On January 29, Israel’s cabinet approved new “housing benefits” for “national priority areas.” The exact application of these benefits to communities in the West Bank is unclear, to me at least, but the cabinet statement says, “The decision is designed to encourage positive migration to the communities.” News reports suggest that of the 557 communities eligible for the aid, 70 are in the West Bank: “The list of qualifying settlements include major enclaves that would likely remain in Israeli hands under a peace deal. But most are located deep inside the West Bank and likely would have to be dismantled.”

And thereby hangs a tale. During the George W. Bush administration, we reached an agreement with Prime Minister Ariel Sharon to end such financial incentives for people to move to the West Bank—even to major blocs that will inevitably stay with Israel in any final status agreement. Israel agreed in part because the incentives were expensive and Sharon (and his finance minister, Benjamin Netanyahu) were trying to reduce the budget. But Israel agreed in part because this was just one element of a larger formula on settlements. Israel would build no new settlements, provide no financial incentives for people to move to settlements, and not permit settlements to expand physically—new construction would take place in already built-up areas.

The idea was that additional construction in those built-up areas, and additional population, would not harm Palestinians and would not make future negotiations more difficult in the way that physical expansion of settlements would. Sharon enunciated the agreed principles in a December 2003 speech, saying "Israel will meet all its obligations with regard to construction in the settlements. There will be no construction beyond the existing construction line, no expropriation of land for construction, no special economic incentives and no construction of new settlements." In exchange, the United States would not object to additional construction or population growth. (I discussed all of this in an article entitled “Hillary Is Wrong About the Settlements” in the Wall Street Journal on September 8, 2009.)

It was the Obama administration, not the government of Israel, that abandoned this agreement. It is hard to blame Netanyahu for thinking he need not be bound by it when U.S. officials have maintained that there never was any such agreement in the first place. This is a piece of the disastrous handling of the entire settlements issue by Obama. By denying the deal with Israel, and by making a construction freeze in Jerusalem and the settlements a prerequisite for peace negotiations, Obama has helped make negotiations impossible for his entire term in office.

Nevertheless, this Israeli cabinet decision is a mistake. To use limited resources to give financial incentives for pulling Israelis into settlements that will surely be given up in any final agreement is to waste resources. Far better would be to build up the major blocs that Israel will keep permanently, or areas of Israel like the Galilee and Negev. I am less concerned about the argument that this move persuades Palestinians that Israel will never give up a single settlement in the West Bank. It did so in 2005 and would do so again as part of a final status agreement—but the Palestinians won’t even go back to the negotiating table.

This cabinet decision is a product of Israeli domestic politics, to be sure, and it is in my view a foolish move. But the origins of it lay in Washington, not in Jerusalem, when the Obama administration in 2009 abandoned a workable agreement on Israeli settlements and started us down this unfortunate path.