Climbing Everest in shirtsleeves

Netanyahu will need all this sympathy. But considering the mammoth size of the problems he is facing, he will need much more. Netanyahu’s past victory over Shimon Peres—after Rabin’s assassination and an unprecedented campaign of vilification against him—was likened to reaching the top of Everest without provisions or gear. Netanyahu’s current attempt to tackle the desperate economic crisis facing Israel should be likened to climbing the Everest in shirtsleeves and sneakers in the dead thick of winter.

For the economic crisis facing Israel is unlike any past one. In the rigid Israeli labor market, a 5% drop in wages last year raises the specter that the lengthy deep recession may have developed into a pernicious deflation, with potentially disastrous consequences. Even the long recession was enough to push Israeli banks close to the brink, causing many of the heavy loans they granted to cronies for dangerously leveraged real estate and communication deals to go sour. A deflation may increasingly prevent an already overextended banking system from granting vitally needed credit not only for expansion but even for routine economic activities. It may also push more and more firms into default with catastrophic consequences for employment and living standards.

Deflation, and the simultaneous growth of government expenditure due to the automatic increase in transfer payments in times of economic distress (while revenues from taxes plummet) cannot be successfully tackled by a patchwork of ad hock measures that every vested interest group, and the economists who represent them, are urging Netanyahu to adopt. He needs to devise a comprehensive and integrated economic plan to deal with the basic structural faults of the Israeli economy—excessive economic concentration and monopolization that curtail competition and efficiency, a huge wasteful public sector and the punitively high taxes required to finance it, a beauraucracy chocking initiative and growth—while taking account of the repercussions various policy initiatives will have on each other, not least the not easily figured side effects and unintended consequences.

But the political pressure on him will be to act and act fast to forestall the crisis, even though such hasty action may not only miss the mark but actually may have some very deleterious consequences, as happened, for example, when dollarization, a sound idea by itself, was proposed at the worse possible time in 1983.

Only a comprehensive plan supported by the best professional opinions here and abroad can enable a finance minister to resist the many pressures for precipitous action that are already developing: for example, the call by some economists not to cut—in fact to increase- the government’s bloated and wasteful budget deficit for fear the cut would plunge the economy into deeper recession.

Perhaps a cut by itself could indeed further depress economic activity. But would it not be preferable to accompany a deficit cut with deep cuts in taxes on productive wages and profits, thus quickly generating real, not make believe, growth? Is not the transfer of resources from wasteful government activity—essentially the equivalent in most cases to hiring labor to dig holes and then fill them up—to productive private sector activity starved for liquidity the more attractive alternative; especially since the growth in private sector activity may also save our banks from default?

The advocates of increased budget deficits will protest that they did not mean to encourage waste, that they recommend a productive use of the deficit, such as the construction of infrastructure.

In last Friday’s Post, editor Bret Stevens demonstrated that the almost universal cry for a 15 billion shekel annual increase in government expenditures on infrastructure (often by parties who stand to immediately benefit from it) may not really generate immediate growth, and that the experience in Japan, which did just that, and on an immense scale, proved that such spending may be wasteful and even damaging.

Or take the idea recently bruited for a swap of the Bank of Israel dollar reserves for long-term government bonds, so that the government could use the dollars to redeem its foreign debt. Those proposing this “swap” argue that it will save Israel the considerable difference between the interests in pays on its loans and what the reserves earn, a sum of 250 million dollars annually, they claim. Little thought has apparently been given to the question of what impact the depletion of dollar reserves and their replacement with government IOU’s may have on the stability of the Shekel, on the flow of foreign investment into the country or on emergency needs for foreign currency that may arise in such turbulent times. Damage to the credibility of the Shekel may have such devastating consequences that even the saving of 250 million dollars may not make it worthwhile.

In sum, only an integrated and comprehensive plan can help the Finance Minister sort out the real long term effects of the various “brilliant” ideas he is bombarded with. Only such a plan can galvanize into concerted action the many parties whose cooperation he will need in order to execute his policy successfully. But most importantly a comprehensive, well thought out and argued plan may lend him what a finance ministry needs most during a time of crisis—credibility.

Fortunately, it looks like Netanyahu has wisely followed this course, refraining from making premature statements, and devoting his time to a serious study of the problems facing him before embarking on their solution.

The fact that Netanyahu pressed into service the veteran Meir Shitreet who had a successful stint as a Minister of Finance shows also that Netanyahu is fully aware of how complex the execution of even the best plan will be, and how much help it will require from his coalition members and especially the Prime Minister. Nothing but a comprehensive reform of the economy will do, and to accomplish this fierce political battles will have to be fought and won with help from all the above.

Netanyahu will also have to restore the credibility of the chief instrument he will be using to shape economic reform, the Ministry of Finance. No matter how talented and dedicated its present top staff is, it has lost all credibility in the last couple of years, under the erratic leadership it had. No one is going to believe in a budget prepared by a team that has recently presented a variety of budgets, each based on questionable assumptions.

Netanyahu definitely has the know how, the energy and the intelligence to tackle this most difficult crisis Israel is facing, a crisis that is also a great opportunity to affect desperately needed changes.

We owe him all the support we can muster, for his success will be the salvation of our economy and a historic turning point that will finally allow Israel to fulfill its immense potential, arrested so far by a fatally regressive economic system that drives it from crisis to crisis.