The American Bailout Plan: Lessons from Israeli History



The American Bailout Plan: Lessons from Israeli History


Prof. Sam Lehman-Wilzig

Schusterman Visiting Israeli Scholar, Brown University


Comparisons between a whale of an economy and a minnow are always problematic. And what worked once may not work two decades later. Having offered those caveats, I still think that the Israeli experience may have an important lesson for what promises to be the biggest transfer of power in the history of the United States. The present $700 billion bailout plan will move a huge chunk of authority from Congressional political oversight to Executive (i.e. Treasury) technocratic governance. Is that healthy for democracy?

           The Israeli case suggests that it can be. From the time of the establishment of the State of Israel in 1948, the politicians ran the nation’s economy and finances. Indeed, during Finance Minister Sapir’s tenure in the 1960s and 70s, the economy was run by “paper slips” that he kept in his pocket – mostly requests by citizens, companies and other groups for financial succor. By the early 1980s Israel was suffering from hyper-inflation (400% a year!) as a result of the amateurish way the economy was run. The country stood at the abyss – sound familiar?

           The solution they hit upon: let the academics devise a master economic plan and then let the professional technocrats in the Finance Ministry administer it in consistent fashion, with a minimum of political input. The short term result: hyperinflation was stopped in its tracks without large scale unemployment. The long term result: despite ups and downs in its security situation and other external problems, the Israeli economy over the past 20 years has gone from strength to strength; indeed, Israelis today are lamenting the fact that the shekel is so strong vis-à-vis the dollar!

           Not everyone has been satisfied with this new state of affairs (or shall we say, affairs of state). During budget negotiations in the mid-1990s, Prime Minister Rabin exploded in the Knesset when part of his political program for resource redistribution was being stymied by the Treasury, asking out loud, literally pounding his fist on the podium: “who do these Fogels [then Director General of the Ministry] think they are?” Moreover, in order to maintain a low budget deficit, the Finance Ministry has occasionally made deep cutbacks, highly unpopular among large sectors of the public and their parliamentary representatives. And yet, the Finance Ministry “boys” continue to hold sway – and the economy continues to proudly withstand the buffeting winds of international recession and other blows.

           All democracies have to make tradeoffs between political representation and governance efficiency. Having faced the abyss in the 1980s, Israel has made its pact with the “technocratic devil”. The American citizenry might well look at the Israeli case when judging the present revolutionary transformation that is being proposed. It may be less “democratic”, but enabling the professionals (not the politicians) in government to run the show at times of crisis and thereafter might well be the lesser (d)evil.


Shana tova to all!

Sept. 29, 2008

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