But Austerity Works So Well

Gershom Gorenberg

At a slight delay, here’s my column  from the American Prospect on the Lapid-Netanyahu budget:

A familiar tale: In a small country on the Mediterranean rim, the government chooses to solve an economic crisis by enacting an austerity budget. Regressive taxes will rise. Aid to families will be cut. Less will be left of the welfare state built decades ago. The novice finance minister promises this will heal the economy.

As the people of that unhappy land say: Happy are those who believe.

The Mediterranean country in question, this time, is not Spain or Greece, but Israel. It is not facing a looming financial meltdown. The crisis amounts to a ballooning deficit—a danger, but not a collapse. Still, Benjamin Netanyahu’s recently formed government has chosen a recipe of austerity. The specific ingredients of the Israeli version were chosen by Finance Minister Yair Lapid, the ex-talk show host whose new Yesh Atid (There Is a Future) party campaigned only a few months ago on fervent Facebook promises to protect the middle class.

There are several implications to this story. One is that ideology is more powerful than experience, especially the ideology of small government. Another is that giving to the rich is the prelude to taking from the poor and, for that matter, all the rest of the un-rich. A third is that a shiny, well-packaged candidate with Facebook skills is a poor bet for saving people whose salaries covers less and less of their bills, or for those who have no salary. In politics, organizing is still more important than advertising.

The most immediate, short-term description of Israel’s distress is that for over a year, tax revenues have fallen far short of Finance Ministry predictions. With too little money coming in, the deficit is ballooning.

But there’s history behind this, explains economist Moshe Justman of Ben-Gurion University. From the middle of the last decade the government cut tax rates. The new tax structure, Justman says, assumed a nonstop boom, with growth of 5-6 percent a year. More recently, growth has slowed to 3-4 percent annually, he says. This isn’t a “deep recession,” he notes. But the slower economy is not yielding enough taxes to pay the bills.

To fill in even more of the picture, those tax cuts were largely a gift to the highest earners. They fit well with the policy trends of privatizing government services, scrimping on health care and education, and reducing the social safety net. Last week, the Organization for Economic Cooperation and Development reported that Israel has the worst poverty rate among 34 member countries. In the standard measure of economic inequality, it comes in fifth, after Mexico, Chile, Turkey, and the United States.

Read the rest here.