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2010 Annual Assessment

Israel and the United States are the two countries with the highest concentration of Jews. Therefore, their economic situation must assume an important place in any assessment of the situation of the Jewish people. This claim is true every year, but even more so in years in which the financial crisis is prominently featured in world news. Understanding the current economic situation and the measures required to improve it in Israel and the United States is necessary for the formulation of an assessment of the situation in the two countries and the Jewish communities residing in them.
The 2008-2009 financial crisis, which has yet to end, is commonly considered to be the worst since the 1929-1932 crisis. Since that time there has not been a recession with such consistent and continuous drops in economic activity, as measured by gross domestic product (GDP); no recession since then has had rising unemployment rates that refused to go down for such a long time; no crisis arose in which the government was forced to inject hundreds of billions of dollars in order to save the financial system from collapse.

Notwithstanding the above, the current crisis is minor, relative to its predecessor of eighty years past. In the previous crisis, the rate of unemployment was 25%, and in the current one it is close to 10%. In the previous crisis the United States experienced a 33% drop in production, in the current crisis a drop of only 2.4% in one year – 2008.

The magnitude of the previous crisis brought about far reaching political changes and instability in the international arena. Nazi Germany was established in 1933 out of a longing for an order and a regime that had been shaken by the financial crisis (and prior to it, due to the hyper inflation of the 1920s). The United States underwent an essential change in the extent and volume of government involvement in the economy: the establishment of a social security system, deposit insurance and bank oversight, a substantial increase in the government share of production, etc. This rise in involvement did not stem from an ideological change, but from the urgent need of the government to take care of its citizens and prevent dangerous political instability that could have evolved into a regime change. Therefore, Roosevelt’s policy was not Keynesian. Contrary to a common misconception, the great economist John Maynard Keynes, who met with Roosevelt, did not succeed in convincing the American president of the advantages of a federal deficit as a way out of the recession. And indeed, the moment the American economy slightly recovered, Roosevelt attempted to balance the budget, and there are those that believe that this policy caused the recession relapse of 1937.1

The current crisis is not accompanied by political instability in any Western country. The American voter punished the Democrats in the mid-term elections (November 2010) but did so within the framework of the regular political process. Stormy political arguments are conducted between the left and the right, and there is an upsurge in radical, anti-government sentiment (represented, among others, by the Tea Party). However, unlike the 1930s, there is no totalitarian model pointing toward an alternative to the current democratic regime – not the Soviet Union, nor Germany, nor Italy, and therefore the political changes are conducted according to the legitimate, democratic ground rules.

Yet, even if changes are not expected in the political arena within countries, in the international arena the crisis may have significant effects. The strength of the United States as a sole super power derives in large part from its economic might. This might is directly expressed in the United States’ ability to finance a global army and navy and indirectly in the standing of the dollar as an international currency. The large, expected American budget deficits in the coming years and the need to deal with them undermine the United States’ ability to intervene militarily in regional conflicts. It is apparent, therefore, that the United States’ ability to project power as it has done in past decades is questionable.

Negotiating the current crisis shows that contrary to what is sometimes believed, the lessons of a previous crisis can aid the negotiation of the next crisis, as is currently the case. United States Federal Reserve Chairman, Ben Bernanke, acted quickly and decisively to save the financial system from collapsing, and he succeeded in doing so. Citizens are much better protected today thanks to the safety net erected during the Great Depression of the 1930s: social security, unemployment insurance, larger government expenditures that guarantee demand will not decrease sharply, and so on. Success in preventing a deeper crisis has an ongoing price. The price that everyone is aware of is the government debt, which grew from 42% of GDP in 2007 to 66% of GDP in 2010 and is expected to reach 85% of GDP in 2015. President Obama recently announced a series of measures intended to reduce the debt, yet the larger price is manifest in a decline in the capacity to deal with the structural problems of the United States; the very problems that were the background of the crisis and to which we will refer in the following.

In Israel, the impact of the crisis was smaller. There nearly was a crisis in the corporate bonds market but it was averted in the end. It must be noted that the situation in Israel is not as brilliant as the aggregate data show. Israel suffers from severe problems of income inequality and many years of neglect along various fronts including education, infrastructure, the geographical and socio-economic periphery, and specific groups, such as the Arabs and the ultra-Orthodox. Infrastructure neglect was chillingly apparent in the effort to extinguish the large and severe Carmel fire, at the beginning of December 2010. Another structural issue is the need to protect the Shekel’s exchange rate by increasing Bank of Israel reserves, a policy that has been internationally criticized as of late.2