Dr. Ronen Mendelkarn, of the School of Political Economy, Government, and International Relations at Tel Aviv University (Photograph: Shay Maman)
"The Treasury's austerity policy has no economic logic"

"Increase government spending, even in face of rising public debt," says Dr. Ronen Mandelkern.

Underfunding will cause businesses to collapse, drive down demand and create a chain reaction, prolonging the recession | "Increasing levels of public debt in the present is an investment in future economic activity" says Mandelkern.

28.04.2020, 16:16

The principle proposed by Dr. Mandelkern of the School of Political Economy, Government, and International Relations at Tel Aviv University is quite simple: If the government disrupts the economy, it must be the one to deal with the consequences. The problem is that the government is doing exactly the opposite.

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Let's cut straight to the point. What is the solution to the crisis?

"The most responsible reaction would be to increase government spending dramatically. That's what governments around the world are doing. For example, take a look at the Bank of England. They've allowed the government to increase its overdraft, effectively increasing debt, so as to enable them to continue emergency spending. In Israel, this is illegal. In Israel there have been a few suggestions on how to allow for enough government spending in this crisis. The most interesting of these was a paper published towards the end of 2019 by Stanley Fischer along with some of his colleagues regarding the question – what will we do in the next crisis? They state very clearly that the usual monetary tools – Interest rate reductions and quantitative expansion – are no longer sufficient. They recommend a mechanism that will, under certain circumstances, print money for government financing, not through borrowing. "

Stanley Fischer (Photograph: Flash90).

Hold on, increasing government debt and printing money are usually considered irresponsible.

"The responsible thing to do now is to allow a significant rise in government debt. We have to think firstly in terms of producing the support the economy needs to survive this crisis, and only then in terms of funding. Increasing taxes at this point is irresponsible, because it will exacerbate the economic downturn. Increasing levels of public debt in the present is an investment in future economic activity. Government support will help the economy grow as soon as this is over, and allow for higher tax revenues which can be used to repay the debt.

Wouldn't that impose an economic burden on future generations?

"On the contrary, it is not at the expense but rather for the benefit of future generations. In such a situation, the role of the Budget Commissioner is to say: We have much deeper pockets than any of our citizens or private businesses. The government can easily spend to keep the economy functioning well over time. That way, businesses will not collapse due to the crisis and we can 'repay our investment,' the debt, more efficiently.

A necessary minimum or response to economic needs

Won't the money also reach people and businesses who can sustain themselves?

"If you miss, it's better to miss shooting up. It's better to have a little too many expenses than you should, rather the opposite. The meaning of aid shortfalls is far more acute. It is better to reduce the risks to the economy, even at the cost of benefiting a certain percentage beyond the minimum required. Letting the economy crash now would destroy the future economic bridge. Take Greece, for example, in the last ten years. The cuts forced on their government only make it more difficult for [the country] to return to growth. Maybe 20 years from now, they will return to the levels they were at before they hit the crisis."

The government has offered tens of billions in assistance. Isn't that exactly what you wanted to happen?

"The question is: What guides you in increasing the budget? What is the scale we can afford? NIS 80-90 billion, of which about 40 is just loans and deferrals, that's a total of 5-6% of GDP. That's a relatively low level of spending compared to the rest of the world. We have to ask ourselves: What is the purpose here? How do you set the level of aid you give to unemployed people and businesses? The approach so far has been – stating the minimum necessary, not what the economy really needs. "

Self-employed protesting low levels of government aid (Photograph: Yonatan Zindel/ Flash90)

So what is guiding the Treasury in their decision making?

"My feeling is that the Treasury, in this case as well as in other crises, is trying to use the crisis to implement long-standing reforms. For many years, the Budget Department has been pushing public sector privatization processes and seeking to reduce the power of unions. They have always seen the unions as a problem. My problem with the Ministry is that they make it seem as if these were steps taken specifically to deal with the crisis, when in reality they have been attempting to push these reforms unsuccessfully for many years. By suggesting that COVID-19 has somehow caused the government to be strapped for cash, the treasury has managed to convince a large part of the public of the unfounded need to cut teacher's salaries. I have no problem with reorganization measures, but it they have to be done as part of an agreement. The problem is that the Treasury is taking advantage of the situation and holding a gun to the teacher's head. "

Lack of assistance will cause great economic harm

Some have been calling for wage cuts in the public sector, as wages in the private sector have been affected. What will be the consequences of such proposals?

The Treasury is trying to get the public sector and the private sectors to lash out at each other. The austerity policy being led by them unjustified and has no economic logic. The public sector accounts for 30% of the economy. Cutting wages now would be disastrous. The government must do everything possible to maintain activity levels in the economy – in both the private and public sectors. A reduction in income will directly translate into a decline in consumption and demand and thus a worsening of the crisis."

Protestors make their voices heard demanding more aid for the self-employed. (Photograph: Yonatan Zindel/ Flash90)

Are the criteria for government assistance too tough?

"If you have to choose between giving out too little or too much, I support the second. If an individual or business gets too much money from the government, it can be dealt with later through taxation. On the other hand, without government aid many businesses and households will collapse financially. As a result, demands will fall and create a chain reaction. The goal should be to stabilize the economy until businesses can get back on their feet. For example, if you give generously first, you can then reassess the situation and absorb some of that money back via taxation. But without quick and easily accessible aid, there will be a great deal of damage to society. "

Are wage subsidies better than unemployment benefits?

"Employees who are out of work and currently on furlough are more likely to lose contact with their employer compared to workers who have been receiving subsidized wages, even if they are not working. The likelihood of unemployed workers remaining unemployed is higher than the chance of wage subsidy workers. Israel doesn't have partial employment schemes. An employer cannot cut hours without laying workers off, which is a problem."


Brought to press with the help of the International Relations Division of the Histadrut