News and Updates

Most politicians treat the world economic meltdown threatening Israel as if it is happening on the moon. So it is comforting that the candidates for prime minister recently described what steps they would take to forestall a terrible crisis.

The three agreed that because of the paralysis afflicting financial markets, which threatens to turn a recession into a deep depression, liquidity should be quickly injected into the system and consumer spending encouraged. This requires a significant increase in the government's budgetary deficit. But the candidates disagreed about how to make use of the deficit.

BINYAMIN NETANYAHU, on the other hand, proposes to create a stimulative macro-environment for firms by lowering business taxes across the board, since sectoral preferences often distort economic considerations. He also proposes lowering taxes to enable individuals to both consume and save more. The advantage of increased individual spending is that it enhances decentralization and competition. Consumers buy from a large variety of manufacturers meeting different needs and offering the best prices - namely, the most efficient. Consumer spending thereby increases economic choice and efficiency.

In contrast, direct government spending increases economic concentration since politicians prefer big business. It enables them to better control the economy and helps them raise campaign contributions. High costs and lack of access further limit participation of smaller firms in government tenders. This is why big business and its many cartels dominate the economy, and the country suffers from a concentration of economic and political power. Concentration leads to less competition, widespread inefficiency, inflated prices and the corruption both of politics and the economy. A CRISIS CAUSED by a world wide economic contraction leading to shrinking demand will impact harshly on an export-dependent Israel. Therefore, it may not be wise to extend government intervention through yet more direct government spending. It will only make the country even less competitive than it already is, with disastrous results. If government nonetheless decides to engage in direct expenditure, it should do so only on focused, well-defined projects, such as basic research. Basic research must initially rely on public funds: until it can be incorporated in products, it has little economic value and cannot attract investment. So Netanyahu is right in proposing such government help.

Netanyahu is also right in insisting that emergency government expenditures are not sufficient (as the failure so far of huge US government expenditures to stimulate its economy demonstrates). To enhance economic productivity and competitiveness, Israel must engage in basic reforms in its land, energy, electricity, water and ports, sea and air.

All these sectors suffer from gross inefficiencies and low productivity, inflated wages and featherbedding. Their reform will require a brutal political war with the influential politicians who represent our oligarchs and other vested interests, such as the powerful public sector monopoly unions. A rough fight will also be required to complete the the partial (though already most beneficial) reforms in financial markets which bankers and their allies in the media are trying to roll back. It is most unlikely that either Labor or Kadima will combat these powerful constituencies.

For the full article from the Jerusalem Post, click here.