently, instead of having a reasonable overtime policy, most Israelis receive no overtime pay at all.

Much of the media as well as the government claim that by turning contract workers into salaried workers, employers would lose the flexibility they need in order to hire additional labor for seasonal projects, end up giving tenure to more useless workers, and ultimately cost employers too much. In truth, this argument only applies to workers in companies with strong unions, such as the histadrut. For all other Israelis, Israel’s policy for firing a worker is not very strict at all, one day of notice per month with a max of a month’s notice. But if employers insist that following the law is too complicated, then at least some sort of compensation should exist.

To begin, all workers, contract and otherwise, should have a pension paid out of their salary. The pension law isn’t just about the worker; it’s about Isael’s economic stability and in an age of electronic transfers there is no reason why this cannot easily be done. Second, if an employer does not want to pay his employees benefits, then the government should establish a set percentage to be paid as compensation for vacation days and a sick policy. Finally, in order to make sure that all employees follow the laws mentioned above, it should be mandated that all wages should be stated to the potential employee excluding the additional pay for benefits. Just as a regular job quotes its salary figures in gross salary not including benefits, so too salaried workers should have their pay offered in terms of gross pay without benefits. This would also end the current situation where employers pay benefits as a part of a minimum wage, effectively paying their workers below minimum wage. This would also allow potential workers to see the payoff of a job in a consistent, understandable way so that the worker can know if the job is really worthwhile.

Allowing businesses to circumvent labors laws is not only immoral, but make every discussion about labor laws entirely irrelevant. If our Knesset members really believe that minimum wage is just an idea, that the pension law is only an option and that social terms are just a proposal, then they should say so. But if they believe that our labor laws aren’t just a suggestion, but the product of our representative democracy, then the only just thing is to tackle the problem of contract workers and bring order to a labor market plagued with anarchy.

Import duties and the Israeli Laffer curve

If you’re like most Americans, you tell your relatives who send you packages not to declare that anything is new or has a value over $5.  You do this because one time a relative sent you something and the post office held it hostage until you paid some sort of ridiculously large tax/fine/payment that is calculated using what I can only assume is some sort of mixture between random numbers and witchcraft.  Well, a tiny bit of that is about to change.

As of January 30th, Yuval Steinitz signed a reformation of two import taxes.

– No import taxes on anything ordered by the internet up to ₪ 1,200, although you’ll still have to pay 16% for VAT.

– No taxes (even VAT) on personal packages valued at $75 (up from $50).

The first reform is a great piece of legislation that decreases the cost of alternatives and fosters more competition.  The ₪ 1,200 limit means that the increased competition will only affect lower end items, not luxuries.  I would be interested to know why the government chose such a low number (why not, let’s say ₪ 2,000), but I agree with the idea.

The second price of legislation is also a step in the right direction, but is telling of the government’s ignorance of the issue at hand.  When someone does not declare the full value on the package, he is really only giving up the insurance on the package in the case of loss or destruction.  The value of something is what you pay to get it and I am not willing to pay customs duties in order to receive insurance on the package sent.  This legislation is not going to make any difference to me on any packages valued over $75 because the cost of customs is still too much for me to declare the items.

If the government want to both maximize tax revenue and help its citizens, it should analyze how much people would be willing to pay for insurance on packages and lower the import duty to that level.

Ronald Reagan won the 1980 election by using the Laffer curve to prove that he could raise government revenue by reducing certain taxes.  For those who are not economics nerds, the Laffer curve is a curve that shows the relationship between tax revenue and the various possible rates of taxation.  History shows us that his application was entirely incorrect, but the theory stills holds.  It seems that this is one of those very rare cases when tax cuts along the Laffer curve could be very useful.

Do you instruct your relatives declare the value of items that are sent to Israel?  If not, how low would the tax have to drop in order for you to tell them to declare the true value?

Trajtenberg: More tax breaks for the rich


this article is a slightly more in-depth version of the op-ed I wrote that was published in the Jerusalem Post.

This past summer, hundreds of thousands of Israelis gathered to protest for social justice; an end to the widening economic gap plaguing Israel’s poor. The demands were simple: cut down on the government corruption and change the monetary policy that work in favor of big business and begin taxing the rich and redistributing wealth. Unfortunately, after months of protesting, the Israeli government on the advice of the Trajtenberg Committee, only marginally changed the tax system, not only failing to address the economic gap with income redistribution or monetary policy, but worsening it by giving disproportionately large tax cuts to the wealthy.

How exactly in the midst of public outcry for reform did the Netanyahu government manage to fit in more tax cuts for the wealthy? The secret was the expansion of a tax loophole using Bituach Leumi, National Insurance. For absolutely no reason, Bituach Leumi, unlike all other programs that are either controlled by the government or sponsored entirely by it, collects its revenue through a separate income tax.

This tax, along with the bureaucracy of Bituach Leumi, has a long history of working against the less fortunate. In particular, Bituach Leumi ignores tax credits and disenfranchises Israelis working more than one job from doing a full tax alignment by demanding that workers do an additional Bituach Leumi alignment and then systematically drowning the workers in confusion, bureaucratic incompetence and paperwork until processing such an alignment becomes economically prohibitive.

Worst of all, Bituach Leumi’s income tax makes Israel’s tax system regressive for the super wealthy, dropping the marginal tax rate for those who earn above a declared ceiling. Previously, the ceiling for Bituach Leumi income tax was NIS 73,422 per month – up to that amount the tax rate was 12 percent, and any income over that amount was not taxed. The Trajtenberg Committee advised dropping that ceiling to NIS 41,850 – in other words, giving a substantial tax cut to both those earning between NIS 41,850 and NIS 73,422 per month and those earning above NIS 73,422 per month. The government approved the measure, which will go into effect next month.

A comparison of the overall income tax rates from 2011 and 2012 shows that Trajtenberg Committee’s reforms ended up not only giving the super wealthy a greater tax break than their less fortunate counterparts in absolute terms, but also in percentage of total income earned.

Consider the charts below of a simple male worker in 2011 and 2012 with 2.25 points.

Notice in the second chart that once a worker makes a bit more than ₪ 40,000, his tax break rises significantly.  That’s the Bituach Leumi ceiling kicking in.

But what about the points?  Certainly all the new points for young fathers should fix this up, right?  Alright, let’s completely disregard women (after all, the Trajtenberg Committee certainly does…) and deal with the case of a father getting 4 extra points for his children.  The graphs would look a bit better:

In this case the less fortunate father would only get a slightly bigger tax cut than his wealthy counterpart.

And this is completely justified; with the price of daycare through the roof and working mothers unable to use their tax credits, helping fathers is a fantastic idea proposed by the Trajtenberg Committee, although an obviously better solution would be to let married couple share points, like they do in the US.

Regardless, giving a few tax credits to the poor does not justify the tremendous tax cuts given to the rich.

The justification for the Trajtenberg committee’s recommendation to cut taxes for the rich is that high income earners were setting up shadow companies to get around paying Bituach Leumi taxes. It was reasoned that by lowering the Bituach Leumi income tax, high earners would be more likely to pay their taxes.

But exploiting one loophole to avoid another is unacceptable, especially when the government can easily close both. The government seems to fear a mass exodus of the rich, which is absurd. No intelligent CEO will just up and leave his job, family and country because he has to pay his taxes, and if he or she does, Israel has more than enough local talent to compensate. This is exactly the kind of corrupt kowtowing to the super wealthy that sparked last summer’s protests.

Israelis need real economic reform that rolls back some of the supply side policies and takes a fresh look at what is supposed to be a progressive tax system. Bituach Leumi should be incorporated into regular income taxes, laws that enable tax loopholes need to be closed and points should be awarded not only based on the individual worker, but also on his or her respective family unit. One we take these preliminary steps, perhaps the Israeli government will finally be able to legislate kind of reform that was promised this past summer.

ER economics 101

This past week, I was sent my doctor to the ER for treatment of a boil.  I’m doing well, thank you, but it was a huge pain.  Certainly more of a pain than wild animals, but not as much of a pain as hail; overall, I’d give it a 6 out of ten.

When I got to the hospital, the ER was packed; there was not a single seat available in the waiting area.  The only time people seemed to get up was in order to yell at the nurses for their not having seen a doctor yet.  Doctors had to run from room to room in order not to get mobbed by impatient patients.  At one point during the evening a doctor broke down and, after a patient yelled at her that he had been waiting five hours, screamed back at the patient complaining about her terrible working conditions and paltry salary.  More words were exchanged, but I don’t know enough swear words in Russian to translate properly.

By the end of the night, I had waited eight hours to see a doctor.  In retrospect, my waiting was partly my fault.  Medical care is a resource like any other and I should have been looking at this situation using economics, the study of who gets what and why.

Hospitals are overcrowded; doctors are resource in a terrible shortage.  One of the jobs of the nurses is to sift through the patients and prioritize so as to use the resource in the best possible way.  This means that seeing a doctor has more to do with one’s relative priority to others in the ER and less to do with one’s time of arrival.  While many try using intimidation to make themselves look like more of a priority, the better strategy is to wait until a time when there is not much competition.

When a doctor sends gives you a referral to the ER, ask him or her if you need to go ASAP or if it can wait until around 3AM.  If it can, then go home and relax before going to the ER.  Doing this can reduce your waiting time from as much as eight hours to as little as thirty minutes.

Two more things to note: (1) Yelling at the doctors will not help.  They are not the ones under-staffing the hospitals.  If you want to yell at someone, look up the MK’s phone numbers and call them. (2) If possible, try to always to go the hospital with food, a book, an iPod, and, if possible, even a laptop and a couple of movies.  You’re going to wait anyways, so you may as well plan your own entertainment in order to make the time go by quicker.

In an ideal world, our government would get its act together and help provide better medical care for its citizens.  Until that happens, the best thing you can do is to be understanding of those trying to provide you with medical care and to do your part as well.

fighting financial dictatorship

Years ago, when governments needed money to help their respective economies, their options were limited to taxing their own people and invading other countries.  Such measures were difficult; after all, people generally dislike taxation (with or without representation) and other countries have a nasty habit of defending themselves.  A few hundred years ago, this all changed when western government discovered that they could just print money whenever they wanted.  But when new money was printed, government bureaucrats tended to waste it on superfluous projects.  To counter this problem, monetary policy was born.  Monetary policy dictated that money would not simply be created and spent; it would be created and loaned out to job creating businesses at varying interest rates.  This would ensure that the money would be given only to businesses so that they could help the economy stabilize and grow.

When money is created from nothing, there is a price, inflation.  Everyone who has money looses some of its buying power when the government makes more money to give to itself, whether for superfluous projects or for lending.  Thus, inflation is a flat tax on money and monetary policy is a tool for collecting a flat tax without asking anyone if they want to pay it.  This is very convenient; when government levies taxes, citizens have the gall to see if there is a worthwhile reason for it and even ask that the tax be progressive.

Ancient Rome was famous for its occasional use of dictators.  Dictators would, for a limited amount of time, assume absolute power and make decisions when the public proved unable to do so.  The head of the Bank of Israel is our dictator for money.  He can decide to supersede the normal way of collecting money and lay a flat tax on all of our money by changing the interest rate and lending money.  The mark of a great Roman dictator was not his conquests, but how infrequently and precisely he used his power and ultimately, when he returned it to the people.    The head of the Bank of Israel should be the same.  In fact it is the frequency with which it uses its power and its complete disregard for the voice of the people that was caused our current financial upheaval.

The Bank of Israel has already admitted that its policy of keeping interest rates low caused the housing crisis.  The bank of Israel kept interest rates insanely low (2%) for all of 2009 and 2010, forcing investors into the only market with a decent payoff, real estate.  And since investors generally have more money than private owners, housing turned from a basic necessity to a piece of a portfolio.

The Bank of Israel insists that it had to keep interest rates low; after all, if they would not have intervened, then exporters would have failed and there would have been massive unemployment.  It was a choice between housing and jobs and Bank of Israel had to make it.

Let’s look at the alternative.  Imagine what were to happen if representatives of the Bank of Israel were to meet the citizens of Israel and explain that they will have to pay more taxes in order to subsidize exporting companies.  Public outcry would ensue, but once the cries die down, citizens would rationally ask for terms and conditions.  Okay, maybe that’s a stretch, but at least the democratically elected representatives of the people could decide on a list of reasonable terms and conditions (perhaps they would even form a ministry dedicated to finance!).  Israelis could demand that the companies submit a plan for their use of the subsidy and explain how they will become self sufficient within the next few years.  Israelis could demand that CEOs of such companies receive limited pay or that the companies do not lay off certain workers.  Then, either the company would agree to the conditions, bargain them, or choose to fold.

Instead, the Bank of Israel decided to play God with the economy and tax the people to bolster the rich.  And with the oversight of the people disregarded, the companies that benefited from the monetary policy reaped the benefits while becoming addicted to government subsidy through the low interest rates.  Now these companies are weaker than before threatening “too big to fail” if the government cuts off their crack.

But at least unemployment is low, right?  And the cost of living has not risen too much, so everything seems okay.  Not exactly.  The low unemployment rate ignores the underemployed.  There is no point in measuring the cost of living to the average or minimum wage when the dispersion of wealth is out of control and there are dozens of loopholes that that enable employers to pay workers well below minimum wage.

Since the social protests began this past summer, it has been difficult to pinpoint exactly what went wrong.  Bibi blames bureaucracy, the Bank of Israel blames the global economy and the Ministry of Finance isn’t sure who to blame because Israel still has low unemployment and solid growth – and this is the problem.  It is exactly this blaming, inaction, and relinquishing of power while denying reality that caused this financial crisis.  It was the government’s secession of oversight to the Bank of Israel and the Bank of Israel’s secession of Israel’s economy to the global economy that caused the current crisis.  As long as our representatives in the Knesset refuse to take back power from the Bank of Israel, they cannot do anything to fix the economic crisis.  And if they refuse to do anything, I suggest we get rid of them and elect representatives who will.

tournament theory and the medical solution

Have you ever wondered why your incompetent boss makes so much more than you?  Well, economists have an answer, tournament theory Developed about 30 years ago, tournament theory suggests that most offices are a tournament where differing workers compete for a prize, which is usually given in the form of a promotion.  Tournament theory suggests that your boss’ pay is not so large because he or she deserves it, but because it is meant to motivate you.

Does the pay difference between you and your boss have to be so large?  At first glance, the answer would seem to be yes.  Let’s take an example of a payment compensation scheme at the fictional but squeaky Rubber Duck Company.   The manager tells the workers that whoever makes the most rubber ducks gets $100 and everyone else at the company will make only $40.  The workers know they are guaranteed $40 and would only put in up to $60 worth of additional effort in order to get the prize; anything else would be a loss.  Realizing this, the manager changes the pay scheme, telling the workers that the winner gets $100 and the loser gets $10, thus increasing the amount of work that each worker will put in to approximately $90.

But first glances can be deceiving.  As the working season begins, workers begin sabotaging one another.  Also, some workers who were previously able to try and put in the $60 of extra effort have cut back entirely because they know they will never be able to produce $90 of extra work like some of their more able coworkers. Finally, one worker notices that a rival company, Quackers, which is currently hiring, is planning on giving their workers the same deal as the Rubber Duck Company except the top prize if $65 and the bottom is $40. Realizing that working at Quackers guarantees $40 and would only require up to $25 of extra work, many workers leave the Rubber Duck Company and their over-competitive manager.

So what’s better, a large spread or a small spread?  Like most things in economics, there is an equilibrium point.  Far from being perfect, this point may end up discouraging a whole lot of workers, especially when there is luck and protectsia involved.  One solution to this is to offer a few different prizes.  Suppose the Rubber Duck Company offered $90 to the best worker, $70 to several runner ups and $40 for the rest.  With not so much of their pay at risk, workers would be less antagonistic, perhaps even helping one another in alliances.  These workers may also take a shot to win the prize, whereas in the past, the out-of-reach goal was discouraging.

In a recent round of negotiation between the Israeli Medical Association, tournament theory, whether using its name or not, was among the many, many issues discussed.  Doctors have been leaving the public sector for many reasons, one of which is a lack of advancement.  In a standard department of a hospital, there are two levels, regular doctor and department head, a position held until retirement.  As a compromise, a new position between regular doctor and department head, or second tier prize, has been offered.  This new position will be called ” service manager.”

This compromise gives me hope.  Creating an in-between level is the obvious solution to discrepancies that are way too high.  Perhaps in time, there will be less department heads, and more service managers who will become the new de-facto department heads with pay discrepancies not as insane as the ones currently in place.  I am curious to see if this works and I am even more curious to see if it can be applied to office life as well.  Perhaps creating loopholes around the levels of bureaucracy ordained by the government and accepted business practice, we can deal with the income disparity in Israel without the need for a socialist revolution.  Or maybe I am too optimistic.  Perhaps we need the pendulum to swing the other way in order to get better social benefits and address the growing income disparity in Israel.

What do you think?

Buy Later, Not Now

A couple of weeks ago, the AACI sent out a link to what I believe is one of the most disastrous examples of journalism I have ever seen in my life.  The article, which was printed in Ha’aretz on August 8, shouts, “Buy Now, Not Later.”  In this article, the author defies logic, standard economics, and all of the experts he interviewed in order to encourage buyers to purchase a home at what may arguably be the worst time to buy in Israel’s recent history.

After stating that people on the internet (like me) believe housing prices are falling, the author insists that conversations with five experts “lead to some different conclusions.”  He points out, correctly so, that the real estate market is more complex than people realize.

Then the article gets ridiculous.

… if people think contractors who paid a lot for land on which to build will agree to sell it at a loss, they are very, very wrong. Nor can the government make them do so. Developers are already doing the math ahead of possible changes, and may well hunker down and not build. Yes, the developers are leveraged (they borrow money to buy and develop the land ) and yes they have to repay debt. But don’t forget that in the last few boom years, they accrued profits and achieved liquidity. They still have a great deal of breathing room.

While I am sure that the developers are making their calculations about holding onto their land to sell when the market is high, they’d be idiots to refuse to build on land they already bought because prices have gone down.  The land they bought is a sunken cost, and if the real estate developers have any common sense, they will not let it affect any of their business decisions.

Even at year-end 2008, when contractors really were in distress, they didn’t lower prices. So, in short, if developers have already bought land, they will simply wait to develop it.

These two situations are not comparable at all.  At the end of 2008, consumers were afraid to invest, so realtors waited for the initial hysteria to pass and then went about business as usual.  In our current situation there will be a fundamental drop in the cost of land, and new suppliers will enter the market, driving down prices.

The banks have also been doing some math. Because of the increase in interest rates and the war the government declared on property speculators, they’ve concluded that demand will be diminishing. Therefore, they have to be more tight-fisted and stringent when lending to developers. That in turn means that in contrast to the government’s wishes, the supply of housing is not about to increase, and the problems wracking the market today will not disappear in the foreseeable future.

Banks will, of course, do the math to see which developers are more viable than others.  And perhaps they will show themselves to be more elastic and the developers will have to take a bigger cut in their profits.  This may be seen as a slight increase in the cost of developing and will shift prices slightly upwards.  Just because a counter-force exists doesn’t mean that buyers will not benefit at all from the tremendous drop in the cost of lands.  Remember, consumer don’t have to buy; they can rent.  Investors don’t have to invest in real estate; they can invest in something else.  But it isn’t simple for real estate developers to change their entire business.  The consumers are more elastic than the developers and will therefore gain more from the drop in price and suffer less from the slight counterforce of the banks.

In general, there’s more and more evidence that the thesis guiding the government – that housing prices have been skyrocketing because of meager supply – is wrong. Most of the problems are on the demand side. Studies by the Bank of Israel and other bodies clearly show that the drop in interest rates is the chief explanation for the jump in transactions and price increases since 2008 (bold mine). Low supply brought less responsibility.

Just because the problem was caused by too much demand, doesn’t mean that additional supply will not fix the problem.  Let’s say  I was the only maker of ice cream.  Everybody wanted what I had to offer and I jacked up the price to $1,000 for a scoop of vanilla (a demand problem).  If you add 1,000 more vendors (supply solution) the price will go down.

Many think the supply more or less meets the demand of housing which people buy to live in: What changed matters was a 50% leap in buying homes for investment purposes from 2003 to 2009, they say. That upset the balance. Here again the problem is demand, not supply.

Here the author makes a good point.  Housing prices didn’t just go up due to low interest rates.  What started the hike in housing prices was the worldwide trend to invest in real estate.  This trend began in the late 90’s in the United States and went viral.  The Banks of Israel’s only made the problem much worse and turned it into a full blown disaster.

Finally, the author finishes his economics lesson and gets to his experts.

Hi first expert, Avraham Kuznitsky, is a controlling shareholder of construction company, so you know he is going to be impartial.  While conceding that prices will fall, Kuznitsky says that people will continue to buy.  He does not address the investors leaving the market, nor that many Israelis simply cannot afford a home.  Most importantly, he does not say the words that are written in bold before his name in the article, “prices will never drop.”

The next expert, Avi Drexler, head of the Israel Lands Administration from 1998 to 2000, is summarized as having said that he personally feels that “prices have peaked and will either stagnate or recede.”

The third expert, Dr. Yair Duchin from Ono Academic College, an economist specializing in real estate, says that “If you want to buy a home to live in – find the right one and buy it.”  He doesn’t make mention of those who currently cannot afford to buy, nor does he state that house prices will remain stagnant.  He simply suggests that “when you buy a home to live in, leave aside considerations of whether prices will either rise or drop to some extent.”

The fourth expert, Zvi Stepak, chairman and chief investment officer of Meitav Investment House, states, “The trend now is prices stabilizing with a tendency toward going down. It’s hard to estimate how much they will drop, but I expect the rate to reach 10% to 15% or even more. It largely depends on the global economy and on Israel’s macroeconomic situation.”

Are you keeping score?  So far out of four experts, none of them have said that prices will not go down.  Let’s check in with number five, Dr. Avichai Snir of Bar-Ilan University.  Dr. Snir says that people are in fact attracted to higher priced housing because of the socioeconomic status that comes with it.  He then summarizes what he believes to be the cause of the current housing problem:

Anyone who couldn’t afford a high-priced apartment beforehand suddenly discovered that with interest rates low they could enter the market. But for the same reason – the low interest rates – investors also entered the market and a situation developed where tenants competed with landlords, meaning investors, over the same apartments. Since landlords are more powerful they won out over the tenants as prices rose.

Dr. Snir makes a very good point.  But by pointing out that tenants don’t have the money to buy a home in the current market, he leaves one problem wide open.  Now that investors are leaving the market and the tenants don’t have the money for the high prices, what’s going to happen to prices?  Yeah, I thought so.

In short, none of the experts quoted in the article said that prices will not fall, not even the impartial expert who works for a construction company.  People will buy; people always continue to buy, but the amount is declining and prices are falling.

Next: a post that is not about the housing crisis!

Gone with Your Home

If you ever read or saw Gone with the Wind, you had a first hand look at one of the most peculiar economic phenomena of the 1800’s.  During the American Civil War the Union (North) had surrounded the Confederacy (South) with a naval blockade aimed to cut off the Confederate States from trade.  Overnight, blockade running became the major business of the South and the Rhett Butlers of the era were born, supplying the south with a lavish array of dresses, jewelry and perfumes.  Unfortunately, the blockade runners didn’t bring one very important thing, food.

The Rhett Butler Effect, as economist and historian Mark Thornton would later call it, occurred due to poor public policy in the South.  In a desperate attempt to collect money for the war, the Confederate government heavily taxed blockade runners.  In response to the tax increase, blockade runners either exited the market or limited their business to items with a greater payoff.  Towards the end of the war, the Confederate government realized that the south was starving and demanded that the blockade runners use a portion of their vessels to smuggle food, which could only be sold at a price well below market value.  This new policy, much to everyone’s surprise, had the opposite effect.  Instead of increasing the amount of food available to southerners, which was already low, runners reduced the amount of food they smuggled because the price limits on the food had them selling it at a relative loss when compared to the potential profit they could be making smuggling luxuries. Since the “cost” of smuggling rose significantly (from the danger of running a blockade to danger + tax to danger + tax + cargo space) even more runners quit the business, those who remained in the business were only smuggling luxuries, and the people of the south starved.

Frankly, you will give a damn.

I understand the tent protesters; I personally struggle to live in a small home, all of 35 meters, along with a wife and child.  I agree with their disgust at the Israeli government, which kept interest rates artificially low, driving cautious investors to the real estate market, sacrificing the housing market in order to subsidize exporters through monetary policy.  I agree that massive housing reform is needed and that government bureaucracy needs to be eliminated.  But when the protesters demand public housing or that builders be bound to build a certain percentage of apartments for a more affordable selling price, I strongly disagree.  Much like the Confederate policies of taxation and reserving cargo space for below market value food, the public and / or affordable housing demands will only exaggerate the effect of an already corrupted market.  In the end, students may get their housing, but when the shortage becomes worse, they, along with the middle class, will be left to suffer.

“Sir, you are no Gentleman.” 

“And you are no Lady.”

Over the past few weeks, both sides have become increasingly unreasonable.  Netanyahu wants the free market to take care of everything, not understanding that students cannot wait until the free market undoes the government’s damage.  Students want affordable housing using government intervention, not understanding that government intervention caused the housing crisis in the first place and that if the government legislates in their favor, some other group (the middle class) is going to have to bear the burden.

“With enough courage, you can do without a reputation.”

The ingredients for a solution are clear.  Israel needs a solution that eliminates the government monopoly on land, plows through bureaucracy and lets the free market correct the mess we’re in, while at the same time providing solutions for those who would otherwise suffer during the market recuperation.

The solution to this problem should therefore have two answers.  First, Israel needs solutions like Netanyahu’s “supertanker” to break through the myriad of government offices that control too much land and slow construction.  At the same time, the Israeli government should provide a temporary solution to students, one that can provide cheaper housing as soon as possible and at a minimal cost.

One such idea would be for the government to give away some of its land in order to build small villages for students from shipping containers built via prefabricated construction (בנייה קלה / בנייה מתועשת / בנייה טרומית).  The government could have an auction among the many providers of prefabricated construction in Israel and choose a handful of suppliers to build student villages as efficiently and quickly as possible.   These companies would be obligated to build either small houses or apartment buildings with living spaces of a predetermined size and quality in return for the ability to charge the students a predetermined amount for rent that is set in advance by the Israeli government.  The construction companies would then bear the financial burden of the building; the government would only have to subsidize the land and its development.   While students live in such housing, they will temporarily exit the real estate market, driving down prices for everyone else.  Once several years have passed and the market recovers, the government could begin to slowly limit the rent controlled housing and allow the students to reenter into a reasonable housing market.  And the best part is that unlike any other solution, this one can be completed in as little as 90 days, as builders of such projects usually complete them in record time.

For those of you worried that such housing is impossible or unlivable, let me assure you that this is not the case.  Containerized housing units are used in England, the Netherlands and all over Europe as a high quality, inexpensive alternative to  building houses.  In the UK, containers are being used to build not only small homes and stores, but also hotels and entire neighborhoods.  Building apartments from containers will allow housing to be built with less land, high standards, and with the lowest possible carbon footprint, which is bound to appeal to college age protestors.  Here are a couple of examples of such buildings :

In order for a real solution to be reached the Israeli public needs a compromise that is more than mutual bribery between the the government and the protesters; it needs a plan that will take care of Israel’s citizens in both the long and short run.  Hopefully this plan, or else another (I don’t claim to hold the monopoly on good ideas), will do just that.

Do you have any solutions to the housing crisis?  If so write them below

PS – If you agree with this solution in this post, or even just like the few Gone with the Wind quotes, you can pass this article along by using the social networking links below.

Housing Solutions Part 2: Young Couples and Families

A few weeks before I got married, my wife found a small place for us to live in Petah Tikvah.  Upon seeing it, I remarked that this small apartment, all of 35 meters, would be okay for the first year of our marriage, but then we’d surely move.  Four years later I not only still live in the same apartment, now with a child as well, but also pay ₪ 500 more per month than when I started.

The housing crisis is real.  Almost everyone I know who does not own his or her home is paying between 40% – 60% of his or her household’s take home pay for either rent or a mortgage.  This is before paying utilities, transportation, clothes and small unexpected expenses.  Oh, and did I mention that these people need to eat? 

I am not talking about people who are wasting money on unnecessary luxuries; I am talking about people who live fiscally responsible lives, who put in a full day’s work at a job that pays (relatively) well and want the ability to simply live in an apartment large enough to house the people inside of it.  We can’t just wait for the invisible hand to correct itself, and certainly not while the government ties the invisible hand behind its back.  We can’t wait for the long run because, in the immortal words of my least favorite economist, “in the long run, we are all dead.”  So what can we do now?

(1) Go North – housing is cheaper in the North and dirt cheap in the Golan.  And while the businesses in these areas generally pay less, the quality of life is much higher.  Also, remember that a penny saved is more than a penny earned (you don’t pay taxes on a penny saved).

(2) Rent over the Green Line (especially in the seam zone).  There is a lot of affordable housing in places life Efrat, Beitar Illit, and Karnei Shomron.  I single out places like the seam zone because they are close enough to allow a relatively easy commute to nearby industrial areas, but the truth is that most yishuvim over the Green Line are cheaper.  If you are looking for a yishuv over the Green Line, I would recommend using Peace Now’s interactive map that discusses all the yishuvim, their populations and where they are in relation to the barrier (I also appreciate using the map for the exact opposite of what its creators intended).

(3) Follow the transportation.  In my post to students, I suggested that TA students look for housing near the Petah Tikvah central bus station because it is just one bus ride to school.  The same goes for a myriad of other neighborhoods in and out of major cities.  If you live without a car, follow the bus lines from your work (in time, not distance) and see which lines or combinations of lines can take you to neighborhoods with cheaper housing.  For those of you with cars, follow the open highways and see if there is a place outside of the city that is only a small commute away.

(4) Don’t buy now.  Even if you have the money, now is the worst time to buy.  We are at the peak of the market and even if prices will go higher, they will fall soon. Yes, I also hate when economists try to act like prophets, but with higher interest rates and government action stirred against the high prices, I don’t see how housing prices can stick for even another year.   (Note to self: If in one year housing prices do not fall, go back and revise this post).

(5) Stick it out (just a bit longer.)  In keeping in line with the last point, prices seem to be slowly beginning to go down.  If you rent, you should probably plan to move in about a year.  Strangely, while the odds are that your landlord will not lower your rent, you will probably be able to find a similar place to live that is much less expensive (I will try to address this phenomenon in another post).  So if all of the options above don’t suit you, just stick it out a bit longer until the prices begin to fall.

Please note that when considering any of the solutions I suggested above, one must calculate how much one can earn (after taxes), how much one can pay in time and money for transportation and what is socially reasonable.

How have you been dealing with the rise in housing costs?  What solutions or recommendation can you offer?

why Bibi is right (and why government bureaucracy is wrong)

I cannot believe I am in agreement with an Op-Ed from Haaretz.  In the following piece, Nehemia Shtrasler does a fantastic job explaining Bibi’s response to the current protests, that government control is the problem and removing it is the solution, and why students are shooting themselves in the foot by not embracing this simple fact.

Israeli housing protesters are missing the point

The protesters on Rothschild Blvd. hate privatization and despise the free market. They want the state to continue controlling the land, and don’t understand that this is costing them billions.

By Nehemia Shtrasler

Saturday night, the Likud party sent its secret weapon to the front lines: Social Affairs Minister Moshe Kahlon. Kahlon spoke sympathetically about the tent protest; he said he understands the demonstrators and identifies with them; he even said that Prime Minister Benjamin Netanyahu would come up with solutions within four days.

But Kahlon’s promises didn’t help, and the demonstration in Tel Aviv that night succeeded beyond the organizers’ expectations. That’s because the housing protest has genuine cause, and the middle class’s feeling that the government is simply exploiting it is backed by solid facts.

Let’s start with housing. Home prices really have skyrocketed over the past three years. In Tel Aviv, they’ve gone up 64 percent, to the point where to buy an average apartment, one needs to set aside 143 (gross! ) salaries – 12 years of work. That is insane.

The problem is that the young people on Rothschild Boulevard are objecting to any suggestion that could improve their situation.

The first and most important thing that must be done is to dismantle the Israel Lands Administration. We must get rid of this dinosaur, which is the primary reason for the rise in land and apartment prices. The ILA, an archaic monopoly, controls 93 percent of the country’s land and releases it in a miserly fashion in order to get the highest possible price.

Rather than continue this profiteering, the ILA should be forced to sell all the state lands it controls to the public – that is, to privatize the land and turn it into a freely marketed commodity. If the ILA merely announced such a new policy, we would immediately see land prices come down, and apartment prices as well.

But those occupying the tents on Rothschild Boulevard hate privatization and despise the free market. They want the state to continue controlling the land, and don’t understand that this is costing them billions.

The second thing that must be done is to reform the planning and construction approval process. Getting plans passed by all the various planning and building committees delays the issuance of building permits by at least two years, which jacks up the price of apartments.

But the Rothschild youth oppose this, too. They like the “green” groups that submit endless objections that these committees must consider, and which keep construction plans tied up for years. This is another factor keeping home prices high.

Another suggestion that would increase the supply of apartments and thus lower their price is to build more high-rise apartment buildings. Why not approve buildings that are 20 to 30 stories high, rather than the eight or nine floors that are currently the norm in residential neighborhoods? Why not give generous building rights to various urban renewal schemes that would allow the construction of apartment buildings 20 to 30 stories high?

But the Rothschild protesters don’t like this, either. They say it destroys the urban fabric and increases population density, even though Tel Aviv is far less crowded than, say, London. This is also why they refuse to accept the division of some of Tel Aviv’s larger apartments, a process that could add hundreds of apartments to the city almost immediately.

The Rothschild crowd also doesn’t want to understand that there’s a connection between their support for illegal infiltrators from Sudan and the lack of inexpensive apartments in south Tel Aviv. Once, they could easily have rented a cheap apartment in the Hatikva neighborhood or other areas in the south of the city. Now these apartments are occupied by tens of thousands of migrant workers from Africa, against whom they have nary a word to say.

And what about the link between paving new roads and the price of apartments in Tel Aviv? This is something else the tent-dwellers refuse to understand. They protested the construction of Route 6, which has greatly shortened the distance to and from the “periphery” and allowed many people to live in Yokne’am or Kiryat Gat and work in Tel Aviv. Without this road, Tel Aviv home prices would be even higher.

But if we were to expand the discussion to speak about the heavy burden borne by the middle class overall, we would hit some sensitive spots fairly quickly. Because the ultra-Orthodox population doesn’t work, and also gets billions from the government, including subsidized housing. The settlers have gotten particularly cheap housing, wide roads and flourishing towns that cost billions. We have an incredibly high defense budget, which is the result of an unwillingness to come to a diplomatic agreement.

Somebody’s got to pay for all this. And the ones who do are the middle class.