Opinion

Israel, Beware of Pseudo-economists. Don't Print Money

Nehemia Shtrasler
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"Helicopter drop," as coined by Milton Friedman.
"Helicopter drop," as coined by Milton Friedman.Credit: Syda Productions / Shutterstock
Nehemia Shtrasler

Oh, the happy days, the days of the coronavirus. The happy days of the false prophets, the astrologers, the pessimists and the pseudo-economists. They are now talking about many years of terrible poverty, the end of capitalism, the death of globalization, and other nonsense that clearly won’t happen. But they are causing great damage. They are fomenting destructive panic, which is just as bad as the coronavirus.

I have already written about “futurist” David Passig. He predicted 300 million dead, and we’re still counting. An equally famous figure is Avi Tiomkin, a financial consultant who didn’t study economics, but has specialized in worldwide doomsday prophecies that aren’t taking place.

At the height of the most recent stock market crash, he said that the global economy was approaching its tragic end and that to prevent that, everything should be nationalized, the stock exchange should be closed for a week, we should operate without any budgetary restrictions, give everyone government guarantees – and forget about all the economic models and financial theories.

But what can you do – the stock market recovered, and anyone who listened to his terrible scaremongering was left with heavy losses.

There are others, professors of economics, who were harmed by the coronavirus. Take for example Prof. Rafi Melnick of the Interdisciplinary Center in Herzliya. He is known for always favoring an increase in government expenditures, but this time he broke the record when he recommended a huge increase of investment in infrastructure, because there is no need to be frightened by the deficit, “A deficit is the solution, not the problem.” A new economic theory.

He doesn’t care that the deficit has already jumped to frightening, unprecedented dimensions of 12 percent of GDP. It doesn’t even bother him that we are now at the bottom of the global ranking in terms of the size of the deficit.

Nor is Melnick concerned about the public debt, which has soared to 76 percent of GDP. He is even ignoring the interest payments on the large debt, which will come at the expense of education and health, and the increase in interest rates, which will harm investments, employment and growth. A large deficit also creates pressure to raise taxes, which would throw the economy deeper into the pit of recession.

It’s true that our standard of infrastructure is low, but an addition to infrastructure must come at the expense of cutting back the inefficient part of the economy – the public sector. There should be reductions in the workforce, the salaries and the budgetary pensions. There should also be a cancellation of tax exemptions that distort the allocation of resources. Melnick didn’t mention that. He found a free-lunch solution – the deficit. But the truth is the opposite: The deficit is the problem, not the solution.

And how do we finance the deficit? Prof. Eugene Kandel suggests imposing a “mandatory loan” on the public. That’s a serious mistake. The capital market here and in the rest of the world is a free market, in which the government can raise all the sums at issue. A mandatory loan harms the market as well as the weaker elements of society, who would be forced to set aside part of their miniscule incomes in order to purchase it. The rich would simply exchange one type of savings for another.

In addition, a mandatory loan would force the Bank of Israel to set up a huge operation, with dozens of workers to deal with registration and follow-up, a step that would greatly increase the cost of the fundraising. A very bad idea.

However, they are all surpassed by Prof. Eran Yashiv of Tel Aviv University, who proposes printing money instead of borrowing from the public. That would prevent an increase in the government debt, and avoid burdensome interest payments. The Association of Alchemists would choose him as president, if it weren’t familiar with Yoram Aridor, who did exactly that in the early 1980s, and led the economy to ruinous hyperinflation, to the last dollar and to mass bankruptcies. I don’t think we need another Aridor.

But not to worry. There are also many professors who understand macroeconomics. The new Finance Minister Yisrael Katz should appoint them as his advisers, and not, God forbid, those who are mistaken.

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