Ethics @ Work: Who benefits from a strong shekel?

Inflation might not be populist any more.

asher meir 88 (photo credit:)
asher meir 88
(photo credit: )
The recent appreciation of the shekel has led to pressures on the Bank of Israel to lower interest rates in order to devalue the shekel. Lowering interest rates makes the shekel less attractive to foreign investors, thus reducing the demand for shekels and their price. One result is a more competitive exchange rate; that is why exporters particularly urged a lower interest rate. Another result is inflation. Devaluation causes inflation directly because, by definition, foreign goods will cost more in shekels when the shekel is devalued; it also causes inflation indirectly because interest rates are reduced by printing money. The only way to reduce the price of money is to increase the supply by creating more shekels. What is interesting from the ethical point of view is the alignment of interests within Israeli society. For hundreds of years, the "tight money versus loose money" dilemma was identified with moneyed interests vs popular interests. Bankers and capitalists are interested in stable financial markets, which depend on a stable currency, since they are heavily invested in these markets; they also tend to be creditors, who are anxious to maintain the value of the pounds or dollars or whatever they are owed. By contrast, the working man is interested in employment, which is augmented in times of economic booms, which are often fueled by easy money; they also tend to be debtors who are anxious to dilute the value of their nominal debts. Perhaps the most famous exemplar of this is the famous 1896 speech by populist US presidential candidate William Jennings Bryan, in which he railed against the deflationary gold standard, promoting instead an inflationary silver standard. Bryan concluded: "You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold." (It is fascinating to note that many historians consider the Wizard of Oz story, written by Bryan supporter L. Frank Baum, a populist allegory. The Scarecrow represented the Midwestern farmer, and the Tin man the industrial worker - both immobilized by economic adversity; the Cowardly Lion represented Bryan - evidently Baum thought he was too timid in taking on entrenched interests. The Wicked Witch of the East represented the sinister Eastcoast moneyed establishment. The gold-colored Yellow Brick Road brings only danger and disappointment; the true way back home is only in Dorothy's silver slippers - unfortunately MGM didn't know the parable and made them ruby instead, to show off their Technicolor triumph. Even the Oz name is viewed as a reference to the two precious metals, measured in ounces.) It may be that today the tables have turned somewhat. In some ways, a strong shekel may benefit the common Israeli and harm the capitalists. Here is one example, which was picked up by the press: One of the things former Labor Party chairman Amir Peretz put on his platform was to significantly raise the minimum wage, until it reached a $1,000 a month - this at a time when the Israeli minimum wage amounted to less than $800. Now Peretz has kept his promise, thanks not to legislation but rather to monetary policy. Today's minimum of NIS 3,700 per month is significantly more than $1,000. The "poor worker as debtor" stereotype is also not characteristic of today's Israel. The middle-class Israeli is, in most cases, dragging around a large shekel-denominated mortgage. But the poorest Israelis can't afford houses anyway, and under Israeli banking laws are not allowed to get into bank debt beyond a relatively small sum. What about the job consideration? This is certainly not a negligible factor, but again it doesn't play out like it used to. One of the complaints about Israel's export-oriented knowledge economy is that it creates comparatively "hire-proof" booms. Even when national income is soaring, a lot of it is due to hi-tech companies that may hire only a few hundred highly skilled workers - in some cases, only a few dozen. The flip side of this regrettable situation is that we can also have comparatively fire-proof busts. I certainly do not mean to imply that the export industries have a negligible impact on employment in Israel, or that the rise of the shekel doesn't endanger jobs at all. What is true is that the effect is less than it was a generation ago. This is not meant to be an endorsement of the central bank's tight-money policy. I'm not really a macro-economist, but my instincts tell me that in a period of very low inflation, lower interest rates are very unlikely to endanger price stability, and would have a positive affect on growth. In any case, the shekel has barely strengthened recently; the changed dollar exchange-rate is mainly due to the steep decline of the dollar against currencies worldwide. However, I do find it fascinating that the centuries-old automatic identification of loose money with "populism" may be passé, at least in our country. Asher Meir is research director at the Business Ethics Center of Jerusalem (, an independent institute in the Jerusalem College of Technology.