Invest in People, Not Factories — Connected Economics Part 3

Populist Israeli politicians and commentators lambasted Israeli generic pharmaceutical giant Teva last week. Journalists piled on, tarring and feathering Teva for allegedly misusing the government tax benefits they were given because they dared to indicate that they would need to fire some employees around the world as part of their strategic plan for the coming lean years of reduced profitability.

“How dare they,” yelled the populist politicians, “use citizen money and tax breaks for acquiring companies and investing globally and still fire local Israeli employees?” Newspapers and talk radio were consumed with the self righteous politicians angling to see who could be the biggest defender of workers rights against the big and bad Teva and Checkpoint, operators of very profitable businesses who used Israeli government legislated tax breaks to invest in their business and expand it over the years.

It is time however, to call an end to this political charade because in fact it is the anachronistic politicians and faceless bureaucrats of Israel’s government that are the root cause of these layoffs. Their refusal to understand and adapt to the fast-changing global economy is directly harming Israel’s workforce and causing unemployment to rise. Worse, their insistence on Teva and others like Pri Galil keeping these future laid-off workers is actually causing the workers ever more long term harm. The politicians will condemn these workers to unemployment again even later in their careers. We need to help all of the workers in Israel but this is not the way and the politicians are in the way.

The State of Israel’s economic policies are still geared to the industrial economies of the 20th century. The economic benefits at the root of the debate around Teva’s responsibility to continually employ underperforming or under-productive Israelis are anchored in 20th century politics and economics. The law for which Teva received the tax breaks is called The Law For Encouragement of Investment (1959). It states in its first clause that the purpose of the law is to increase the manufacturing capacity of Israel (section 1/1). When you scroll down to the business plan that an applying company must submit in order to qualify for benefits, the Law states that the plan must be for one or more of the following three purposes:

1. Constructing or expanding a factory in whole or in part

2. Building, expanding or acquiring an asset that is a property for rent

3. An investment in a manufacturing plant that achieves the goals of the law…

You read that correctly, the law is targeted at manufacturing, factories, hard assets. It is targeted at encouraging businesses with grants or tax breaks to build manufacturing plants in the periphery and, in some cases, supporting software development with tax breaks. Let me help the myopic politicians and bureaucrats understand that when you incentivize new advanced manufacturing plants, workers get fired. The reason is because new manufacturing plants are more technologically advanced, more efficient and those technologies replace workers. This is inevitable and if it does not happen here in Israel, it will happen in another country in the world. But let us state clearly that the result, and perhaps unintended consequence of the way the Investment Incentive Law is thought of today, will INCREASE unemployment in Israel. Even the small clause in the law that talks about worker retraining (section 18c) focuses on increasing their training to increase the factories output, or, in other words, efficiency, which obsoletes labor!

Combine an outdated law with the relentless march of the internet and the globalization of the workforce and we can easily see how unemployment of factory workers in Israel will increase. No political screaming on talk shows will change that basic economic fact.

As I wrote in my blog post entitled Connected Economics Part 2 back in February:

“Based on my theory of Connected Economics, it is likely that the new job seeker was laid off from his job because his company became more efficient through technology or because his job was shipped overseas like I wrote in my last blog post. Alternatively, the industry he worked in was deemed inappropriate for this geography or the changing connected economy. In Israel, Cellcom employees were laid off because of efficiencies and employees of Pri Galil were sent home because it no longer made economic sense to can those vegetables in Israel. These jobs are not coming back to Israel and there will be more similar layoffs at other carriers, banks, insurance companies and every other service business in Israel that is being made more efficient by the digital economy. In fact, these efficiencies have a tendency to accelerate and with them layoffs are accelerated. Any government intervention in propping these businesses up, as suggested by Shelly Yehimovich, is simply “spending” that is a waste of money.”

The relentless march of technology has obsoleted this industrial era approach to employment. If workers do not constantly improve their skills and learn new ones, they will be unemployed and no factory or law will change that.

Horace Dediu, the King of Apple analysts and blogger at Asymco.com, correctly writes: “Your professional education is going to change. You’ll never stop learning…you will be the subject of disruption probably more than once in your career.”

Actually, I think our politicians do not truly care about the workers. If they did, instead of screaming at Teva and Checkpoint and insisting that they take the superfluous workers back, they would reinvent the way we think about economic value. We need to move from an economy that encourages investments in factories to an economy that encourages continuous investment in HUMAN CAPITAL. Human Capital, the ability of a human being to improve his education at any stage of his career, advance himself/herself and improve his skills is not a focus of the Israeli government.

So, if the politicians actually cared about the people and our economic future, they would craft a radically new law and a completely new approach that is suited for and invests in the networked human economy of the 21st century. We need to invest in constant individual and collective human professional and intellectual improvement and education from cradle to grave. Instead of screaming at Teva to re-employ these workers, why doesn’t some forward looking politician say that we will give government incentives to any company that up-skills its employees? Why not condition tax breaks on reinvesting in continuing professional education for all Teva factory employees in areas outside of their current jobs. Some of these workers can become computer programmers and others can find advancement in supply chain logistics, still others in 3D printing and in other higher value areas. Low value jobs will be obsoleted or move overseas. Therefore, we need to constantly and continuously encourage employers to up-skill their employees so we can compete globally. And we need to constantly and continuously encourage every citizen to up-skill themselves.

How about a tax incentive plan for Checkpoint, Teva and other profitable tech companies which says they can deduct from their taxes 2X their costs for training every unemployed person to be a computer programmer or some other advanced skill? This will also help tether more citizens of Israel to the engine of high tech growth. How about letting profitable tech companies deduct the costs of training employees in new skills that are unrelated to their current jobs but which up-skill the employees?

How about a series of benefits that encourages risk taking and individual entrepreneurship? In the United States, 515,000 businesses were launched every month during 2012. That is a 30% increase from a decade ago. Individual entrepreneurship will also enable Israeli citizens and residents to be employed globally as I have written in the past. To understand how powerful this trend is, In the last 6 years, the billable hours on global freelancer work platform oDeskhas grown from under 1 million per year to almost 50 million hours per year. That is a 50X increase in 5 years of independent people employed by global businesses who do not need to have factories here. There are currently 45 million independent workers in the USA and that is growing to 65 million by the end of this decade.

However, in Israel, starting an independent business is fraught with red tape and very difficult to finance so we are not capturing this massive trend toward individual entrepreneurship. Instead of a law that encourages investment in factories with taxpayer money, we need a law that encourages individual entrepreneurship in every area of the economy.

These would be forward thinking policies which liberate people from their dead end careers and help them improve themselves. That will improve the resilience and future of the Israeli economy.

I fear that the reasons that politicians do not pursue investment in human career advancement are simple: First, organized and chained labor is actually a political benefit for many politicians who rely on them for support every four years and who enjoy the workers’ dependence on political saviors. Second I fear that the forward thinking politician who stays ahead of global economic trends has not been born yet. The current “Encouragement of Investment Law” has actually been around since 1959!! Sadly, I also fear, that in reality, cynical politicians do not believe in the heart, soul and mind of Israel’s citizens. They do not believe they can improve their professionally skills enough to improve their employability.

We need to change our tune and change the politicians tune quickly. I believe in Israelis’ capacity for constant career improvement and we need to get everyone focused on that.

We can do a lot to transition from an industrial economy to a connected human capital economy. However, we need to start by throwing away the laws and tenets that are vestiges of last century’s economy and move into the 21st century. We need to throw out the 1959 factory law that focused on big companies, iron and concrete and replace it with a new 2103 investment encouragement law and approach that focuses on people, human capital and entrepreneurship. The new law must also focus on corporate responsibility to forever train and up-skill its workers and members to compete in the 21st century economy. Our small but talented country, our economy and our future depends on it.

To read connected economics Part 1: click http://sixkidsandafulltimejob.blogspot.co.il/2013/01/connected-economics-part-1.html

To read connected economics Part 2: click http://sixkidsandafulltimejob.blogspot.co.il/2013/02/connected-economics-part-2-wasteful.html

[Originally published on 21st October 2013 by MIchael Eisenberg]