Sunday, July 21, 2019

Netanyahu's free-market orientation and Israel's economic vitality

In the comment thread under my post yesterday about Israeli Prime Minister Benjamin Netanyahu, a commenter pointed out how Israel subsidizes education and has a pretty nearly single-payer health care system.

But what is Netanyahu's relationship to that arrangement?

It turns out it is to reform it:

. . . what he'd really like to be known for are his economic reforms. At least that was the point he continually made while accepting the American Enterprise Institute's Irving Kristol Award on November 9. Speaking to a largely sympathetic, right-of-center crowd, Netanyahu earned applause when he argued that the Laffer curve worked, and that his 2003 tax cuts had transformed Israel into a market economy and an engine of growth.

In 2003 Israel was suffering from its worst economic recession since its founding. The second intifada was primarily blamed for the downturn, but Netanyahu, who took over the Finance Ministry under Prime Minister Ariel Sharon, also blamed a bloated public sector and stifling regulations. Using a story about training as a parachute soldier (an anecdote he repeated at the AEI dinner), Netanyahu explained that the public sector had become a fat man resting on a thin man's back. If Israel were to be successful, it would have to reverse the roles. The private sector would need to become the fat man, something that would be possible only with tax cuts and a trimming of public spending. Netanyahu's Finance Ministry even put out information packets explaining the Laffer curve to Israelis.

Netanyahu didn't just engage in rhetoric. He pushed through controversial reforms that some have blamed for creating serious income inequality. The top individual tax rate was cut from 64 percent to 44 percent, while corporate taxes were slashed from 36 percent to 18 percent. Government spending was capped for three years. Pension ages went up for both men and women. He also liberalized currency exchange laws. The results were a success on the macroeconomic level. Unemployment dropped, as did the debt-to-GDP ratio (from 102 percent to 80 percent). And taxes went from 35.6 percent of GDP in 2000 to 30.5 percent in 2015. Netanyahu credits these reforms for making Israel's high-tech boom of the last few years possible. 

Does this prove that the Laffer curve was a success? Some economists have long conceded that in smaller economies, it might be possible to generate higher revenues by lowering taxes. It certainly is easier to make tax cuts pay for themselves when dealing with a nation of 8 million like Israel than a nation of 300 million like the United States. And in Israel, tax receipts did rise after Netanyahu's tax cuts. In fact, they were sharply higher in 2007 than in 2003, before falling for several years because of the global recession.

A cursory examination of Israel's financial situation shows that Netanyahu might have succeeded where President Reagan failed. His tax cuts did pay for themselves. And he has transformed Israel into more of a market economy (although the rise of tycoons led to sharp protests in 2011 and a slight tax increase to pay for more public spending). In fact, the prime minister recently announced plans for more cuts to taxes, this time to the VAT and corporate levies

So AEI, an organization devoted mostly to conservative economic policy goals, seems justified in giving its award to Netanyahu. After all, he might have shown that the right-of-center economic policies that have stalled in the United States might actually work for other countries. 

Like all leaders that wind up getting history's nod for their effectiveness, he knows that letting people keep more of their own money spurs human advancement.

8 comments:

  1. Aren't there 3 criminal cases pending against him in his Chosen Land?

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  2. There are. And his free-market orientation has boosted Israel's economy.

    One of those cases where two facts about something are both true.

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  3. So we here too in our City on the Hill can make our economy robust alon with government subsidized college tuition and universal health care.

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  4. Um, no we can't. For one thing, it goes against our principles. Both policies (government subsidized college tuition and universal health care) run against the basic American value of freedom. They're redistribution - that is to say, taking Citizen A's money at gunpoint to address the particular situation of Citizen B.
    There's also the fact that the US has over 300 million citizens as opposed to 8 million, which would make these policies even less workable here. One entity, the government, cannot efficiently administer such big reworking of the economy.
    But the main point is that it's stupid to say, "Israel has such-and-such policy, therefore that policy is great." Britain is another very Western nation, but it has shit policies for all kinds of areas.

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  5. Um, by 1956 8 million vets were educated by the gummit here and it ushered in the middle class and unprecedented prosperity, and rather than filling hallowed halls with riff raff, fueled the American edication system to becoming the greatest the world had hitherto known.

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  6. They were vets. They get treated differently, and rightly so.

    For that matter, consider that military service is mandatory for nearly every Israeli citizen. That surely figures into that country's arrangement for higher education.

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  7. Same arguments against free college applied back then too. Bit, oh no, we'd rather make our youth mortgage their futures. Or move to Israel and be chosen and special.

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  8. No one "makes our youth mortgage their futures." Individual people make individual choices about whether to pursue education beyond high school, what kind, and how they're going to pay for it.

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