Economists in Israel and elsewhere have criticized the Israeli government's aid package for rescuing the economy from the coronavirus crisis. In an international comparison presented at a conference of the Israel Economics Association, Israel placed last among the developed countries for the scope of government aid measured as a percentage of GDP. In a lecture at the conference, Prof. Martin Eichenbaum of Northwestern University warned the decision makers in Israel against "fear of the budgetary cost of intervention."
"Government aid to the economy can be compared to a bridge laid over a chasm," Eichenbaum said. "Since there is no way of knowing the length of the bridge required, you have to decide which risk is the greater - that the bridge will be too short, or too long." Eichenbaum pointed out that the cost to the Israeli government of financing 10-year debt was even lower than that of the US.
"The Israeli bridge looks less stable, less clear, and shorter-term than the bridges of the developed countries," said another participant at the conference, Prof. Zvi Eckstein, dean of the Tiomkin School of Economics and head of the Aaron Institute for Economic Policy at the Interdisciplinary Center Herzliya.
Larry Summers, who served as economic adviser to US presidents Obama and Clinton, recently estimated the damage to the US economy from the coronavirus pandemic at $80 billion a week. On that basis, by analogy, the weekly damage to the Israeli economy is $1.6 billion, or nearly NIS 5 billion (this is without taking into account the fact that the rate of infection in Israel has so far been lower than in the US).
Double whammy to business
The economic crisis caused by the coronavirus outbreak is exceptional in that it severely affects both the supply side and the demand side. The restrictions on opening businesses and on whole economic sectors on the one hand, and on the other hand the fear of becoming infected by the virus and of unemployment, which leads people to avoid places liable to be crowded, to save more, and to reduce spending, land a double whammy. Eichenbaum said that without government intervention, this double hit on the supply and the demand side would lead to a deep and protracted economic slump.
Eichenbaum questioned the Darwinian argument that the crisis is sifting out weak businesses that have no economic justification and is leaving the healthy and strong ones. He said the recession was causing irreversible damage to "healthy" businesses and workers, among other things because it was hurting investment, causing the collapse of businesses that are not allowed to operate, and progressively destroying the skills of jobseekers the longer they were cut off from the labor market.
"This is a clear market failure," Eckstein said, "and the government's task as custodian of the economy is to construct a bridge that will enable businesses to traverse the crisis period - a bridge formed by lending money at the expense of the future. That's the ABC of economics, especially when the government itself is the one initiating the constraints. The question is whether the bridge is strong enough, and our bridge looks more unsound, less safe, less organized, and less predictable in almost every respect."
Eichenbaum presented at the conference an international comparison compiled by Efraim Benmelech of the Kellogg School of Management at Northwestern University, in which Israel ranks in the middle of the list for extent of government aid, but below every country in Europe except for the Netherlands. Benmelech's study includes the cost of raising debt, and shows that Israel's debt raising costs are low by international comparison.
"The government of Israel currently pays less than 1% interest annually on ten-year debt," Eichenbaum said. "That's less than the US government pays."
Eckstein and Dr. Sergei Sumkin, a senior researcher at the Aaron Institute for Economic Policy, presented a comparative analysis of the Israeli aid package against those of other developed countries. In this comparison, Israeli is in next to last place, with an aid package amounting to 6.7% of GDP, which compares with 23.9% in Germany, 17.9% in the UK, and 12.2% in the US and Denmark.
In this context, the Ministry of Finance argues that global comparisons are unfair, because they fail to take into account the relatively high component of state budgetary expenditure in Israel, whereas the aid in many countries is based on bank loans and credit.
Eckstein and Sumkin did not stop at examining the size of the debt package, but also looked at its duration. For example, the deferral of tax payments in Israel was for less than three months, which compares with six months in Germany, Austria, Denmark and Australia, "countries not known for being spendthrift," said Eckstein.
The Israeli government has avoided intervening in the rental market and has not taken steps to defer and reschedule rent payments. Participation in the fixed costs of businesses in Israel is limited and is based on problematic criteria. "When the state determines businesses' entitlement on the basis of a comparison with their turnover in 2018, it basically punishes businesses that have managed to double their turnover since then," Eckstein said. "The general perception is that execution in Israel takes longer and gives less certainty to businesses than the government aid offered in other countries. The result will be a higher rate of business insolvencies. As for the labor market, I don't see how unemployment will fall to around 8% by the end of the year as the Bank of Israel estimates."
Published by Globes, Israel business news - en.globes.co.il - on June 16, 2020
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