What Israel Can Teach Us about Rebuilding an Economy

William A. Galston
Bill Galston
William A. Galston Ezra K. Zilkha Chair and Senior Fellow - Governance Studies

November 30, 2009

The wall between The Wall Street Journal’’s news division and its editorial page makes for a lot of good reporting and a fair amount of cognitive dissonance as well. For example, the November 24 edition featured an article, tucked away on A14, about Israel’s response to the economic crisis. In it we learn that the Netanyahu government raised taxes, avoided traditional stimulus measures, and ruled out government bailouts for banks and bondholders. In short, the government rejected supply-side economics, Keynesian economics, and “too big to fail” economics—a trifecta of heresies against the competing orthodoxies that dominate the U.S. landscape. The result: a rebound that Barclays analysts call “the strongest recovery story” in Europe and the Middle East.

Undergirding this heterodox strategy is a principle that I’ll call “sound diet” economics—namely, eat your spinach before dessert. As Israeli finance minister Yuval Steinitz puts it, “We wanted to create expectations and send the message that although now it’s difficult, later it will be better. We expect to come out of the crisis with an advantage over the rest of the Western world.”

The Israeli government’s approach was hardly laissez-faire, however. Rather than consumer-oriented pump-priming, it poured funds into large, fast-track infrastructure projects and private sector R&D programs. The country will come out of the downturn with value added to both its public goods and its high-tech economy. No wonder Steinitz is so confident.

This mindset helps explain why the Journal (also on November 24) was able to run a review of Dan Senor and Saul Singer’s Start-Up Nation, a book-length paean to the Israeli economy. Israel, says the review, is the world’s “techno-nation,” with a share of GDP devoted to R&D 50 percent bigger than that of the U.S., and venture-capital investment per capita at 2.5 times our rate.

So while Israel, besieged throughout its existence, builds its future, the United States, with every advantage in the world, devours its seed-corn. What’s happening to us is not just a concatenation of policy problems; it’s a test of our moral fiber and our capacity to govern ourselves. Does our government have the guts to feed us some spinach before dessert? Will the administration endorse a bipartisan budget commission with real teeth, along the lines Senator Kent Conrad advocates? Will it invest political capital to move a National Infrastructure Bank through the Congress? While the signs so far are not encouraging, it’s not too late to change course. If we lose our future, we’ll have no one but ourselves to blame.