September - Not a Very Good Month

If we lower taxes and cut government spending, we won't have to be afraid of another September disaster like the Lehman Brothers crash and the world financial crisis.

September is apparently not the most successful month of the year. It turns out that during September we were witness to two frightening events that sum up well the first decade of the third millennium.

On September 11, 2001, we saw the biggest terrorist attack ever live on television - on the Twin Towers, the Pentagon, and the fourth plane that went down in Pennsylvania. The towers collapsed, the Pentagon was damaged and 3,000 people lost their lives. America was in a state of shock; how was it possible that someone would dare attack the greatest power on earth?

On September 15, 2008, the great world financial crisis began. It started when Lehman Brothers, the giant investment house, went bankrupt and sent shock waves across the globe. Stock exchanges all over the world tanked, and terrified investors were sure their investments were up in smoke.

After Lehman Brothers, other large banks and insurance companies collapsed and people thought the world was coming to an end, or at least the capitalist system.

What's interesting is that there is a direct link between the Twin Towers disaster and the world financial crisis. In the wake of the 9/11 disaster, people had the feeling that the U.S. economy would deteriorate into a recession; that was when Federal Reserve chairman Alan Greenspan adopted an expansionary monetary policy - he cut interest rates. But he cut them too deeply and for too many years.

As a result, it was very cheap to borrow money and Americans went on a shopping spree. They took out mortgages and bought apartments, increased private consumption and even started investing in the stock exchange.

Parallel to this, president George W. Bush started an all-out war against Al-Qaida and its leader, Osama bin Laden, to punish those behind the great terror attack. Bush sent the military to Afghanistan and then started the war in Iraq. The result was huge expenditures and a monumental U.S. budget deficit.

In this way, personal spending by Americans combined with the administration's deficits to inflate bubbles in consumption, real estate and stocks. They burst in a huge explosion in September 2008 and the world entered the greatest economic crisis since 1929.

When the crisis was at its peak a little more than a year ago, economists and people with vested interests competed with one another to see who could produce a more bleak forecast. Some said it would be worse than 1929. Others said it was the end of capitalism. Some hoped it would be the end of America. Others merely forecast that the United States would sink and China would replace it.

But what can you do - the stormy prophecies by those expecting the return of good old Marxism did not come true. Capitalism did not die. It is still the best way to run an economy. Free enterprise is still the essence of an economy that wishes to grow; only when there is growth is there something to share with the weakest sectors of society.

It is correct to claim that government intervention throughout the world increased in 2009 - both to save banks and financial institutions and to increase social and welfare spending. But this is legitimate intervention that is welcome at a time of crisis. Keynesian theory supports that. The only problem is the strength of the intervention and its duration.

This is where some countries went overboard; for example, the United States, Greece and Spain. They deteriorated into a situation where they had a frightening deficit of 12 or 13 percent of their gross domestic products, which has disastrous results. The credit ratings of Spain and Greece have recently been downgraded. Growth in these countries is zero and unemployment is on the rise.

No one is downgrading the credit rating of the United States because of its power, but its situation is also not wonderful.

Today Greece and Spain have no choice but to adopt a plan for sharp budget cuts, and this comes at a time of recession and high unemployment. Because that's the only way they can get back on the path of economic growth and regain the trust of the world and investors.

By contrast, countries that started off from a good position with low debt and a negligible deficit - like New Zealand, Switzerland and Israel - came out of the economic crisis quickly and well. These countries also did not exaggerate things with some kind of grandiose rescue plan

The conclusion is that it is always right to keep budget deficits at negligible rates and government spending low; to ensure this, taxes must continue to be cut for prolonged periods. That's why Finance Minister Yuval Steinitz was correct in reducing the value-added tax by half a percent beginning today. It would be good if he cut it even further.

That's why Prime Minister Benjamin Netanyahu was right when he pushed for a further lowering of income tax and corporate tax, also starting today.

Some people recommend that government spending be increased instead of lowering taxes, but they are mistaken because these are precisely the two components that serve as fuel for growth.

That was proved already in 2003.

So it is not enough to lower taxes, it is also necessary now to cut NIS 3 or 4 billion from the 2010 budget to support growth in the private sector.

If that happens, we will not even be afraid when September comes around.