Hi everyone, welcome back to My Weird Prompts. I'm Corn, and I'm sitting here in our living room in Jerusalem with my brother. It's March seventeenth, two thousand twenty-six, and the sun is finally hitting the balcony, but we're staying inside to talk about something that usually makes people want to throw their coffee mugs across the room.
Herman Poppleberry, at your service. It's indeed a beautiful day, Corn, but we're about to dive into the murky waters of Israeli economics. Specifically, the stuff that makes people stare at their bank statements in mild shock every single month.
Yeah, no kidding. Our housemate Daniel sent us a prompt this morning that got us both talking before we even had our caffeine. He was looking at the price of a specific brand of imported Italian pasta at the supermarket down the street and then compared it to what he saw on a European retail site. The price difference was staggering. It's what I call the AliExpress paradox. You can order a gadget or a bottle of vitamins from halfway across the world, pay for international shipping, and it still ends up being forty percent cheaper than buying the equivalent version at a mall in Tel Aviv or a pharmacy in West Jerusalem.
It's a classic Israeli experience, Corn. You feel like you're being penalized just for living here. And the prompt Daniel sent over really digs into the why. We're talking about the history and economics of protectionism in Israel. Specifically, how this nationalistic Blue and White movement, or Kachol Lavan, which sounds incredibly patriotic on paper, actually creates a massive, invisible burden on the average Israeli family.
It's a fascinating tension, right? On one hand, you want to support your neighbor, the local farmer in the Galilee, the domestic manufacturer in the Negev. That's the Blue and White spirit. It's deeply baked into the Zionist ethos of self-reliance. But on the other hand, we're living through a persistent, grinding cost of living crisis. We're in two thousand twenty-six, and while we've seen some legislative attempts at reform over the last few years, Israel remains one of the most expensive places in the entire O-E-C-D to simply exist. Today, we want to strip back the layers of that Blue and White sticker. Is it a badge of honor, or is it a hidden tax on the middle class?
That's the question. And to answer it, we have to look at how we got here. Israel didn't just wake up expensive. It was designed to be self-sufficient out of necessity. In the nineteen fifties, during the period of austerity known as the Tzena, the state had to control every calorie and every cent of foreign currency. Protectionism was a survival strategy. But that design has some serious legacy issues that are clashing violently with the modern globalized world. We're going to look at the dark side of protectionism, the national security arguments that people use to defend it, and where the middle ground actually lies between a closed fortress and a wide-open market.
I think a good place to start, Herman, is defining what we mean by protectionism in the Israeli context today. Because it's not just about high tariffs anymore. In the old days, you just put a massive tax on a foreign car or a foreign television. Today, it's much more subtle. It's more like a thousand tiny paper cuts.
You're spot on. Most people think of protectionism as a big tax at the border, like a fifty percent duty. And while we certainly have some of those, especially in agriculture, the real protectionism in Israel today is what economists call non-tariff barriers. It's the regulatory friction. It's the Standards Institution of Israel, or the S-I-I, telling an importer that a vacuum cleaner or a microwave that's perfectly safe for a consumer in Berlin, London, or New York is somehow not safe for a consumer in Jerusalem unless it undergoes a unique, expensive, and time-consuming local test.
Right. And looking at who benefits from that test, it's rarely the consumer. Usually, it's the domestic manufacturer who already has their production line set up to meet those specific, quirky Israeli standards. It creates a moat around the domestic market. If you're a small importer, you look at the cost of getting those approvals, the laboratory fees, and the bureaucratic delays, and you just say, forget it, it's not worth the headache.
We talked about this a bit in episode six hundred fifty-five when we discussed the headache tax. That regulatory friction is a policy choice. It's a choice to favor the incumbent. And this is where the Blue and White movement gets complicated. The government puts a lot of weight behind the idea that buying Israeli is a Zionist act. But when that sentiment is used to shield a company that hasn't innovated in thirty years from a superior, cheaper product from abroad, you aren't building national strength. You're subsidizing inefficiency and rewarding stagnation.
And that subsidy is paid for by the guy buying groceries on a Tuesday night. If I'm paying twenty percent more for milk or cheese because we have strict quotas on imports to protect a handful of large domestic dairies, that's money coming directly out of my pocket. That's money I can't spend on my kids' education, or on a local service business, or save for a down payment. It's a massive transfer of wealth from the millions of consumers to a few specific, politically connected protected industries.
And it's often the most basic items. Look at the dairy sector. It's one of the most protected in the country. We have what's called the target price for milk, the Mechir Matara, which is a guaranteed price for farmers. We have import quotas that limit how much foreign butter or yogurt can enter the country. And if you want to bring in something outside that quota, you face tariffs that can be over one hundred percent. The argument is always food sovereignty. We can't rely on foreign countries for our basic calories. But Corn, we're a high-tech superpower. Does it make sense to be so protective of low-value manufacturing and traditional agriculture at the expense of everyone's purchasing power?
Well, that brings up the infant industry argument. That's the classic economic theory that you protect a young industry until it's strong enough to compete on the world stage. You give them a head start. But the problem in Israel is that these industries are no longer infants. They're middle-aged, very comfortable, and they have very powerful lobbyists. They have no incentive to lower prices or improve quality because they know the competition is being held back at the port by the Standards Institution or the Ministry of Agriculture. They're essentially permanent infants who never want to leave the nursery.
That's the trap. Protectionism is supposed to be a temporary bridge to help a country industrialize, but in Israel, it has become a permanent fortress. And what's worse is the second-order effect on our most important sector, the tech world. This is something people often miss. If the cost of living is thirty percent higher in Israel than it should be because of these barriers, then tech companies have to pay thirty percent higher salaries just so their employees can afford a basic apartment and food. That makes our tech exports less competitive on the global market. Our protectionism in the supermarket is actually a drag on our innovation in the cloud. We're literally taxing our most productive workers to support our least efficient industries.
That's an incredible point. It's all connected. You can't have a high-cost island and expect it not to affect your ability to compete globally. But let's look at the other side for a second, Herman, because I want to be fair to the arguments we hear in the Knesset and in the media. People mention national security constantly. They say, look at the supply chain disruptions we saw in twenty-twenty-four and twenty-twenty-five. If the ports are blocked or if there's a regional conflict, we need to be able to feed ourselves. Is that just a convenient excuse for rent-seeking, or is there a genuine core of truth there that we have to respect?
It's both, and that's what makes it so hard to untangle. There's a genuine core of truth, but it's often used as a shield for corporate interests. We actually touched on this in episode five hundred forty-eight, the one about guns versus butter. In a country like Israel, security is the ultimate trump card. If you can frame your business interest as a matter of national survival, you win the argument. But we have to ask if we're really worried about being unable to import pasta. The world is a very interconnected place. Even in times of extreme tension, shipping lanes usually stay open for basic commodities. And if they don't, having a local pasta factory doesn't help if you don't have the local wheat to put in it.
True! And even if we wanted total food sovereignty, we can't be sovereign in everything. We don't grow enough grain for our own bread. We don't have enough water to be truly self-sufficient without massive energy inputs for desalination. So, the idea of total autarky is a myth anyway. We're already dependent on the global supply chain for the most fundamental things, like fuel and raw materials. Protecting a specific brand of chocolate or a specific type of hard cheese under the guise of national security feels a bit disingenuous when you look at the actual logistics.
It really does. And think about the opportunity cost. If we opened the markets, the money saved by consumers would flow into other parts of the economy. Maybe people would start more small businesses. Instead, that capital is locked up in paying for overpriced domestic goods. It's a massive misallocation of resources that keeps the country poorer than it should be.
I also think about the quality aspect. When you shield a company from competition, quality inevitably suffers. I've noticed this with some of the Blue and White products. They're functional, but they're rarely world-class. If they had to compete with the best products from Italy or Germany on a level playing field, they would either have to get much better or they would go out of business. By protecting them, we're effectively settling for mediocrity and forcing the entire population to settle for it too.
You're right. Competition is the fire that forges excellence. Without it, you get stagnation. And we see this in the retail landscape too. We have these giant importer monopolies. A single company might represent ten or fifteen of the world's biggest brands. They use their market power to keep prices high and keep smaller competitors out. And the government, through these regulatory barriers, basically hands them that monopoly on a silver platter.
So, where do we go from here? We're not saying that we should just abandon all domestic production and become a pure import economy tomorrow. There has to be a middle ground. What do economists call that spectrum?
There are a few terms. You might hear about a mixed economy or managed trade, but I prefer the term strategic trade policy. The idea is that you identify the areas where you truly have a strategic need for domestic capacity. Maybe that's certain types of high-end defense manufacturing or very specific food staples that are critical for a week-long emergency. You support those in a targeted, transparent way, perhaps through direct subsidies rather than hidden tariffs. But for everything else, you move toward regulatory harmonization.
Regulatory harmonization. That sounds like a fancy way of saying we should just trust the standards of other developed nations.
That's precisely what it is. It's not like an Israeli stomach is different from a French stomach, or an Israeli electrical outlet is fundamentally more dangerous than one in Switzerland. By harmonizing our regulations with the world's major markets—a policy often called What is good for Europe is good for Israel—we could overnight eliminate a huge portion of the cost of importing goods. That would bring instant competition and lower prices for everyone.
It sounds so simple, yet it's so hard to implement. We've seen various versions of this law pass in the Knesset over the last few years, but it always seems to get watered down or delayed. Why is there so much resistance? Is it just the lobbying power of these big companies?
That's a huge part of it. These companies are very well-connected. They frame any attempt at reform as an attack on Israeli workers. They say, if you allow these imports, the factory in the Galilee will close and five hundred people will lose their jobs. That's a very powerful emotional argument, and it makes politicians nervous because those five hundred people are a concentrated voting bloc.
But they never talk about the five million people who are paying an extra fifty shekels a week on their grocery bill to keep those five hundred jobs. If you did the math, it would probably be cheaper for the government to just pay those five hundred workers a full salary to stay home and retrain than it is to force the entire country to pay inflated prices forever.
It usually is! That's the irony of protectionism. The cost to the consumer is almost always many times higher than the benefit to the protected workers. But the cost to the consumer is diffused. You don't go on strike because your pasta cost two shekels more. But the benefit to the protected industry is concentrated. They have a massive incentive to fight for their privilege, while the average consumer is too busy working two jobs to go protest at the Knesset.
It's the classic problem of collective action. But I think the tide is turning. People are more aware of this now than they were even five years ago. With the internet and the ability to compare prices instantly, the curtain has been pulled back. You can't tell an Israeli that they're paying a fair price when they can see the same item for half the price on their phone while standing in the aisle.
That's why the Blue and White movement is having a bit of a mid-life crisis. It used to be this unquestioned patriotic duty. Now, people are starting to see it as a marketing gimmick used by big corporations to guilt-trip them into overpaying. I think we need to redefine what Blue and White means. Maybe it should mean Israeli products that are so good and so efficient that they can win on their own merits, without needing a regulatory shield to survive.
I love that. A Blue and White based on excellence rather than protection. That would be a true reflection of the Startup Nation spirit. Instead of saying buy this because it's Israeli, say buy this because it's the best in the world and it happens to be made here. That's how our tech sector works. They don't ask for protection; they compete and they win.
True. And for that to happen, the government has to get out of the way. It has to stop being the gatekeeper that protects the inefficient. We need to move toward that strategic trade policy we talked about. Identify the real security needs, like we discussed in episode four hundred seventy-four regarding national autonomy, and then let the market handle the rest.
It's interesting you mention that episode, Herman, because back then we were talking about how a nation can never be truly independent in the modern world. We're all part of this global web. Trying to pretend otherwise by building these regulatory walls around our tiny market is just a recipe for a very expensive, stagnant life.
It really is. And it's not just about the goods themselves. It's about the culture of competition. When you have an open market, businesses have to be on their toes. They have to provide better service, better quality, and better prices. In Israel, we often complain about poor service, as we discussed in episode six hundred fifty-five. Well, why should a company provide great service if they know you have no other choice? Protectionism breeds a take it or leave it attitude.
So, for our listeners who are frustrated with the cost of living, what's the takeaway? What can the average person actually do besides complaining about the price of cottage cheese?
First, be a savvy consumer. Don't just blindly follow the Blue and White sticker if it means you're getting a worse deal or a lower quality product. Use your purchasing power to reward the companies that are actually providing value. Second, we need to change the political conversation. When a politician talks about protecting local industry, we should be asking, at what cost to the rest of us? We should be demanding regulatory harmonization.
It's about spotting the rent-seeking. When you see a new regulation that seems unnecessarily complicated, ask yourself who it's really protecting. Is it protecting your safety, or is it protecting someone's market share? Most of the time, in this country, it's the latter.
Spot on. And we should be skeptical of the national security argument when it's applied to things like pasta, laundry detergent, or pineapples. True national security comes from a strong, efficient, and wealthy economy. An economy that's bogged down by protectionism is ultimately a weaker economy, and that's a real security risk in the long run.
That's a great way to frame it. Prosperity is a component of security. If the middle class is struggling just to make ends meet, the social fabric of the country weakens, and that's a much bigger threat than having to import our cheese from Poland or our butter from Ireland.
We've seen how economic frustration can lead to social unrest. A more open, competitive economy would do more for Israel's long-term stability than any number of protective tariffs.
I think we've covered a lot of ground here, Herman. From the AliExpress paradox to the halls of the Standards Institution. It really comes down to whether we want to be a closed, expensive fortress or an open, dynamic part of the global economy.
I think the answer for a country like Israel has to be the latter. We're too small to be a self-contained market. Our strength has always been our ability to innovate and connect with the world. Protectionism is the opposite of that. It's looking inward and trying to preserve the past, rather than looking outward and building the future.
Well said. And look, we know this is a complex topic. There are people whose livelihoods depend on these protected industries, and we don't want to minimize that. But we have to look at the big picture. We have to look at what's best for the entire nation of nine million people, not just a few specific interest groups.
Yes. It's about the common good. And in two thousand twenty-six, the common good is an affordable life for all Israelis.
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Thanks to Daniel for sending in that prompt today. It definitely gave us a lot to chew on, even if it makes me want to go check the prices in my pantry right now.
Just don't look too closely at the receipt, Corn. It might ruin your afternoon.
Fair point. I was just thinking, Herman, about that specific case with the pineapples. Do you remember that? A few years ago, there was this huge thing about why pineapples are so expensive in Israel.
Oh, I remember that vividly. It was a perfect case study. They claimed it was about a specific pest that might be on the leaves, so they required all imported pineapples to have their tops cut off. But then, of course, the pineapples rot much faster without the tops, which makes importing them by sea almost impossible. You have to fly them in, which is incredibly expensive.
And meanwhile, the few local growers were selling pineapples for like thirty or forty shekels each. It was absurd. It was a clear case of using a phytosanitary regulation as a blunt instrument for protectionism. It had nothing to do with safety and everything to do with keeping the price high for a small group of producers.
And that's the thing. Most people hear about a pest and they think, oh, well, we have to protect our agriculture. They don't realize that there are ways to treat the fruit or inspect it that don't involve making it unimportable. But the simpler, more protective solution is the one that gets chosen because it benefits the local monopoly.
It's those little details that really add up. Whether it's pineapples or car seats or electronics. Each one of those little barriers is a few more shekels out of our pockets.
Definitely. It's a death by a thousand cuts. Or a thousand regulations, in our case.
Well, hopefully, as we move forward, we can start to heal some of those cuts. It's going to take some serious political courage, though.
It definitely will. But as the cost of living remains the number one issue for Israelis, the pressure on politicians to actually do something real, rather than just talking about it, is only going to grow.
Let's hope so. I'd love to be able to buy a pineapple without feeling like I'm taking out a small loan.
You and me both, brother. You and me both.
I actually wanted to mention one more thing before we go. We talked about the Nordic model briefly. It's interesting because those countries, like Sweden or Denmark, have very high taxes, but they have incredibly open markets. They understand that you need the efficiency of global competition to generate the wealth that then pays for their social services.
That's such a crucial distinction. People often confuse being pro-market with being anti-government. You can have a strong social safety net and a very open, competitive market. In fact, you probably need the latter to afford the former. Israel sometimes feels like it has the worst of both worlds: moderate to high taxes but a closed, inefficient market that makes everything expensive.
Right. We have the high costs of a complex system without the full benefits of a truly open one. It's a strange middle ground to be stuck in. We have the regulatory burden of a protectionist system without the growth of a truly free market.
It's the headache tax in action. But if we can shift toward that Nordic style of open markets and regulatory harmonization, it would be a huge win for the Israeli consumer.
For sure. I was just thinking about the kibbutzim too. We talked about them in episode nine hundred ninety-one. The shift from that communal, protected mindset to the Startup Nation reality is still ongoing. There's still a lot of that old guard mentality in the agricultural sector especially.
Oh, for sure. The kibbutz movement was the backbone of early Israeli protectionism. It was all about self-reliance and building the land. And while that was vital in nineteen forty-eight, it's a very different world in two thousand twenty-six. Transitioning those old structures into a modern, competitive framework is one of the biggest challenges we face.
It's like trying to upgrade the software of a country while it's still running.
Precisely. And some parts of the system are still running on code from the nineteen fifties.
Well, that's why we do this show. To look at the code and see where it needs an update.
Guilty as charged.
One last thing, Herman. I just realized we didn't talk about the ports. The ports are the ultimate bottleneck for protectionism in this country.
Oh man, the ports. The labor unions
