Israel’s Recession

William Galston has a post about the resilience of the Israeli economy in the face of the global recession, arguing the U.S. could stand to learn a lot:

In it we learn that the Netanyahu government raised taxes, avoided traditional stimulus measures, and ruled out government bailouts for banks and bondholders. In short, the government rejected supply-side economics, Keynesian economics, and “too big to fail” economics—a trifecta of heresies against the competing orthodoxies that dominate the U.S. landscape. The result: a rebound that Barclays analysts call “the strongest recovery story” in Europe and the Middle East.

Undergirding this heterodox strategy is a principle that I’ll call “sound diet” economics—namely, eat your spinach before dessert.

Knowing that Israel is a small country, I suspected that the real story is that Israel did is just let its currency sink in value, boosting exports. And, indeed, since the onset of the downtuwn in mid-2008 the Shekel has gotten cheaper relative to the Euro, the Yen, and even dollar which has itself been depreciating:


This is exactly what I would do if I were in charge of Israel. Faced with a downturn, a small developed economy needs to be much more worried than a large developed economy does about maintaining markets’ confidence in your ability to sustain your debt level. At the same time, a small developed economy has much more ability to sustain employment and growth by making its currency cheaper. So a policy of austerity and devaluation is a very reasonable course of action. The United States is in a very different situation. Trade is a much smaller share of our overall economy (less than half as much), our currency automatically appreciates in a panic (because of the “flight to quality” effect), and we have much greater ability to borrow.

Long story short, the Israeli story, though interesting and possibly relevant to Sweden, Iceland, and New Zealand, doesn’t have much of a moral for the United States.