Stanley Fischer, the Israeli Economy's Single Parent

A responsible adult, the governor has devotedly tended to the economy. But where is his partner at the treasury?

David Rosenberg
David Rosenberg
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David Rosenberg
David Rosenberg

It’s very telling that Stanley Fischer announced he was stepping down after eight mostly laudable years as Bank of Israel governor, at a time when it can be said: he failed at one of the more urgent tasks he took upon himself - to prevent the housing market from overheating.

Perhaps by the time he actually leaves office at the end of June he’ll be able to point to some success in that sphere. Central banking isn’t a magic show and no one, not even Stanley Fischer, can pull a rabbit out of a housing hat. But the odds are that the steps he has taken to date, placing ceilings on how much big a mortgage a home buyer can take out, will by themselves contain the rise in home prices.

If he fails, it won’t be Fischer’s fault. Like every central banker, Fischer has a very limited number of tricks up his sleeve. He can contain demand for home loans, as he has done. But he can’t order the Israel Lands Administration to make more land available for development. He can’t offer incentives to contractors, put an end to the cement monopoly or prod planning bodies to speed up approvals, all of which would increase the supply of new housing.

Indeed, his concern vis a vis the housing market right now is to ensure the banks don’t wind up with rafts of bad loans to the mortgage sector or to builders. Restricting credit to builders as he has done has put him in the ironic situation of reducing the supply of new housing and puffing up prices at a time when he’d like to see the supply increase and prices stabilize.

Cherchez la Finance Ministry

In the last week or so since Fischer announced his resignation two years ahead of schedule, it’s become a cliché to call Fisher the responsible adult of Israeli economic policy. However, it would be more accurate to say that Fischer has been the single parent.

The economy has been tended to lovingly by daddy Stanley on the side of inflation, banking system stability and, when times were difficult back in 2008 and 2009, shielding the economy from the global recession.

But Fischer’s spouse – the government and principally, the Finance Ministry – hasn’t been holding up her end of the relationship vis a vis the care and feeding of the economy.

And, as any single parent will tell you, no one person can do the work of two even he is winner of multiple central-banker-of-the-year-kind of awards. The price of housing is just one example.

There’s a view about economic policy that says the job of government is to stay away and let business get down to the business of doing business. Everything else will fall into place – the economy will grow, jobs will be created, poverty will be vanish, supply and demand will be perpetually in balance and so forth.

In America, this view has morphed over the last decade or so into a religious doctrine in the sense that it’s immutable to any rational analysis or concession to real-life circumstances. In Israel, the idea of free markets as a panacea was never adopted with the same kind of fervor, but it guides Benjamin Netanyahu’s economic philosophy to the extent he still retains any.

Give back that ball!

But the fact is there are a lot of things a post-industrial economy needs besides creating an uninhibited playground for entrepreneurs. We can start with the proposition that they don’t deserve one.

Individual businesspeople frequently make poor decisions, not just because the government distorts the normal mechanisms of the market, but because they are human, prone to make bad decisions by the same fears, greed, vanity, wishful thinking or just plain ignorance that other mortals are.

The collective wisdom of the markets has been repeatedly shown to be no better; we have the U.S. mortgage crisis as the latest bit of evidence. Everyone from homeowners and property speculators, banks and Wall Street all tipped into the abyss.

It’s not that government officials are wiser, but they provide at least a counterweight to the collective stupidity the market suffers. On that account, Israel certainly has failed. Regulation is heavy-handed, bureaucratic or opaque where it should be efficient and transparent (for instance, tax regulations and land policy) or absent or spottily enforced (anti-trust, labor laws). For a developed economy, corruption is too commonplace.

Another thing a responsible, adult, two-parent government can do is create the right fiscal environment. During the first years of Fischer’s term at the Bank of Israel, the Finance Ministry did indeed play its part. Starting with Bibi himself and in the years following, the government ran small budget deficits, started to reverse and reform the ever-growing welfare state, and bequeathed the economy a current account surplus. That created a more attractive business and investment environment, inspired economic growth and equipped Israel to cope with the global financial crisis when it began in 2008.

In the last three years, however, the treasury and more exactly its boss, the prime minister himself, has abandoned fiscal discipline.

But the most important thing a responsible adult government can do in the post-industrial era is to create the foundation of a knowledge-based economy, one where output and productivity is led by the intellectual resources of its people.

For that you not only need entrepreneurs, but people with the right education and skills sets that only an excellent school system can provide. For the sake of the economy, they need to be healthy in the broadest sense of the word – not simply disease-free, but capable of putting in years of productive labor, especially as the population grows older and the need for people to remain the workforce longer grows more critical. A knowledge economy workforce needs a sense of belonging to society, which means they have a sense that the rewards of working and contributing are distributed fairly and in difficult times they have a safety network to fall back on.

Not even the most enlightened entrepreneur is going to take on these tasks because they are collective. He won’t build and operate a school in the hope that the six-year-olds he enrolls will become his future employees. He won’t sponsor anti-obesity programs or conduct medical research because the benefits they accrue him as an entrepreneur are too small relative to the costs. It’s not in his power to ensure a modicum of social and income equality.

These are all things that only a government can do and they are where Israel’s government has mostly failed.

Stanley Fischer was left to fend for himself as a single, responsible parent to cope as best he can, and mostly succeeded. What we need now isn’t just another responsible adult to succeed him at the Bank of Israel but a second one at the treasury as well. Things being as they are, that second job is now more critical than the first.

Stanley Fischer. Credit: Bloomberg
Stanley Fischer with the kids. He's the one in the center, looking towards the camera, light blue tie.Credit: Emil Salman

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