Cut the budget, fast

The government must act now to stave off the global crisis closing in on us.

By DANIEL DORON
SKorea stock Xchange (photo credit: )
SKorea stock Xchange
(photo credit: )
The world economic crisis will eventually reach this country too. Even if we do not undergo a serious financial crisis (not a certainty at all, since the crisis is still expanding and no one can tell where it will hit next and with what force), the deep worldwide economic contraction is enough to pose painful challenges. to Israel. It will not only cut vital capital investment (the source of our hi-tech development), but will also shrink exports, essential for potential growth. The government can prepare for this crisis, but not through direct intervention to protect weak creditors, which would only worsen the crisis. Instead, the government must stimulate quick economic growth by cutting its bloated budget and reducing its deficit, which would ease the pressure on borrowing by lowering interest rates. Budget cuts would transfer vital resources from a profligate government to the more productive private sector (whose productivity would be further enhanced by reducing government control). There are specific budget areas where waste is particularly rampant (e.g., the defense establishment's pensions, and education - but where not?). But for political expediency, across-the-board cuts, such as Binyamin Netanyahu imposed in the past, may work better. The government must also reduce taxes, especially on small and medium-sized enterprises, which are the chief engines of growth and employment. The enormous potential of these enterprises would be unleashed quickly by massive deregulation and in the longer term by breaking up the government's land monopoly, a source of stagnation and widespread corruption. Government should complete and expand reforms in banking for households and small businesses, which are now starved for credit or pillaged by the banks (to cover their great losses on loans to cronies). Providing ample competitively priced credit to these enterprises can spur quick growth, especially in the laggard economies of the Negev and Galilee that have been denied credit by the banks. THESE ARE not theoretical propositions. Between 2004 and mid-2008, 400,000 jobs were added to the economy. Unemployment plummeted from 10.4 percent to 6%. In the same period, public expenditures (government and public sector) dropped from 47.6% of GNP in 2004 to 44.2% in 2007. The government's budget deficit as a percentage of GNP also fell from 3.6% in 2004 to 0% in 2007 (!). These are empirical reasons for cutting the budget - instead of increasing it, which is what the heads of Labor and Shas (Ehud Barak, Avishay Braverman and Eli Yishai) and the social lobby agitate for. Experience proves that contrary to their arguments, it is a cut in government expenditures and in taxes, and not their increase, that creates employment. It was the "cruel Thatcherite policies" of Netanyahu that not only saved the economy from collapse but actually helped the disadvantaged most by spurring fast and strong growth that increased employment figures. In fact, policies advocated by the social lobby and by the Histadrut, which has an iron grip over labor markets, have been a major cause of chronic unemployment and of low wages. The Histadrut's so-called "progressive" labor laws have politicized the workplace, making workers captives of corrupt unions. Productivity incentives have been so distorted that the capable worker manages to produce only about half that of his US counterpart. It was no accident that the Histadrut enterprises and those of the kibbutzim and moshavim went bankrupt the moment the Begin administration stopped the government's heavy subsidization of them. BUT FACTS do not impress our "social lobby" and the politicians associated with it. They exploit poverty for partisan purposes. Recently Barak circulated an article by the new guru of the Left, Nobel laureate Paul Krugman, calling on the US government to increase its deficit. As Nehemia Strassler of Haaretz explained, what may be good for the US (a controversial proposition at best) is not necessarily good for Israel. Public expenditures here are far more profligate and wasteful. It is also worth recalling that Krugman suggested the same prescription for Japan when it was in the grip of a heavy recession in the 1990s. It made matters worse, deepening the recession and slowing economic recovery. You do not need a Nobel Prize in economics to understand why. Governments are seldom successful in economic undertakings because they are not motivated - as so many fantasize - by the public's greater good. Rather, they are driven by politicians' desire to further their own objectives and to help vested interests that support them, such as the oligarchs or the public sector monopolies unions that represent every third worker. For this, they readily sacrifice economic considerations. The results are evident in any government activity you choose to examine: in education, health, justice, even in defense. Hasn't increased government spending on education actually diminished the level of education? Can anyone remember when a government plan to retrain workers or increase employment succeeded? This however does not deter the advocates of increased government spending from requesting enhanced government "investments" in education and job creation. Similarly, as regards "investments" in infrastructure - another mantra of the spenders. Is there one example of successful government development of infrastructure without huge costs overruns and prolonged delays? The only effective government crisis preparation is for government to cut its budget, lower taxes and regulation, break up costly monopolies and generally facilitate enhanced economic activity. But how many politicians will undertake such a thankless job? The writer is director of The Israel Center for Social and Economic Progress.