WILLIAM GALSTON NOVEMBER 30, 2009
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The wall between The Wall Street Journal’s news division and its editorial page makes for a lot of good reporting and a fair amount of cognitive dissonance as well. For example, the November 24 edition featured an article, tucked away on A14, about Israel’s response to the economic crisis. In it we learn that the Netanyahu government raised taxes, avoided traditional stimulus measures, and ruled out government bailouts for banks and bondholders. In short, the government rejected supply-side economics, Keynesian economics, and “too big to fail” economics—a trifecta of heresies against the competing orthodoxies that dominate the U.S. landscape. The result: a rebound that Barclays analysts call “the strongest recovery story” in Europe and the Middle East.
Undergirding this heterodox strategy is a principle that I’ll call “sound diet” economics—namely, eat your spinach before dessert. As Israeli finance minister Yuval Steinitz puts it, “We wanted to create expectations and send the message that although now it’s difficult, later it will be better. We expect to come out of the crisis with an advantage over the rest of the Western world.”
The Israeli government’s approach was hardly laissez-faire, however. Rather than consumer-oriented pump-priming, it poured funds into large, fast-track infrastructure projects and private sector R&D programs. The country will come out of the downturn with value added to both its public goods and its high-tech economy. No wonder Steinitz is so confident.
This mindset helps explain why the Journal (also on November 24) was able to run a review of Dan Senor and Saul Singer’s Start-Up Nation, a book-length paean to the Israeli economy. Israel, says the review, is the world’s “techno-nation,” with a share of GDP devoted to R&D 50 percent bigger than that of the U.S., and venture-capital investment per capita at 2.5 times our rate.
So while Israel, besieged throughout its existence, builds its future, the United States, with every advantage in the world, devours its seed-corn. What’s happening to us is not just a concatenation of policy problems; it’s a test of our moral fiber and our capacity to govern ourselves. Does our government have the guts to feed us some spinach before dessert? Will the administration endorse a bipartisan budget commission with real teeth, along the lines Senator Kent Conrad advocates? Will it invest political capital to move a National Infrastructure Bank through the Congress? While the signs so far are not encouraging, it’s not too late to change course. If we lose our future, we’ll have no one but ourselves to blame.
9 comments
This is fascinating, but I would be careful about saying that Israel's response is contrary to Keynes. To Keynesians perhaps. Galston slips in that Israel did increase government spending dramatically, although Galston neglects to tell us how much, either in absolute terms or relatively in comparison to the US economy. This highlights two things: First, according to Keynes, it is government spending that is necessary in a severe slump, not tax cuts, not hand-outs for other actors to spend, but actual government spending that increases output at least a dollar for a dollar and certainly more based on some fraction that is spent by the people who then have additional marginal income. Thus, a lot of the stimulus in the US was wasted because it consisted of tax cuts or things other than government spending (and I do include in government spending money that gets passed to and spent by the states). This is due to our political incapacity which required tremendous compromises with principle in order to get anything passed -- with the Republican mania for tax cuts and the Democratic preference for favored groups. As well, a great deal of the stimulus package has not even been spent in the current period. Thus, the US stimulus was not only too small but a lot of it was misdirected. Was even half of it even stimulative? In this country, being obsessed with finance, we tend to focus on whether the spending is financed with debt or taxes. What matters is the net increase in spending. Thus, if the taxes are levied in such a place (the rich) whose consumption will be little effected by the reduction in net income, it may be as good or better than debt financing in increasing spending. The incorrect assumption is that debt financing does not reduce private spending on either capital or consumption. But the liquidity to buy government debt and the liquidity to pay high-end taxes comes from the same pockets, the difference is that in one case the party who pays the government receives back paper and in the other case not. in my opinion, we would be better off financing stimulative government spending with high-end tax increases (again, Galston doesn't tell us what taxes Israel increased) -- cycling funds that would not be spent into spending on worthwhile investment as Israel has done. This is by no means contra-Keynes, just contra Keynes as perverted by US monetarism and anti-tax mania.
- roidubouloi
December 1, 2009 at 9:18am
Given that religious fundamentalists appear pretty close to shutting down a multi-billion dollar Intel facility on Saturdays the end is nigh for this rosy-eyed view of "startup nation."
- ndmackenzie
December 1, 2009 at 12:44pm
Oh my god! Religious fundamentalists causing a Sabbath closing. The end is truly nigh. When the Jewish religious fundamentalists start strapping themselves into bombs to blow up children, like the Moslem fundamentalists you so admire, Mackenzie, you might actually have a point. Back in the real world where most human beings are not driven by Mackenzie's insatiable bloodlust, the very last thing that is going to dis-rail Israel's economy, in whatever state or stage, is religious fundamentalism, although that is Mackenzie's devout hope. What's the matter ND? Not enough bloodshed lately in and surrounding Israel to keep you happy? You sound like you're in a bad mood.
- roidubouloi
December 1, 2009 at 1:37pm
Matthew Yglesias has a different take on this:
He concludes that Israel is such a small country that this is the right thing to do for Israel but with no bearing on how the US needs to respond.- ndmackenzie
December 1, 2009 at 5:57pm
According to the Bank of Israel, on 31/12/2007, the shekel-dollar exchange rate was 3.846 shekels/dollar, while on 01/12/2009, the exchange rate was 3.775 shekels/dollar. So the shekel has appreciated by roughly 1.8% against the dollar over the past two years. On 31/12/2007, the shekel-euro exchange rate was 5.6592 shekels/euro, while on while on 01/12/2009, the exchange rate was 5.6895 shekels/euro. So, it has depreciated by roughly 0.5% against the euro during the same time period. It looks as though Matthew Yglesias is barking up the wrong tree.
- JPKatz
December 1, 2009 at 11:28pm
Matthew Yglesias - since the onset of the downturn in mid-2008 JP Katz - According to the Bank of Israel, on 31/12/2007 Israeli Central Bank - The steep decline in the index this month and declines in the last few months testify that the economy is sliding into a recession, whose first signs appeared in the index in the last quarter of 2008 (http://www.haaretz.com/hasen/spages/1065699.html) I think Yglesias wins for appropriate use of timescale. He also has a graph showing the increase in Israeli currency in early 2008 followed by a dramatic reversal as Israel slid into its recession somewhat later than the major currency zones.
- ndmackenzie
December 2, 2009 at 1:30am
The Haaretz article confirms that Israel's economy slid into a recession somewhat later than other major economies. It doesn't say anything about exchange rates. Exchange rates for the shekel, and many other currencies, fluctuate on a daily basis. Over the past two years or so, I don't see any dramatic movement one way or the other. I have no doubt that currency fluctuation can have a big impact on an economy, but I am unclear what significance is being attached to the slight fluctuation in the shekel over this time period. There was a slight decline in value of the shekel in mid-2008, and Israel's economy went into recession at the end of 2008. What's supposed to follow from this?
- JPKatz
December 2, 2009 at 9:16am
ndmackenzie "Matthew Yglesias has a different take on this" Yglesias is the antisemitic crutch our resident nazimackenzie likes to lean on.
- jacksondyer
December 8, 2009 at 9:39am
As for Yiglesias, "William Galston has a post about the resilience of the Israeli economy in the face of the global recession, arguing the U.S. could stand to learn a lot" what would he do if he didn't have TNR to argue against. He lives for taking the contrary view of any New Republic article that shows Israel in a positive light. (Yiglesias' shtick about TNR and Israel has gotten old.) No wonder our resident nazi, nd mackenzie loves to quote his comments, wrong headed as they are.
- jacksondyer
December 8, 2009 at 9:44am