Stanley Fischer on the Israeli economy

The word is that Stanley Fischer will be nominated to be #2 at the Fed, good news in my view.  Here is Ari Shavit recounting his meeting with Stanley Fischer:

…he [Fischer] utters the relevant figures in slow, measured, Anglo-Saxon Hebrew.  In the years 2004 to 2008, Israel’s average annual growth rate was 5.2 percent.  While the world was in crisis in 2010-11, Israel’s average annual growth rate was 4.7 percent.

…Fischer tells me there are four reasons for this success: reducing government spending dramatically (from 51 percent of GDP in 2002 to 42 percent in 2011); reducing the national debt significantly (from 100 percent of GDP in 2002 to 75 percent in 2011); maintaining a conservative and responsible financial system; and fostering the conditions required for Israeli high-tech to continue to flourish.

There is then a discussion of how Israeli R&D and starts-ups are so strong and how dynamic the tech sector is.  Fischer then turns to the problems:

“We have four problems,” he says.  “Our education system has deteriorated, and it endangers our ability to sustain technological excellence.  The employment rate among ultra-Orthodox men is only 45 percent.  Most Arab women do not work.  Fewer than twenty business groups control much of the local market and thus restrict competition.  Right now the high-tech miracle helps to conceal these four problems that are weighing down the wider economy.  But in the long term, these problems endanger Israel’s ability to remain prosperous and successful.”

That is from Ari Shavit’s excellent new book My Promised Land: The Triumph and Tragedy of Israel, reviewed here.


Naive question but what's the mechanism by which reducing government spending spurs growth rates? Not trying to be sarcastic.

I can understand how, say, a reduction in tax rates or devaluing your currency could spur growth but is there some fundamental way in which government spending directly hampers growth rates? Especially in the 5-10 year time frame discussed here.

Interesting question, government can fund value added activities or just redistributes money?

If the money is used to finance activities than generate value added activities like technology export to other countries, $1 less of taxes may yield more than $1. If government redistribute taxes through food stamps, that $1 just yields $1 of food. But, things are not that easy, education is a value added activity that pays much later and that private business benefit from it a lot.

So, it's not about saying 52% is too much and 42% is better, it's about the purpose of government spending. In the specific Israel situation the spending reduction led to debt reduction. Fine, but don't extrapolate.

It certainly can, but it has to seize money to do it, and it suffers from Friedman's "other people spending other people's money" efficiency problem, so it probably shouldn't.

Should they be seizing money in the enterprise of seizing a couple years of the lives of young Israelis who work (but not those who refuse to work because they reject the existence of israel because it prevents the first coming of the messiah) in order to seize the land of non-Jews and to seize the liberty of even more non-Jews?

Or do you see taxes to pay for killing and destruction to be a free market transaction?

I, for religious reasons, oppose war, but I find those who call all sorts of government spending and the taxes to be "seizing their money" to think that they are not "seizing my money" when they demand lots of taxes to pay for the ability to kill a couple billion people in just a day.

I am a republican, small r, and a checked democrat, so We the People collectively decide what "government" which is us, does, just as We the People do collectively to create the marketplace. The market place is not defined by an individual - you can not create the marketplace you want - it is determined by everyone else, and probably is not to your liking.

I look at the bright side of the probably hundred billion dollars spent on WMDs that are so massively destructive they never were and never can be used - millions of people were well paid for doing something that required a lot of high tech science and engineering in effectively digging holes in fields and then filling the holes back in. The claimed purpose was totally bogus - the worst mass destruction in the USA was not deterred by the ability to kill a billion people and destroy at least 50% of the global GDP in a day.

The Constitution makes clear the idea of a standing army and ready war capability something to be feared, yet the one thing those who use the words "seize" to describe, first taxes, and then after Reagan made the Republican Party the legitimizer of tax cut, borrow massively, and spend on big government for things too horrible to allow, use the word "seize" for spending on general welfare, is they never criticize loudly the digging holes and filling in holes of militarism (lest they be widely denounced by others who use "seize" as "dangerous", but they sure hate "nation building" of any sort.

Well, you are either reducing taxes now or in the future when you reduce spending.

Does anyone know the tax rate trend in Israel? Was this growth spurt preceded by declining taxes?

Considering the arrow of time I think we can safely ignore future taxes causing a past growth spurt.

Really? Don't expectations matter?

No, investors only care about quarterly gains, bro.

Why aren't we all communists? Because markets are better at allocating resources than government.

Markets are better at keeping people motivated. They probably are not better at allocating resources. Need to stop conflating these two.

"allocating resources" - for what precisely?

Too often, for the glory of the Big Comrade, Father of his People.

Market failures are when specific markets become very similar to government; slow feedback loops, failure is almost impossible, there is no natural limit to stupidity.

Markets work because to meet payroll in two weeks I have to serve my customers in a way that they will pay. And there are others who are intent on serving those customers better than I. Government spending gets in the way of that rather vicious feedback loop. The whole notion of smoothing out business cycles is about preventing the corrective mechanisms of the market. Government spending keeps people doing things that are counter productive and would otherwise be done differently, forced to be done differently if that money wasn't there. Paradoxically, the threat of failure produces growth. I will come up with a better product, a cheaper way of doing something, higher quality, more targeted offering. Which creates economic growth.

And yes everyone throws good money after bad. Only government has the ability to collect or print resources so they can continue to do so to perpetuity.

...because the Soviets were famously competent setting the prices of things? Troll harder please or at least provide evidence for outlandish statements such as these.

How is the free market at replacing all the aging and decaying bridges built by the collectivist big government Republican and Democratic majorities in the 20s and 30s through 60s?

The conservative let the free market do it experiment most notably resumed by the former Bush budget director who turn a slight operating budget surplus into a $400 billion budget deficit before leaving to be Indiana governor has not proven popular or effective. New England gave up on toll roads in the 20s, the 1820, so it should be no surprise that privatizing the Indiana Toll Road (which led to Mayor Dally privatizing the Skyway "bridge" and all public parking in Chicago) has not been well received. Gov Daniels is hardly acclaimed for his free market transportation efforts. Nor is Gov Perry who was going to use the free market to create the most fantastic transportation system in Texas that was superior to big government spending.

What I find ironic is the lack of any American investors in those projects, just rent seeking banks taking a cut of the money foreign investors paid to privately operate the toll roads and run them better at lower costs than government while making big profits. Obviously they still remember the New England toll road corporations went bankrupt because it cost too much to prevent free riders and the free riders ensured they lost money on their investment. Ultimately toll road projects became coercion - either buy shares in the corporation and get nothing in return other than the road running by your property, or see the road go out of the way to favor your competitors and bankrupt you.

Government is necessary and is good at things like building and repairing bridges. It cannot do so if all the money it can raise is spent on handouts and entitlements. Is this a difficult concept?

Government is often fairly good at paying private contractors to build and repair bridges. The contractor is motivated by his/her private gain. Let a government agency alone build and repair without hiring private contractors....Meh

The economy, the free exchange of goods and services, provides resources for government to exist. The services that government provides, either direct such as roads and police have a cost benefit curve. Just like paper clips. Without paper clips most businesses would have trouble keeping going. But more expensive paper clips will not make a business prosperous, it is overhead. Government also removes costs; political instability makes it difficult for the free exchange of goods and services to be done effectively, so a stable political structure is a benefit to the economy, as are courts and laws. When government has unlimited resources they will act as anyone does, build for the sake of building, which costs the economy.

But all those things start from the fact that the resources upon which the government draws for it's existence comes out of the productive output of the economy. Too much government is a drag on the economy. Too little doesn't accomplish the things that a healthy economy requires. That change, 51% to 41 % represents how much less burden government is upon the economy. Sweden did a similar transition in the same direction, and thrived. The US has that number going the other way, and oddly enough isn't thriving.


Maybe a few of those percentage points were being spent on regulatory activities that actively decreased beneficial economic activity. Remove a percent or two of that, and not only do you allow those same resources to be spent elsewhere, but you get additional economic growth too.

Thanks! That's exactly the sort of explanation I was looking for. Most of the other comments above seemed tangential.

So reduction in govt. spending can be taken as a proxy for a regulatory relaxation which is then the fundamental conceivably spurts growth. Empirically I've no clue if that holds in this case, but at least it sounds a viable reason.

Yeah I have no clue if that's actually what happened in this case. It just seems like the most facially plausible reason that cutting government spending would lead to increased economic growth in a short time frame.

I wanted to come up with a good, realistic, and simple example. Let's say that, previously, licenses were required for all sorts of businesses - barbershops, nail salons, etc. The bureaucratic process involved in getting one was costly and time-consuming, not only for the potential business-owner, but for the government. Further, the government actively monitored businesses to make sure they were in compliance.

Now, the government eliminates the licensing requirement, and can correspondingly stop the monitoring activities. Government spending goes down while economic activity increases.

Possibly, but again only tangentially. I'd put it a little more hard nosed.

When transfers to individuals occur, those individuals don't work as hard, don't innovate, don't start businesses, don't invest. Hunger is a great motivator. The same happens when businesses are the destination of those transfers. I suspect that the US will see a decrease in innovation and entrepreneurship as health care becomes more socialized. Why bust your butt making a pile of money to look after the needs of your family when someone else is going to pay for it.

When the return on investing in a lobbyist or placing yourself in the stream of 51% of the economy that gets strained through government is greater than investing in some risky venture that creates a new market, guess what gets invested in. For example, in the industry that I work in, government subsidizes new hires. It also subsidizes equipment replacement. Has for a long while. So we see untrained folks installing equipment, and a shortage of trained technicians who can service and maintain the equipment. It looks great by some numbers and measures, but the reality in the market is that there aren't enough trained folks to do the work that is available.

The influence of government in these matter is reflected by the percentage of government to GDP. The smaller the number, the more focussed government is on doing it's core business.

Yea but if you have inadequate regulation, you may for a while have the appearance of more growth only later to discover the Enrons, Worldcomms etcetera. Balance balance balance!

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When government spends it is bidding real resources away from competing uses. This is the same thing that happens when private entities spend in the market, except that private entities are subject to market discipline and government is not. That is, when a private entity spends $X on Y goods that at least suggests that those goods are worth that much money, whereas when government does so we cannot draw the same conclusion.

Consider a wildly contrived example: suppose the government was spending $1B per year to purchase musical instruments and shoot them into space. That's $1B worth of musical instruments that no one will get any use of any longer. The raw inputs that went into producing those instruments were also bid away from competing uses, but instead of being used they will simply float in space. This is a waste of real resources, and we would all be better off if this spending were discontinued. Now, the musical instrument industry will try to focus your attention on how it will suffer if this spending ceases, but you must resist that siren song and focus on the waste. As I said, this is a silly example, but it is not too far off from many real government programs. The US government for example spends hundreds of billions every year on weapons which have no purpose other than to explode and kill. A cruise missile costs ~$1.4M and it is difficult to argue that this is an efficient use of resources.

Yes, and it drives the prices of the inputs higher than they would otherwise. If engineers can make good money designing fragile financial or military instruments that just end up blowing up, why would they spend their efforts at designing a new way of doing something or a product that creates a new market?

And the fellow that has an idea for a new market or new product has to pay a premium for the engineers he needs to design it. No problem really, just go somewhere else to hire them, and create the economic growth there instead of here. This has been happening already.

This also happens in one industry towns, resource development. In Alberta Canada, anyone who wants to do something has to compete with the the oil business for hiring and any other inputs. The costs get too high. Government can do the same thing with their money.

Of course, all this is on a sliding scale. As the left is wont to say, the engineer couldn't get to the workplace if there weren't roads. On the other hand, if you look at the roadbuilding industry, it would make one hesitate to encourage that type of setup by spending more government money.

Stanley Fischer of (former) Rhodesia and Bank of Israel, for Fed governor? Interesting idea... I did think that Bibi Netanyahu would have been an excellent candidate for US president on the Republican ticket (hat tip to Steve Sailer). May be there are some efficiencies to be gained here as well - free international market in political candidates (and appointees).

Well they already appointed a Canadian governor of the Bank of England. Free international market in political candidates? Yeah sure why not? Sounds like the next phase of the ongoing neoliberal trainwreck.

Why should lines on a map matter that much? Id rather elect a good brit than a bad American.

So I assume all the campaign financing will be internationalized too then? Foreign governments or their Soverign Wealth Funds sponsoring candidates okay?

Isn't that why the Obama campaign disabled those controls on it donation collection? We have that now.

Why would you assume that? Is it because you cant think of a real objection?

Why have countries?

Well exactly, once you get the point where Presidents, Prime Ministers and other high officials can just come from any old place as if it's some international "talent" market you might as well just abandon the idea of nations and have open borders or no borders. I'm not on the big anti-immigration bandwagon around here but I know this is not a palatable idea to many of the commentors found in these parts.

Oddly enough, almost all the royal families in Europe are/were of foreign origin or strongly mixed with foreigners. And it was considered prudent, actually (lots of relatives in other countries = USUALLY lower willingness to go to war with one another. It didn't quite play out in 1914, though.)

There is nothing new about practice of hiring foreign experts to run things. This has been practiced since at least the Middle Ages.

A foreign guy *may* have the advantage of not being member of any of the host country's competing cliques.

There is also nothing new about it being very unpopular. Medieval history is full of resentment at foreign experts being brought in.

But in Fischer's case he is an American. He was an American for 40 years before the Bank of Israel.

That is true. The visceral hate of the street mob against foreigners in position of power seems to be culturally universal (so much for the "celebrate diversity" movement).

That said, the same hate may be put to good use, if the nation needs to perform some severe reforms, but the locals are afraid of being the target of the hate. In that case, the foreigner serves not just as the executor, but also as the universal scapegoat. After the necessary adjustments are done and the pain subsides a little, he leaves and hey, the national fabric is healed once again.

Golda Meir?

.....and a Citigroup / Citibank stint.

There are precedents, in medieval times it was quite common for the clergy to cross national borders.Various well known prelates came from other countries - united admittedly by their knowledge of Latin.Sports teams today hire the 'best' irrespective of nationality. Kings and queens have been grabbed from all over, when required. Eliminating countries however would be a whole different challenge, ala the EEC. Carthago delenda est, anyone..?

The Middle Ages do seem to be a constant source of inspiration for many of people pushing these ideas in contemporary times.

So, do you think that the nature of people and their organizations has developed much since then?

Or could it be that some people of today are so blinded by the shiny gadgets in shops that they consider themselves smarter and more moral than their ancestors who needed a parchment for writing?

I often think that the ancient Roman philosophers had more insight into people than contemporary scientists. Possibly because they didn't voluntarily distract themselves with the notion of how things OUGHT TO be and just observed them as they were.

The nature of human organizations sure has changed, even if people haven't. Of course you may disagree, but if you do I'd love to hear your argument.

Roy, I do not think that the nature of organizations has changed any more than the nature of its constituent elements - the people. Only the management methods are different, thanks to the technical development.

Modern AMA or union organizations are pretty much an equivalent of medieval professional guilds, using a different language in their P.R., but having the same incentives and goals, and often using the same methods of lobbying as the medieval people used to.

On the other hand, the medieval Fuggers or Knights Templar had a remarkably modern structure and mode of operation, up to and including the international character of the trade.

Marian, just look at issues like responses to hereditary authority, the role of issues like violence and honor, etc... You specifically picked the most "modern" of medieval organizations, merchant houses and guilds, but even those are radically different today. But even if these are the spring shoots of modernity they were tiny specks in a profoundly different world. Can you imagine where our society would be if our institutions behaved like those of late medieval Florence? I know we have domesticated the Medici and Fuggers in our economic history, but in practice they were much more like warlords and mafiosi than any first world businessman or financier.

Yes, Roy, it may well be that my view is colored by what I want to see.

There is also the fact that those organizations who were the most similar to the modern ones probably left many more written texts than the others, literacy being rare. Therefore they tend to be overrepresented in modern history books.

If I am remembering correctly, during the Warring States period in China, there were roving scholars looking to sell their skills (at politics and making war) to whoever would take them in.

Robert J. Fischer for the Federal Reserve...

As for Stanley, I did not know he was conservative in politics. He will be a useful foil to liberal Yellen.

And I, for one, welcome our new post-national globalist overlords!

I hear Putin's a master at spycraft, so when he finally retires from the Kremlin, Obama should appoint him head of CIA.

Hmm ... note the interesting career of former German federal chancellor Schroeder.

Ensuring cleaner energy supplies than German brown coal? All the while bypassing any Polish transit fees? And helping to bind Russia to German economic interests (such as investing in expensive real estate around Baden-Baden)?

Let's just call that a mixed perspective, which any politican is happy to live in. Like the Green Party member on the EnBW board - Gunda Röstel

Spymaster? Why not POTUS?

No, Netanyahu will be the GOP nominee in 2016.

Fischer tells me there are four reasons for this success: reducing government spending dramatically (from 51 percent of GDP in 2002 to 42 percent in 2011)

It worked pretty well for Sweden and Canada, too. Anything the government is doing that isn't a true public good should probably be left to the private sector.

Tyler, Is there any mention in the book about Israel becoming a natural gas exporter? Will Israel be immune from "Dutch disease" issues? Also, are there any papers on how Indonesia, once an OPEC nation, put up very respectable growth rates after leaving OPEC?

No one is probably immune, but I would expect Israel to be at least very resistant. The Jewish secular culture is incredibly intellectually curious.

I disagree. Jewish secular culture tends to be incredibly intellectually insular.

Not my experience. At all.

Most Arab women do not work.

I do believe if Arab women working will bring better economic growth across all of Israel but what doesn't that long term solidify the one state solution? And if that occurs how long before the Arab population stops pursuing a two state solution that Israel will never agree to and instead pursue equal rights across all Israeli territories?

"Most Arab women do not work."

Translated: Put them to work so they won't have time to have non-Jewish babies as part of the War of the Cradle.

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