The International Arena
As we indicated at the beginning of this Introduction, the financial crisis has serious implications for four areas of Jewish people policy planning. The first is the international arena. In connection with the financial crisis, we are witnessing a global realignment and redistribution of power. Whereas between 1991 (the collapse of the Soviet Union) and 2008 the United States enjoyed significant global dominance, today it is being increasingly forced to share economic and political power with rising states, most notably China but also Brazil, India and Turkey.
As we have seen, the United States has incurred a number of long-range, structural economic problems. These include a huge federal deficit (along with state and municipal deficits) financed by huge federal debt, a very large portion of which is held by foreign countries, some of which like China, are emerging as rivals to the US. This foreign debt itself is a point of strategic weakness as Richard N. Haas and Roger Altman have pointed out:
“…During a crisis over Taiwan, for example Chinese central bankers could prove more dangerous than Chinese admirals. A simple announcement that China was cutting back its dollar holdings could put huge pressure on the US dollar and/or interest rates. This would be similar to the way the United States used economic pressure against the United Kingdom during the 1956 Suez crisis, when Washington refused to support an IMF loan to the British government unless it agreed to withdraw its military forces from Egypt.”
In addition, the requirement to rein in the deficit could pressure cuts to the American defense budget and will also inhibit America’s ability to intervene militarily especially in wars of choice, and its presence in Iraq and Afghanistan will be affected. Furthermore, the authors point out, budgetary pressures will also affect humanitarian interventions, foreign aid, intelligence and homeland security.14
Similarly, the US will have a weaker voice within the IMF and other global institutions, it will be unable to undertake direct financial interventions, and perhaps most importantly, the soft power of the US is being undermined. The US, most of Europe (with the exception of Germany) and Japan are all suffering from deleveraging, slow growth and high unemployment. In contrast to both China and Israel, US annual growth in the third quarter was 2.60%. The US model of political freedom and market-based capitalism is seen as risk-prone and discredited after the financial crisis and that it ultimately may lead to poorer societies and lower standards of living.
In contrast China in 2010 enjoyed around 10% growth as it has averaged for the past three decades. It is the world’s leading exporter and manufacturer and
China’s economic prowess is already allowing Beijing to challenge American influence all over the world. The Chinese are the preferred partners of many African governments and the biggest trading partner of other emerging powers, such as Brazil and South Africa. China is also stepping in to buy the bonds of financially strapped members of the Eurozone, such as Greece and Portugal. Fortune’s latest ranking of the world’s largest companies has only two American firms in the top 10 – Walmart at No. 1 and ExxonMobil at No. 3. There are already three Chinese firms in the top 10: Sinopec, State Grid, and China National Petroleum.”15
“A simple announcement that China was cutting back its dollar holdings could put huge pressure on the US dollar and/or interest rates”
In addition, China is translating its economic rise into new diplomatic and military assertiveness. As Gideon Rachman put it:
At the G-20 summit in November, the U.S. drive to deal with “global economic imbalances” was essentially thwarted by China’s obdurate refusal to change its currency policy. The 2009 climate-change talks in Copenhagen ended in disarray after another U.S.-China standoff. Growing Chinese economic and military clout clearly poses a long-term threat to American hegemony in the Pacific. The Chinese reluctantly agreed to a new package of U.N. sanctions on Iran, but the cost of securing Chinese agreement was a weak deal that is unlikely to derail the Iranian nuclear program. Both sides have taken part in the talks with North Korea, but a barely submerged rivalry prevents truly effective Sino-American cooperation. China does not like Kim Jong Il’s regime, but it is also very wary of a reunified Korea on its borders, particularly if the new Korea still played host to U.S. troops. China is also competing fiercely for access to resources, in particular oil, which is driving up global prices.16
Fortune’s latest ranking of the world’s largest companies has only 2 American firms in the top 10, compared to 3 from China
On the military side, the Chinese are developing weapons systems that can challenge the American military, ranging from aircraft carriers and “carrier-killer” missiles to stealth bombers and missile carrying drones.17
One of the most important directions of Jewish people policy is to form policies that adequately address this potential shift of global economic and political power, not only to China but also to countries like Brazil, India and Turkey. This assessment addresses the issue in the general geopolitical discussion above and in the special essay on the Jewish people and the rise of Asia.
A second geopolitical area in which the economic crisis has affected the Jewish people is the result of the midterm elections in the US. The Republicans, and especially Tea Party candidates emerged triumphant, taking control of the House and narrowing the Democrat majority in the Senate. This seems to be due to the combination of continued very high unemployment and hard times on “Main Street” on the one hand, together with a perceived “moral deficit” in the administration policy vis-à-vis Wall Street on the other. The US government (albeit the prior Republican administration) bailed out those financial institutions that were deemed “too big to fail” (such as AIG), yet could not put an end to the huge profits and huge bonuses of the Wall Street firms. Thus, Wall Street firms were not perceived as having paid for the economic misery that they brought upon the nation. This fueled and gave credence to the anti-government sentiment that the Republicans and especially the Tea Party propagated.
The Republican victory produced a House of Representatives that seems to be highly supportive of Israel and the current Israeli government and its policies. It also entailed the election of many candidates who had Tea Party associations. While these candidates are largely pro-Israel, the Tea Party does have isolationist leanings which could have implications for US foreign aid to Israel (especially in light of the budget deficit) and for involvement in the Middle East. If, as certain indicators show, the American economy is improving, it could have positive electoral implications for President Obama and the Democrats in 2012. (See the essay on the Jerusalem-Washington-Jewish Community triangle for further elaboration).
Israel and Its Economy
The two main countries in which most Jews currently reside, Israel and the United States, experienced the financial crisis differently: Israel was barely harmed while the United States is still in the midst of the crisis and its aftermath. Yet, both are in need of significant structural changes.
Structural changes in the United States are related to fixing global imbalances such as a lack of savings in the United States compared to a surplus of savings in China. Structural changes in Israel are necessary to renew growth and to solve urgent social problems. Both countries are in need of significant improvement in infrastructure and the education system. The deficiencies of the education system in both countries are partly responsible for the high degree of socio-economic inequality, which has risen sharply in recent decades. Improving these systems is also necessary to maintain and enhance their technological advantages which permit the two countries – still – better economic performance, relative to the rest of the West.
Internal structural changes, if implemented, will allow Israel and the United States to face the challenge of a rapidly changing world. As we have seen, the first decade of the new millenium featured the rising prominence of China and India. Israel will suffer if the shift of exports from the West to the East encounters difficulties and if growth in the West is not renewed. In the foreseeable future the United States will continue to be Israel’s main export market due to Israel’s focus on high-end, innovative technologies.
But the risk inherent in the profound global structural changes is also accompanied by opportunity. Israelis are renowned for their ability to identify opportunities and realize them due to the flexibility of the Israeli way of doing things. Israeli business culture has many disadvantages – the price paid for flexibility – yet, in a swiftly changing world, this culture has advantages. Therefore, it is entirely possible that Israel will emerge from the crisis in better condition than its competitors in the rest of the world. Non-Israeli Jews share this cultural attribute of being able to identify opportunities and being innovative and original.
In the foreseeable future, the US will continue to be Israel’s main export market due to Israel’s focus on high-end, innovative technologies
What is the role of the Israeli state and the institutions of the Jewish people in these special circumstances? In Israel, all the government bodies must be made more capable of identifying changes and acting flexibly in new circumstances, to create infrastructure that will permit realizing these opportunities on the one hand, and to minimize the damage caused by changes on the other. In Israel, the venture capital funds, whose creation was inspired by the state, are an example of a most successful governmental action: the establishment of the infrastructure necessary for realizing the opportunity in creating a high-tech industry. In contrast, the failure to deal with those cast out of the textile industry, along with the entirely unnecessary rapid pace in which the industry was exposed to competition from China and India is another example of the problems of Israeli governance system.
In addition, in order to stay competitive vis-à-vis economies such as Singapore, New Zealand, Chile and Eastern Europe, Israel has to improve its ability to mobilize effective collective action to strengthen its educational system and its various infrastructures (transportation, civil defense, civil service etc.). Such strengthening may involve changes regarding the relative strengths of the various arms of government, such as the Department of the Budget in the Finance Ministry and their role in the budgetary process. In addition, Israel has to integrate the ultra-Orthodox and Arab sectors into the workforce and the productive economy.
A central issue in which the economic capabilities of the Jewish community has significance for the continued Jewish life is the cost of living Jewishly
The American Jewish Community
As mentioned, the United States requires structural changes.
In the United States, Jews are on average better educated and have therefore enjoyed a higher return on human capital in the United States and have attained a larger share in growth relative to their proportion of the population.18 However, factors that harm the US economy or lead to declines in living standards will surely affect the well-being of American Jews.
The institutions of the Jewish people, for their part, must be aware of the economic structural changes, identify their effect on the Jewish people, and prepare for them with appropriate infrastructure. A central issue in which the economic capabilities of the Jewish community, as individuals and as a collective, has significance for the continued existence of Jewish life is the cost of living Jewishly. Educational and communal infrastructures of Jewish life are not cheap, and there are those who are already claiming that the cost of participation distances Jews from participating in Jewish life. If the economic capabilities of Jews as individuals and as a collective changes for the worse, it will require thinking through and finding solutions. At this point, the issue must be watched and preparations made for the various possible scenarios.
As pointed out in last year’s Annual Assessment, the analysis of the cost of living Jewishly is quite complex and involves a range of choices and preferences. Nevertheless, one area in which economic considerations seem to have played a role is that of Jewish day school enrollment. As pointed out in the 2009 Annual Assessment, “Jewish day schools have also been hard hit by the whipsaw of declining enrollments and increasing demand for financial aid; during the past year, at least a half-dozen day schools closed their doors.”
This decline in enrollment also continued from the 2008-2009 to the 2009-2010 school years, though not as much as feared. For schools with over 250 students, total enrollment dropped an average of 3%. However, schools with fewer than 100 students experienced a drop of 7%. Simultaneously, there was also an increase in financial aid. Solomon Schechter Day School Association schools reported a 14.9% increase in the amount of tuition assistance. Five of the 16 Progressive Association of Reform Day Schools schools benefited from emergency aid provided by the Jim Joseph Foundation. With the exception of Cleveland, each community in PEJE’s (Partnership for Excellence in Jewish Education) data reported increases in the amount of financial aid awarded. Boston’s 2% drop in enrollment benefitted from a 24% increase in financial aid awards. Phoenix drop of 3.2% was accompanied by a 15% increase in awards amounts.19 One response to these emerging economic difficulties in regard to Jewish education has been the emergence of a small number of public Hebrew charter schools which provide Jewish/Hebrew education for free. (See the brief discussion of this phenomenon in the Developments to Watch section below.)
Another area that has been adversely affected by the financial crisis has been philanthropic donations. While the decline in donations has continued from 2008 into 2009 the rate of decline has slowed. Thus the decline, year to year, in donations to the Jewish Federations of North America had in 2008 been 25%, but in 2009 it was 19%.20 In 2010 donations seem to have entered a slow “thaw.” “Charities,” says the Chronicle of Philanthropy concerning general giving in the US, “that raise the most from private sources are expected to eke up by a median of just 1 percent this year, meaning that half expect to do less well and half anticipate doing better. That is a big improvement over 2009, when donations tumbled by a median of nearly 6 percent, but still a long way from the sums most groups were raising before the economy slowed.”21 In addition, as last year’s Assessment noted, the Madoff scandal also egregiously harmed American Jewish philanthropy. The effects of the scandal continued to reverberate this year, as certain philanthropic endeavors such as Hadassah Women returned gains acquired by investing in Madoff’s fraudulent funds and other organizations are under the threat of the “clawback” of these funds.
But even if the American economy, as certain indicators are starting to show, fitfully improves, the structural weaknesses and the steps needed to repair them may not only keep the American Jewish community weaker than it had hitherto been, but also may encourage a change in relations between the American Jewish diaspora and the State of Israel.
The Relationships and Equilibrium between Israel and the Diaspora Communities
The salient economic fact in the Jewish world today is the discrepancy between the Israeli economy and the economies of the countries of residence of the other large Jewish communities – The United States and Western Europe. As we have seen, the American economy is still in the throes of unemployment of over 9% and low growth, even though the Great Recession has formally ended. Similarly, economists foresee a decade of slow growth for Europe due to austerity measures undertaken to stem market fears about surging public debt levels and a central bank focused more on controlling inflation than boosting growth.22 Furthermore, global market forces and US actions have put in place a real devaluation of the dollar meaning that America’s relative purchasing power has declined and will likely continue to do so.
Israel needs to contribute more in regard to projects designed to enhance the well-being and strength of the Jewish people
Israel, on the other hand, enjoys growth of 4.5% and record low unemployment (6.1%). The NIS has been gaining in strength and Israel has very large foreign currency reserves. Furthermore the recent discoveries of major natural gas reserves hold the prospect of providing Israel with a domestic energy source with both positive economic and security implications. On the individual level, Israel has in the past two decades developed a substantial wealthy class.23 All these developments point to the fact that there needs to be a “rebalancing” of Israel-Diaspora relations. Whether in terms of government or private funds, Israel needs to contribute more, and in certain areas, take the place of Diaspora funds, in regard to certain projects designed to enhance the well-being and strength of the Jewish people.
To a certain extent, this is already happening. As pointed out in last year’s Annual Assessment, American Jewish philanthropy to Israel in recent years has focused upon the “third sector,” the non-profit, non-governmental sector which advances projects for social amelioration and change. As American Jewish philanthropic donations have declined, the Israeli “third sector” has also suffered greatly. In response, the Israeli government allocated a NIS 200 million package to help struggling social welfare organizations for the years 2009-2010. This program was designed to replace or supplement American Jewish funding of these organizations. This program has been renewed for 2010-2011.
Another, much smaller, initiative involves private donations. A consortium of American Jewish philanthropic organizations (The Avi-Chai Foundation, The Jewish Federation of New York, The Jewish Funders Network and Keren Tmurah) undertook during 2010 to match donations given by Israeli individuals to organizations and projects dealing with Jewish renewal. The consortium matched gifts from 40,000 NIS to 200,000 NIS. The express purpose of the program was to encourage and increase Israeli private philanthropy. Finally, the Israeli government has just announced that it will greatly expand its support for “Birthright” reaching 350 million NIS over three years. This move has induced the American Jewish supporters of the project to expand their funding so as to maintain the 2:1 ratio of private American Jewish support to Israeli government support.
When future trends are analyzed it is important not to fall into the trap of accentuating short-term trends and ignoring the long-term trends that balance them. For instance, although Israel traversed the crisis better then the United States, there is no basis to the claim that Israeli Jews will, in the coming years, be wealthier than Jewish Americans. The demographic and technological forecasts predict high growth for the United States, relative to Europe, and in the index of GDP per employee, Israel has not grown faster than the United States in the past thirty years. Not only is it too early to eulogize the United States as the wealthiest nation in the world, it is also too early to say that Israel is closing the economic gap between it and the rest of the developed countries in the Western world.
- This issue has been widely discussed in Roosevelt’s new biography. See Brands, 2008. Regarding the crucial importance of the crisis for making changes in the American economy, see Bordo et al., 1997.
- See the IMF for veiled criticism of Israel http://www.imf.org/external/np/ms/2010/112910.htm and the OECD report upon Israel’s membership http://www.oecd.org/document/54/0,3343,en_2649_33733_44392758_1_1_1_1,00.html
- Many of the ideas raised here can be found in several recently published books about the crisis: Rajan (2010); Johnson-Kwak (2010); Akerloff-Shiller (2009);Reinhart-Rogoff (2009).
- A professional description, which can be understood by any layman, may be found in Johnson-Kwak (2010); a more technical explanation may be found in Brunnermeier (2008).
- This position is emphasized in Johnson-Kwak (2010), pp. 67, 71.
- On of the goals of the quantitative easing initiated by the Federal Reserve was to make the public feel richer and thus consume more.
- OECD (2010). IMF (2010).
- At the time of this writing, we were notified of a development that can contribute greatly to the development and prosperity of the Israeli economy: a discovery of large quantities of natural gas in the “Leviathan” field, off the Haifa coast.
- See Lane and Milesi (2010).
- See: Spivak (2010, In Hebrew) and also Ahdut-Spivak (2010, in Hebrew).
- See: description of the safety net in the Ministry of Finance’s website www.mof.gov.il/hon, Report of the Supervisor of the Capital Market, 2009.
- At the time of this writing, the stability of the peace with Egypt has become a concern again for the first time in decades.
- See (Ben Bassat & Dahan, 2006) who explain the technique through which the Ministry of Finance has taken over the entire civil service, including the prime minister’s role in this process, and they suggest strengthening the Economic Council in the Prime Minister’s Office so that it will constitute a counterweight to the Budget Department in the Ministry of Finance during preparation of the national budget.
- Roger C. Altman and Richard N. Haas, “American Profligacy and American Power: The Consequences of Fiscal Irresponsibility,” Foreign Affairs, November/December 2010.
- Gideon Rachman, “American Decline – This Time it’s for Real”, Foreign Policy, January-February 2011. See also Martin Wolf, “In the Grip of a Great Convergence”, Financial Times, January 4, 2011.
- Rachman, “American Decline”.
- “A Chinese Stealth Challenge,” The Wall Street Journal, January 5, 2011.
- It is reasonable to assume that Jews have a larger part, relative to their share of the population, in the financial sector in the United States and Britain. This is one of the sectors that lead growth in the past decade, and it is also the sector that is currently facing uncertainty as to its future.
- MOFET-JTEC, http://jtec.macam.ac.il/portal/ArticlePage.aspx?id=543
- The Chronicle of Philanthropy, Oct. 17, 2010, http://philanthropy.com/section/Philanthropy-400/237/
- According to a survey conducted by Merril Lynch Israel enjoys the third fastest growth rate of millionaires in the world. http://www.ynet.co.il/articles/0,7340,L-3909038,00.html
Brands, H.W. Traitor to His Class: The Privileged Life and Radical Presidency of Franklin Delano Roosevelt. Random House 2008.
Michael Bordo, Claudia Goldin, and Eugene White, eds. (1997), The Defining Moment: The Great Depression and the American Economy in the Twentieth Century (Chicago: University of Chicago Press).
Richard A. Posner (2010), A Failure of Capitalism: The Crisis of ‘08 and the Descent into Depression. Harvard University Press.
Atkinson A.B. and T. Piketty, eds. (2010). Top Incomes: A Global Perspective. Oxford University Press.
OECD (2010). Economic Survey of Israel. published on 20 January 2010.
IMF (2010). Israel, Article IV Consultation—Concluding Statement of the Mission November 29, 2010.
Leah Ahdut and Avia Spivak: The Pension System in Israel and Fifteen years of Reform, Research Policy No. 8, Van Leer Institute, June 2010 (in Hebrew). http://www.vanleer.org.il/econsoc/pdf/1_research_polilcy8.pdf
Avia Spivak (2010). The Non-Bank Credit Crisis in Israel in the Beginning of 2009. Van Leer Institute, In printing. (in Hebrew)
Moshe Yustman and Avia Spivak (2006). The State Budget Following the War. Paper No. 2 in the series: Controversies in Economics. (in Hebrew). http://www.vanleer.org.il/Data/UploadedFiles/EconSoc/1/dispute2.pdf
Avi Ben Bassat and Momi Dahan (2006). The Knesset, the Government and the Budgetary Process in Israel. The Israeli Democratic Institute. (in Hebrew).