Is That a Wolf at the Door or a Chickenshit Politician?

Israel isn't on the brink of an economic crisis, but we are suffering a crisis of economic leadership.

David Rosenberg
David Rosenberg
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An angry wolf (illustrative)
An angry wolf (illustrative)Credit: Dreamstime
David Rosenberg
David Rosenberg

Is Israel facing a genuine economic crisis – or are we suffering from a crisis of confidence in the economy's leadership?

There are good reasons to be worried about the way the economy is going. Growth has been slowing this year. More recently, consumer prices have started to fall, creating the specter of deflation, and the housing market has seized up in the face of policy mismanagement. Abroad, Europe is tottering towards its third straight recession and overall the global economy is looking worse for wear. The unending turmoil in the Middle East and the ever-present threat of a conflict with Hamas, Hezbollah, and maybe ISIS one day hangs over us.

But are things really that bad?

Moaning about the economy seems to be a favorite Israeli pastime. That was especially the case with the Gaza war over the summer, which provided the tourism industry, retailers, farmers and the like with so many tales of woe to share with us.

The reality is better reflected in boring old numbers. In the year of the slowdown, declining exports and a missile war, Israeli gross domestic product will probably grow 2.2%. That's the lowest in a decade, apart from the two recession years of 2003 and 2009, but it's hardly cause for panic. The general consensus is that growth will pick up to 3% in 2015, a low-ish figure by the standards of the last decade but certainly quite respectable.

Furthermore, the sharp depreciation of the shekel since July is already showering its benefits on the economy. Even as Hamas rockets were disrupting manufacturing and transportation, and the effect of the shekel depreciation was starting to be felt. Merchandise exports actually grew in the third quarter.

Crying deflation

Then there's the wolf of deflation. The fact that consumer prices have actually declined in the 12 months through September has set off a wave of moaning about our sad economic fate, and the fear that it will set off a vicious circle of falling prices and consumers who put off buying and businesses that put off investing because they expect things to cost even less if they wait.

But deflation is far from posing a real threat. Bond yields and economists expect inflation of 0.9% over the next 12 months, which is under the government's official target and makes the Bank of Israel, which is supposed to be keeping prices inside it, look bad. But it's certainly not deflation like the kind Europe is threatened with – deflation created by a crippled economy. By contrast, our deflation is partly imported (falling oil and commodities prices) and partly the result of government policies designed to lower the cost of living (scheduled reductions in electricity and water prices, and more competition).

The threat of war is the most concrete of them all, but as we're are gradually learning once again, two months after Operation Protective Edge ended, rocket wars don't have to have a lasting economic impact. The big one we'll inevitably be fighting with Hezbollah – whose arsenal is 10 times bigger and many times more powerful than Hamas' -- is another story. But that isn't on the immediate horizon, certainly not immediate enough for the central bank to be cutting interest rates or experimenting with quantitative easing.

In short, there's good reason for our economic leadership to be taking precautionary steps, but no more. But instead we have one leader who's screaming there's a wolf at the door, another only concerned with whether the wolf will be voting for Yesh Atid and a third doesn't seem to care whether there's a wolf or not, but if there is, hopes it'll eat up the second leader.

No wonder we're suffering a crisis of confidence rather than a crisis.

Bow wow

Karnit Flug, the governor of the Bank of Israel, is the one crying wolf. Not that you could tell that from her public comments or the minutes of recent Bank of Israel monetary committee meetings. But you can see it in the back-to-back rate interest rate cuts over the summer that brought them to a level even lower than in 2009. Flug hasn't done it yet, but she is signaling that she may begin a program of quantitative easing.

Inflation, of course, is lower than it was in 2009 so real interest rates are higher, but Flug isn't facing the economic tsunami that Stanley Fischer did five years ago. Near-zero interest rates and QE will do little for an economy that, unlike then, isn't facing a shortage of investment capital. Borrowing costs are incredibly low for consumers or businesses that want to borrow. Cutting them further and injecting more liquidity into the economy is more likely to set off an asset bubble of higher home and bond prices than encourage investment.

But cutting rates and loose talk about QE do send the message that the Bank of Israel is truly worried, leading the rest of us to wonder if there's something we don’t know. Maybe there is a wolf at the door that we ordinary mortals don't yet see it. Better run.

Finance Minister Yair Lapid's wolf problem is of a different order. Burned politically by his early effort to be a responsible finance minister by slashing the budget after he took office, he has apparently decided that the economists who guided him are a bunch of useless know-it-alls. Now he seems determined to give the voters what he thinks they want -- or at least what they can understand and take advantage of, like his plan to exempt many home buyers from the value-added tax.

Lapid is selling it was a solution to skyrocketing home prices, but none of those hated economists think it will have that effect at all – quite the contrary.

Meanwhile, Lapid has presided over the making of a directionless budget whose main parameters – no tax hikes, a bigger-than-planned deficit and a huge increase in defense spending – were dictated not by economic imperatives but by political considerations. The fact that the budget is mildly expansionary, as it should be to counter the slowing economy, is just a happy coincidence. If there really were a wolf at the door, no one in the right mind would want Lapid there defending it.

The prime minister's wolf problem is that he doesn't seem to care about it.

Netanyahu seems to have lost any desire to do anything except to see off challenges to his rule, particularly those created by the Palestinians or by the settlers, both of whom seem happy to exploit his caution, paranoia and pessimism.

"The only thing he’s interested in is protecting himself from political defeat. He’s not [Yitzhak] Rabin, he’s not [Ariel] Sharon, he’s certainly no [Menachem] Begin. He’s got no guts,” an unnamed American official told The Atlantic magazine this week. He was referring to Netanyahu in the context of the Palestinians, but it could just as well apply to economics. The prospect of standing by and watching Lapid, a weakened but potentially dangerous rival, consumed by the wolf of recession is another instance of his survival instinct at work.

What happened to the old Bibi of a decade ago – the finance minister who worked to restructure the budget and privatize companies? He was a rare case of someone holding the finance portfolio who had mastered the subject of economics, had a true economic philosophy and the wherewithal to implement it. There were certainly a lot of people who loathed his ideas, but on the whole he was success: Israel's economy enjoyed many years of high growth and shrugged off the global recession in large part due to his reforms.

Calling Bibi a chickenshit politician, as they seem to be doing in Washington these days, isn't a very nice way to say it but doesn't make it less true. If Netanyahu is indeed afraid to attack Iran or risk negotiating an agreement with the Palestinians, he could at least be using his free time to show some economic leadership.

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