The Battle for the Credit

Medals for pulling the economy out of a profound crisis should go those who deserve them most: the private sector and the public.

Now the fight is about who gets the credit: Who pulled us out of the great international economic crisis and who deserves the medal?

Today we can definitely say that the crisis is over. There is no room for reservations and saying that "not everything is rosy," or that things are still "uncertain." Today, after two years of global crisis and a year of local crisis, the world has emerged from the deep pit and Israel is one of the countries that has even moved on to economic growth. True, it is slow growth, but it is still growth.

Competing for the international credit are U.S. President Barack Obama and the chairman of the Federal Reserve Board, Ben Bernanke. Obama said recently that the United States may be seeing the "beginning of the end of the recession," and America is on the right path. He sees his intervention and subsidy programs as the cause of the recovery, but many people do not agree. Billionaire investor Warren Buffett had a harshly critical opinion piece last week in The New York Times complaining about the giant budget deficit - 13 percent of GDP - the swelling national debt and the negative trade balance. He expects tax increases, the dollar's collapse and inflation, and called on the administration to cut expenditures because "we don't want our country to evolve into [a] banana-republic economy."

Bernanke said last Friday that the world economy was returning to growth thanks to the intervention of the central banks and governments around the world. Claiming that reducing interest rates and providing trillions in liquidity was what saved the economy, Bernanke was trying to give himself a pat on the back. But there is a heavy price to pay for all this in inflation, a weakening dollar and excessive intervention in free-market processes.

Our situation is quite similar. Here, too, a behind-the-scenes battle for the crown is going on between the finance minister and the governor of the Bank of Israel. At this week's cabinet meeting, Finance Minister Yuval Steinitz explained he was responsible for the turnaround by creating the economic package deal, passing a two-year budget, expanding state spending and helping grant credit. But governor Stanley Fischer is not giving in easily. He says lowering interest rates was the right step, as was massively increasing the money supply, and that it was correct to intervene in foreign currency and bond markets because this made the shekel depreciate and prevented deflation.

It's true that the passage of the two-year budget was an important achievement that contributed to stability, but the budget itself is a bad budget, bloated and wasteful with a big and frightening deficit. It's a budget filled with political expenditures, and the money is not being spent appropriately on infrastructure and growth.

We still have not forgotten the expensive and irresponsible coalition agreements with Shas and Labor, or the bloated cabinet. Increasing child allowances is a bad move that encourages the creation of large, poor families. We have also not forgotten the embarrassing surrender to Histadrut chairman Ofer Eini in the package deal, or the lack of cuts in the defense budget. In addition, the budget does not include important reforms that could have let the economy spring forward: reforms of the ports, the electricity sector and the Wisconsin welfare-to-work program, which needs to be expanded. The budget was increased by more than necessary, so there was a need to increase taxes on labor, which is poisonous for employment and growth.

Fischer's policies are also problematic. The large influx of funds is dangerous and could create destructive inflation. His intervention in the dollar market still has not proved itself, and it cannot move the exchange rate over the long run.

Then who deserves credit for pulling us out of the crisis?

The private sector, which organized itself quickly. It became more efficient, laid people off measuredly, trimmed, lowered costs and changed markets and plans. It did exactly what the government didn't. And the Israeli public also deserves credit. It did not go wild with a shopping spree as in America, and did not act greedily or take out huge mortgages against nonexistent income.

Another reason is that we entered the crisis in a relatively good macroeconomic state, with a low budget deficit, a declining national debt, high economic growth and stable prices. There was room to fall without collapsing.

If Steinitz and Fischer were managing the crisis in a more appropriate way, we would be enjoying 5 percent annual growth today without inflation, and not the stuttering 1 percent growth with serious fears of inflation. In any case, the medals should go those who deserve them most: the private sector and the public.