Almost accidentally, Netanyahu let slip just how much his dealing with the COVID-19 crisis is inspired by Milton Friedman's theories. In a televised interview this week, PM Netayahu revealed the economic theory guiding him In dealing with the current economic crisis | The concepts he presented are outdated and ridiculously out of tune with current events, and the Israeli public will be the one to pay the price | Opinion
In a televised interview this week, Prime Minister Benjamin Netanyahu on Saturday unveiled, almost incidentally, the economic paradigm guiding him in dealing with the Covid-19 crisis. As Israeli citizens, and for people who care about the country from abroad, it is essential to pay attention to these ideas- and to the danger posed by them.
In an interview with Dana Weiss of News 12, Netanyahu was asked why, while most world governments have released massive stimulus packages in an attempt to strengthen the economy and protect their citizens, Israel has released negligible amounts of financial aid. Netanyahu replied: "There is a man who talked highly of me – his name is Milton Friedman, the legendary Nobel laureate. He said a simple thing – if you have a lot of money chasing few goods, you get hyperinflation, which is very dangerous. That's why I think there should be money for a lot of people, but without flooding. I am not sure that what is being done in other countries will not pose a great danger".
From there on, the conversation focused on the establishment of a unity government. Still, this brief moment revealed what guides Netanyahu in the face of the greatest economic crisis in the history of the country: Milton Friedman's doctrine that public investment is detrimental to the economy, government aid should be as minimal as possible, and the belief that the markets should be left to navigate the crisis on their own.
Bad timing, worst economic theory
Milton Friedman was not only an award-winning economist who liked Netanyahu, but also one of the most influential economic thinkers of the twentieth century. Friedman promoted the idea that governments are primarily "disruptive" to the economy, and that states should allow the market to regulate the economy uninterrupted. But the current crisis has clearly made this idea totally unviable. Markets around the world are collapsing, and the fate of the entire countries depends not on spontaneous self regulating markets, but on government decisions, and their citizens' confidence in these decisions – whether in the effort to eradicate the pandemic or provide financial support.
Netanyahu fears that if the government were to give out cash support to those who have taken a hit to their income, demand would rise, leading to a surge in inflation. But is that really what we need to worry about now? This crisis, caused by an epidemic, has halted the economy almost completely, and dramatically reduced demand. Money that will flow to businesses and households will mainly contribute to maintaining demand at a reasonable level, preventing families from entering the cycle of unemployment and poverty. It's hard to believe that a massive wave of price increases is around the corner, especially after a decade in which inflation has consistently missed the target from the bottom consistently, with interest rates at near zero levels.
Thus, while most governments of the world are increasing their spending to help citizens who desperately need it, the Israeli prime minister insists that the aid should be as low as possible.
Interestingly though, Netanyahu is refraining from implementing another idea that Milton Friedman invented – "Helicopter Money" – direct payments made by the government to the citizens' bank accounts. This is precisely the idea that US President Donald Trump is now promoting, in the form of a $ 1,200 pay-out to every US citizen. No means tests and no exceptions. Friedman originally proposed the idea to avoid increasing state spending on welfare systems, but Netanyahu seems reluctant to accept any considerable measures of aid.
Netanyahu argued that his government cannot approve sweeping aid measures because "we need the Knesset for the budget limit to be breached, this requires an emergency government or an emergency unity government." Political stability is indeed essential for dealing financially with the crisis, but it is also possible to act within the existing framework.
In January and February alone, the government spent NIS 11 billion less than its available budget, which could now be used to fund financial aid to households. The same act that prohibits people from working or leaving home, known as the Emergency Regulation Act, can also be used by the government to produce the funding for such aid. Another solution could be for the Knesset to pass a routine law that will set a new budgetary framework for dealing with the plague. Contrary to Netanyahu's words, the problem is not politics, but his economic beliefs, that we all might pay the price for.