Analysis

Netanyahu's Coronavirus Fear-mongering Is Causing Irreversible Damage to the Economy

Treasury aiming to get economy functioning after Passover, but prime minister could snag the recovery

Benjamin Netanyahu delivers a speech regarding the new measures that will be taken to fight the Corona virus in Israel, at his Jerusalem office, March 14, 2020.
AFP

Prime Minister Benjamin Netanyahu’s remark in interviews he gave on Sunday that the coronavirus is “the greatest crisis since the Middle Ages” elicited mockery from the media and wonder from historians. But it’s safe to assume that for millions of Israelis who heard him, it was close to what they are feeling right now.

But Netanyahu’s alarmism doesn’t square with the assumptions that his own government is working under, including the Finance Ministry and the economic team the prime minister himself is leading. The treasury is thinking about the morning after the epidemic.

In particular, they are worrying how to get the Israeli economy moving again after the Passover holiday ends in mid-April. By that time, officials believe, the economy should be able to gradually end the lockdown it’s now in.

To accomplish that, the treasury must prevent employers from taking irreversible steps during the lockdown and keep their business functioning as much as possible. It’s about ensuring that the spike in unemployment stays a spike and doesn’t presage a longer-term higher rate. Thus, for example, restaurant owners who have shut their doors must feel confident that after the holiday they will be back in business and refrain from breaking leases or declaring bankruptcy.

That was behind the package of steps announced by the Finance Ministry last week, which include permission for the self-employed and small businesses to delay making tax payments, grants to the self-employed and people laid off, easier loan terms and bigger credit lines. More measures like these due to come this week should be in the same vein.

Politically helpful, economically hurtful

But Netanyahu’s policy of fear is undermining this goal. It’s designed to help him politically and force Kahol Lavan into a unity government under the terms he wants – keeping the justice, defense and interior ministry in his hands as well as chairmanship of the Knesset. The Health Ministry also has its reasons for stoking the atmosphere of fear, so that the public obeys its directives of staying at home and preserving social distance, but its voice doesn’t carry the same power as the prime minister’s.

For the economy, however, the policy of fear is creating a crisis, not just in the financial markets that behave on the basis of future expectations but even on the level of the real economy. Fear not only has a tangible effect on business and consumer sentiment, but its factual basis is dubious.

China, Taiwan and South Korea seem to have passed through the worst of the coronavirus and testify to pandemic’s having a sell-by date. Even Netanyahu has said in interviews that his goal is for much of the Israeli economy to leave the lockdown as soon as possible.

It’s true that even if the lockdown is terminated after Passover, the economy will not simply pick up where it left off. The weeks of paralysis spell big – and in many cases unrecoverable – declines in turnover for almost all businesses. But it is likely that the lion’s share of the more than 510,000 workers who have been registered for unemployment benefits will return to their jobs after the holiday. Some 90% are on unpaid leave, not laid off.

Netanyahu should remember that his fear tactics exact a heavy price. The hundreds of thousands of unemployed who wonder whether they will have a job to come back to next month don’t need a prime minister to give them a needlessly dire picture of the situation and cause despair. They need a leader who talks straight.

“There’s a man who spoke sensibly to me. His name is Milton Friedman. He said, ‘If you have a lot of money to spend on a few goods, you get hyperinflation, and that’s very dangerous.’ So, I’m worried that there will be a lot of money for a lot of people. I’m not confident that what they’re doing in other countries won’t create a big risk. We’re going to do it differently. Yesterday, at 12 at night, I spoke with the governor of the Bank of Israel about how much money we can spend to truly ensure the [economic] security of Israeli citizens. A person knows he’s got a piece of bread.”

These words, which Netanyahu spoke in an interview Saturday night with Channel 12’s Dana Weiss, elicited a strong reaction from Kahol Lavan. “What the prime minister is offering hundreds of thousands of newly unemployed is the teachings of economic Darwinism,” said MK Ofer Shelah. “From his point of view, you should drown. As if the great economic crisis of the 1930s wasn’t solved in exactly the opposite way. As if we haven’t learned over the last decades about the importance of a government knowing when to spread an economic safety net. As if the entire Western world, from Trump to Boris Johnson, aren’t doing exactly the opposite.”

Both sides are exaggerating. Netanyahu’s claim that massive government intervention in the economy will lead to hyperinflation is based on the assumption that whatever a government spends now it will have to collect back after the crisis is over. In other words, if it raises spending now, it will have to raise taxes later and businesses will compensate themselves for their higher costs by raising prices.

But with all due respect to Friedman, a Nobel laureate in economics, and to Netanyahu, worries about hyperinflation are premature. It will only happen if the government tries too quickly to balance its budget again and does it exclusively by raising taxes. If it chooses to gradually reduce the budget deficit that grows over 2020 to contend with the coronavirus, and does it through spending cuts in, say, defense, prices won’t rise.

On the other hand, the government’s restrained policies so far have their place. To the 8-billion shekel ($2.2 billion) loan fund that the government created and the 7 billion shekels in other aid, you have to add the steps being taken by the Bank of Israel: buying government bonds and a $15 billion credit line opened to the banks to ensure liquidity for the economy.

Pressure from everywhere

Meanwhile, the treasury is under pressure from every conceivable interest group. Industrialists, celebrity restaurant owners, bankers and lobbyists for the most narrow interests are drowning them in ideas about how best to rescue the economy. Their phone numbers are circulated in WhatsApp groups of interested parties and they are being flooded with messages from teachers, the self-employed and just about every imaginable sort of citizen.

Civil society organizations presented last week what they define as “a plan to save them.” Knesset Members Uri Maklev, Jaber Asakla, Orit Farkash-Hacohen, Oded Forer and Moshe Arbel submitted a bill calling for all the financial charges run up by coronavirus victims to be suspended for up to 30 days after the crisis has ended. MK Keren Barak appealed to the treasury to ease the terms of the loan guarantees, including doing away with the fees required. Accountant Shlomo Nass, who represents a number of interest groups, among them the association of travel agents and tax consultants and the airlines Arkia and Israir, has his own economic rescue plan.

All these plans inevitably include special assistance for their sponsors. One group accounts for a major share of municipal tax revenues, another for employment. One wants help by being able to delay value-added tax payments, another wants to be able to put employees on unpaid leave for just two weeks.

The government’s biggest problem is how to allocate the aid effectively. In Israel, there’s no reason to send everyone a $1,000 check, as the U.S. government is thinking of doing. A self-employed person whose business has evaporated won’t get much help from that and a worker who is still at his job doesn’t need a gift from the state like that. Regardless of what Netanyahu says, not everyone needs help.