Israel needs clear economic policy to help it out of crisis, top economist says

Israel needs clear economic policy to help it out of crisis, top economist says

Former Bank of Israel deputy governor Nadine Baudot-Trajtenberg says lack of economic leadership has brought unemployment in Israel to among worst of OECD nations

Former Bank of Israel deputy governor Nadine Baudot-Trajtenberg (Bank of Israel)
Former Bank of Israel deputy governor Nadine Baudot-Trajtenberg (Bank of Israel)

Israel must set out a clear economic program to enable it to climb out of the economic crisis, instead of just dishing out money and announcing rescue plans that have not been thought through fully, Nadine Baudot-Trajtenberg, a former deputy governor of the Bank of Israel, said in an interview with The Times of Israel.

What Prime Minister Benjamin Netanyahu’s governments have done until now, she said, “is just an opening of the purse. We haven’t seen a program.”

Businesses and economists have been decrying what they say is a lack of economic leadership, as Israel copes with the fallout of the coronavirus pandemic.
The economic package that the country provided as the crisis struck came too late and was too little, they said. Now, as the second wave of the virus strikes the nation, bringing with it the threat of further lockdowns, and as the streets roil with anger and discontent, Netanyahu, in what seems to be a panic reaction, is simply doling out cash.

Last week, Netanyahu and Finance Minister Israel Katz said they would immediately funnel NIS 6 billion ($1.75 million) in handouts to all Israelis, rich and poor, in a bid to jumpstart spending in the economy. In light of widespread criticism though, the Prime Minister’s Office on Monday tweaked the plan, linking the handouts to income.

Prime Minister Benjamin Netanyahu wears a face mask to help prevent the spread of the coronavirus as he opens the weekly cabinet meeting, at the Foreign Ministry, in Jerusalem, July 5, 2020. (Gali Tibbon/AP)

That widely criticized plan, came about a week after the two unveiled another plan, that would add an extra 80 billion shekels to rescue the economy – by paying out grants to small businesses and extending unemployment benefits to June 2021, or until unemployment drops to below 10 percent. This adds to the NIS 80 billion ($23.3 billion) rescue package announced in March, which was later raised to NIS 100 billion ($29 billion).

Meanwhile, tens of thousands of citizens have taken to the squares to protest against the Israeli government’s mismanagement of the crisis.

The NIS 6 billion handouts plan was a “bewildering response,” said Baudot-Trajetnberg, “so thoughtless” in light of the fact that the government had months to think about what to do, she said. And whereas the plan to extend unemployment benefits to June 2021 does provide some sort of certainty for the jobless, she said, and is “generous,” its design is flawed because it is only a “short-term” fix.

“Everybody now is pretty aware that we’re going to be living with this crisis for at least a year,” she said. “The virus is not going anywhere.” And if that is the case then the design of the policies must be thought through “a lot more than what the government has done.”

People scuffle with police at a protest against the government’s new restrictions to contain the spread of the coronavirus, in Tel Aviv on July 18, 2020. (Miriam Alster/Flash90)

The large package and the way it was designed, she said, gives people a disincentive to work. And that is not because people do not want to work, but because, if people try to supplement their unemployment income with part-time work — possibly the only kind of work they find in the crisis — they would lose the benefit. They would thus have no incentive to supplement their income in that way, she said.

That is a “badly designed” plan, she said. And “given that it’s going to cost us so much money,” it should have been more carefully crafted.

Israel had more than 50,000 confirmed cases of COVID-19 and 409 deaths from the illness as of July 20. With the economy entering a second round of lockdowns, jobless figures that spiked to over 1 million in April, were still around 21% in July, according to the National Employment Service.

Before the coronavirus, the unemployment rate was below 4%, according to the Central Bureau of Statistics data.

Closed shops and restaurants in Tel Aviv on March 15, 2020. (Miriam Alster/FLASH90)

Canadian born Baudot-Trajtenberg has an MA in Philosophy, Politics and Economics from the University of Oxford in England and a PhD in Economics from Harvard University. After leaving her post at the Bank of Israel in 2019, she spent a few months at the Bank of International Settlements, which along with the World Bank and the International Monetary Fund sets out economic policy, and has now joined the faculty of the Tiomkin School of Economics at the IDC Herzliya, a private college.

Education, health must be top priorities

What Israel needs now, said Baudot-Trajetenberg, is for the government to focus first and foremost on setting out a plan for the education and health systems, in light of a second wave of the coronavirus pandemic and the fact that the virus is likely to be with us for a prolonged period of time.

“Six weeks from now, schools are supposed to start — how do we manage that?” she said. The issue is crucial not only for the children’s education, but also for the economy, much more than for other countries, because Israel has a relatively higher fertility rate, and also a higher participation of women in the labor force, compared to other developed economies.

Israel had a fertility rate of 3.1 children per woman, the highest in OECD countries, as of February 2019. And women in Israel have higher employment rates than women in any other OECD country, except for Ireland, according to a Taub Center report.

“That’s a combination which you don’t find anywhere in the world,” said Baudot-Trajtenberg. “So, the school issue and working from home or not working from home, it’s a huge issue in Israel. So it’s not surprising that the big shout-outs have come from parents and from teachers. The government has not listened to them.”

An Israeli schoolchild engaging in remote learning at her home in Moshav Haniel, in central Israel, March 18, 2020. (Chen Leopold/Flash90)

The government needs to start thinking about what type of support it should be giving parents if schools are not going to reopen as scheduled in September, because of the pandemic, she said. Without a solution, the economy will not be able to get back to work, because one of the parents will need to stay home.

We “have been cheating in the past few months,” she said, when everyone has sort of worked from home. This is something that may be feasible for the short term, she said, “but the truth is, if you have young children at home, there’s no way you can work eight hours a day.”

“We should start thinking much more carefully about how we redesign work and how we redesign school, and what type of support and incentives the government gives for this to happen.”

In addition, inequalities that exist today among children – regarding their access to computers also must be addressed, she said. In Israel, the percentage of kids who have access to both a computer and a quiet space to study was lower than that of many developed countries, including the Netherlands, Denmark, Norway and Switzerland, for example, according to OECD figures.

“So, if we’re asking kids to do studying online, we have a large proportion of our kids who are not going to be able to do that,” she said. And that is something that also needs to be taken care of, to make sure the quality of education is not hurt and inequality even more entrenched into the education system.

Magen David Adom workers wearing protective clothing transfer a patient to the coronavirus unit at Sheba Medical Center in Ramat Gan on July 8, 2020. (Flash90)

In a similar manner, Baudot-Trajtenberg said, the government must prop up hospitals and teams handling the pandemic to gear it up for the influx of patients that are bound to be jump come autumn, when coronavirus patients and flu patients will flock to hospitals. Even before the pandemic, Israeli hospitals were starved for cash and understaffed.

Not only that, but the pandemic has made it more urgent than ever for Israel to tackle structural problems in the economy that it should have tackled years ago: including creating greater access to broadband internet for citizens, deploying 5G networks, and boosting the use of technology and artificial intelligence for medical and educational purposes, she said. “That is infrastructure for the 21st century,” she said.

Working ‘in the dark’ during an unprecedented crisis

The magnitude of the shock the COVID-19 crisis has created has left policymakers and economists globally scrambling for the right tools to combat the economic havoc it is creating, she said.

“There’s a lot of improvisation going on,” regarding economic policies, Baudot-Trajtenberg said. “Everybody’s sort of working in the dark.”

And that is because this crisis is a catastrophic combination of being not only global, but also being a crisis of both demand and supply.

Economic activity can shrink because of demand factors — when consumers spend less, leading to price drops — or supply factors — when there is a shortage of products, or products fail to reach markets, triggering a sharp price rise. For example, when a tsunami or major physical destruction occurs, it hampers the delivery of products and other resources to consumers, sending prices higher.

Until now, most recessions — like the Great Depression in the 1930s and the recent 2008 financial crisis — have been demand-based, and most of the tools designed since World War II are tools that respond to a demand shock to the economy, where fiscal or monetary policies — like tax cuts, increased expenditures and transfer payments and unemployment benefits — are used to support demand, when there is such a drop.

The only supply slowdown witnessed by the modern economy, albeit on a “much, much smaller basis,” Baudot-Trajtenberg said, was that caused by the oil crisis in the late 1970s and early 1980s, when oil prices and those of other products surged as oil supply was cut.

The economic crisis created by the coronavirus pandemic, explained Baudot-Trajtenberg, is a global “shock of both demand and supply,” something that has never happened before, and that is what is leaving policymakers and economists confounded.

“When we think of what are the right policies to use, there is a big question mark,” she said.

The most immediate impact of the pandemic on the economy, however, has been on the demand side, she explained, causing people to stop buying products and services because of the lockdowns imposed, and triggering global layoffs and unemployment.

Israel unemployment among worst in OECD nations

According to OECD figures released earlier this month, the cumulative impact of the COVID-19 crisis on employment and hours of work is 10 times the size of what the world witnessed during the global financial crisis a decade ago.

The figures also show that regarding unemployment, Mexico, Italy and Israel are the worst hit among OECD countries, in terms of the drop in the number of work hours — Israel had lost 35.29% of work hours, two months from the onset of the crisis, compared to February, when the crisis first hit, Baudot-Trajtenberg said, based on OECD numbers.

To address these problems, countries globally have used a “massive amount of the typical tools,” but in a “much, much, more aggressive way,” Baudot-Trajtenberg said. They have pumped money into the economy, both from the central banks and from Treasury coffers.

Demonstrators protest against Prime Minister Benjamin Netanyahu outside the PM’s official residence in Jerusalem on July 18, 2020. (Olivier Fitoussi/Flash90)

But Israel did everything “too little and too late,” she said, mainly because the crisis started at a time when the nation was also handling a political one, as the country held its third election in 12 months in a bid to get a government.

“We had no government, so we didn’t have economic leadership. So, we’re really behind the curve in terms of responding from a fiscal point of view,” she said.

And even as unemployment has surged, the support given by the government has been “slow and small,” relative to what other countries have done. In addition, the policies were not clear, leading to a lot of uncertainty in the economy, which “stops people in their tracks in terms of spending,” she said.

The protests Israel is witnessing on its streets, she said, is “a reflection” of how the people perceive the government’s handling of the crisis. “We haven’t seen such protests anywhere else,” she said.

“Everybody has been going through this great crisis,” Baudot-Trajtenberg said. But the “social outcry here, has been much, much bigger than anywhere else.”

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