Text size

The negative consumer price index for November (-0.2 percent) again foiled the forecasters, making 2003 as the first year in history with inflation of less than zero. This is the result of the overly stringent monetary policy maintained by David Klein during the course the year. But this does not mean that the governor of the Bank of Israel should be held to blame for all the economic woes.

The main reason for the deep recession, high unemployment, decline in private consumption and fall off in tourism and investment remains the continuing state of war with the Palestinians. The global high-tech crisis and general economic downturn are also important factors. Then comes government budget policies, and only then - at the bottom of the list - are interest rates, which indeed were kept too high this year.

Some people are fond of attributing all of the ills in the economy, including poverty, to the interest rate. They ignore unemployment, insufficient government investment in education and training in development towns, and the budget cuts of recent years. They only hold the interest accountable.

This is a baseless contention because it fails to take into consideration the great benefits of low inflation, especially for the weaker sectors of society (basic commodities do not go up in price), salaried workers (wages are not eroded) and mortgage holders (monthly payments do not increase).

Klein's critics said the same things about his predecessor, Jacob Frenkel. But if Frenkel had capitulated then, during the middle of the buoyant 1990s, when Beiga Shochat was presiding over an expansive fiscal policy and irresponsible wage policy that greatly increased salaries in the public sector, we would have found ourselves in a serious financial crisis.

Critics of Frenkel and Klein reiterate that the Bank of Israel was wrong in dragging the government of Israel toward a budget policy of restraint. But the truth is that we are very lucky that these two men, Frenkel and Klein, were not afraid to emphasize time and again how important it is to trim the government's bloated spending, cut its role in the economy, and trim the huge national debt. It's the current finance minister, Benjamin Netanyahu, understands this well. In June 2002, we were on the verge of a very serious financial crisis, which would have led to severe poverty and unemployment because of a burgeoning deficit.

In an effort to explain to the public the big mistake of those favoring a large deficit and low interest (always, at any price), we'll cite two of their other myths here. They would make the argument that high interest rates do not reduce inflation and can even spark a rise in prices.

They even argued that one day, when the Bank of Israel's interest rate would be lower, a "mountain of shekels" would collapse upon us (NIS 200 billion are held in shekel-linked deposits and bonds). According to this argument, the public would at once convert billions of shekels into dollars, resulting in a huge devaluation of the shekel that would produce enormous inflation and a general economic collapse. But as time passed, both of these prophecies proved false.

Therefore, let's hope that Netanyahu does not listen to their current advice: "Increase the deficit a bit." This is being put forward as a magical solution to spur economic growth, but it is again a false promise. If it were really so simple, why not be generous to all and pass out money we don't have? This is precisely the deceptive magic of false prophets.