How to Fight the Recession (Extract)

Extract from a story in Issue 17, December 8, 2008 of The Jerusalem Report. To subscribe to The Jerusalem Report click here. George Bernard Shaw re-marked that if we laid all the world's economists end to end, they would not reach a conclusion. A recent Newsweek article with "advice from seven Nobel economics laureates" reached no conclusion but was simply baffling. Nevertheless, though I am one of those end-to-end economists, let me venture some advice on the current situation. Another wiser Nobel economics laureate, the Hebrew University's Robert Aumann (2005), said recently that the crisis at its core is not economic or financial, it is psychological. Fear prevails and creates the very results we dread, generating even more fear. For example, a survey in the Israeli business daily Globes in October reported that 19 percent of Israeli workers feared layoffs. The question is: How can the cycle of fear be broken? Israel is lucky it enters the recession after five fat years of 5 percent growth. But lean years are ahead. The Bank of Israel's companies survey, released on November 8, found Israeli companies "deeply pessimistic" and facing slowdowns in all sectors. Both Israel and America need leadership that offers a credible message of hope and optimism. Here are five things our leaders can do that will help us emerge from the coming lean, bitter and dark year of 2009 into the sunshine of a 2010 recovery. 1. Tell the truth. This crisis is one of trust. Banks have stopped lending, because they doubt they will be repaid. The U.S. administration has poured hundreds of billions of dollars into the banks, so they will resume lending. But it is like pushing on a string; the banks are holding on to the money instead of lending it. In Israel, the Finance Ministry and the Bank of Israel are considering similar policies, but they will be equally ineffective. Rebuilding trust in society will take time. It will require absolute transparency. Tell us the truth. Tell us how bad things are and if and why they will get worse. In election campaigns, politicians sugarcoat. This is no time for that. Nothing will end the recession quicker than rebuilding trust within society. This must be the focal point of any policy. 2. Invest in infrastructure. Israel has an ambitious ten-year plan for investing in infrastructure - roads, buses, railways, urban light-rail systems, clover leafs and hospitals. It is time, for instance, to build a hospital in Ashdod, a major city, which has none. The recession is a perfect time to accelerate such investment. It creates jobs - construction is labor intensive - and builds the foundations for future economic growth. Deficits? They are OK, as long as the money is used to build assets that in future will help repay the debt. But, as the Technion's Prof. Arnon Bentur notes, there will be a shortage of civil engineers to implement this infrastructure program. So we must invest in educational infrastructure, too. Finance Minister Ronnie Bar-On, who is showing admirable leadership, says his ministry is building a stimulus package, including infrastructure investment. But will the Knesset act on it? As for America, compared to Europe and Asia its infrastructure is ramshackle. Its bridges are collapsing, its roads have potholes, its airports are jammed (compare JFK to Singapore's Changi) and its "fast" trains are slow as molasses (ever ride on the Acela?). This is the time to rebuild them. It worked during the Great Depression, under the New Deal. Public infrastructure banks, as proposed by Senate Banking Chairman Sen. Christopher Dodd and Sen. Chuck Hagel, should be set up in both America and Israel. 3. Get people to save. This will baffle economists. Surely we want people to spend, not to save! If consumer spending is about 70 percent of Gross Domestic Product (GDP) in both America and Israel, then a 4 percent fall in consumption destroys nearly 3 percent of GDP growth. The point is, people overspent in the boom. They now need to restructure and get out of debt. But with falling asset prices, they need help. Governments can create tax-free high-interest assets to encourage ordinary people to save. The funds can be put into infrastructure investment, which can and should replace consumer spending as the engine of growth. Investment creates assets to support future growth, while consumption uses up assets that future generations will thus not have. The writer is academic director of TIM Technion Institute of Management, Tel Aviv. Extract from a story in Issue 17, December 8, 2008 of The Jerusalem Report. To subscribe to The Jerusalem Report click here.