Israel's economic battle plan: Steering the economy through war - opinion

Israel is at war – again. The cost in human lives and suffering is already immense and growing. How should Israel manage its economy during and after a prolonged war that may be fought on two fronts – South and North?

Here are some thoughts and suggestions.

Create an economic war cabinet

Under pressure, and with great reluctance, Prime Minister Benjamin Netanyahu appointed a war cabinet that includes two former chiefs of staff – Gadi Eizenkot and Benny Gantz. He should do the same for the economic war.

The current cabinet of ministers “is populated by ministers who are seen as not up to their jobs,” said David Rosenberg in Haaretz. The understatement of the decade.

“[They are] devoted to sectoral interests over national ones (haredi ministers) or focused on irrelevant agendas.” They have already failed miserably and have skulked undercover for the past week, as cowards, unable to face public scorn for their failures.

Here are some suggestions for the members of an economic war cabinet: Manuel Trajtenberg; David Brodet; Yuval Steinitz; Karmit Flug, Jacob Frenkel.

Build and submit to the Knesset a revised 2023-2024 budget

The current two-year government budget became instantly obsolete at 6:30 a.m. on Shabbat, October 7. We need a new one.

On Tuesday, July 25, MK Moshe Rot (United Torah Judaism) presented a draft Basic Law – Torah Study, exempting yeshiva students from army service. Some 74 days later, war broke out and 360,000 Israelis were quickly drafted into the IDF reserves and prepared for war. That law is dead and buried, hopefully forever.

But this is not the case for some NIS 14 billion ($3.5 billion) in “coalition funds” – money paid to persuade politicians and their parties, many of them Ultra-Orthodox, to join the Netanyahu coalition. Our tax money.

A lot has already been spent. Some has not. These funds are needed for defense. Meirav Arlosoroff notes in Haaretz that one billion shekels in coalition payoffs from the 2023 budget has still not been disbursed, and four to five billion shekels from the 2024 budget.

Every shekel of those coalition payoffs should be diverted to rebuilding the destroyed homes and factories on the Gaza border. The damage was estimated at NIS 5 billion ($1.25 billion) in the first week of the war.

How to pay for the war: Long-term strategy

Israel’s economy began this war on the wrong foot. Hi-tech, the economy’s growth engine, saw a 65% decrease in investments in the second quarter compared to last year. This, after a 90% drop in such investments in the first quarter.

It is time to draft us civilians, who are not combatants. How? By reducing what we spend in order to save resources for the war effort.

Here is what we can learn from one of history’s greatest economists, John Maynard Keynes, who wrote a series of articles on “How to Pay for the War” in The Times of London in 1940 as Britain went to war. At the time, Britain fought alone (like Israel) against a nation – Germany – twice its size.

First, Keynes and his team measured Britain’s total resources, creating what is now known as GDP (gross domestic product).

“Our [Britain’s] GDP is not enough,” he noted. “We must be more productive. And we need to reduce private and public civilian consumption to divert resources to the war effort.”

Israelis will not be in the mood to invade shopping centers anyway during the war. The government should impose compulsory saving.

Keynes invented the concept of “deferred pay” – a loan by wage-earners to the government, to be paid back after the war. It was a kind of compulsory saving. Israel needs the same. We have done this in the past.

Build a defense budget for the coming two years, calculating defense needs realistically

Each Iron Dome interceptor missile, for instance, costs $50,000. As Hamas launches thousands of rockets on Israeli homes and cities, many interceptions are needed.

Calculate Israel’s GDP in the coming two years, taking into account the absence of reservists from the workplace. Add to that the goods we import, in part paid for by dollar reserves. (The Bank of Israel has allocated $30 billion from its reserves to support the sagging shekel, now worth just 25 cents.)

Subtract defense needs from the GDP, and budget what remains for public civilian consumption and private consumption, along with minimal investment needs to maintain infrastructure and for exports to earn needed foreign currency.

This was Keynes’ formula. It was implemented by the Churchill government.

Economies, along with armies, win wars.

Japan’s sneak attack on Pearl Harbor, killing 2,403 Americans – nearly all navy sailors and officers – brought the US into WW II. As America geared up for war, Japan was doomed. The US economy was emerging from the Great Depression with high unemployment. The war ended it.

US GDP doubled twice. The US sent massive amounts of war material to Britain when president Franklin D. Roosevelt cleverly invented the Lend Lease program (we are only “lending” you the equipment) to overcome isolationism in the Congress. It was evident by 1944 that Japan could not match the overwhelming military might, producing ships, guns, tanks, planes, generated by the vast US economy.

Israel is a small country with a $500 billion economy. According to The Economist, our GDP per capita in 2023 is $58,270, the 13th-highest in the world.

It is vital to manage our economy with as much intelligence, creativity, and wisdom that we use to continue the war. Our economy cannot be left in the hands of Finance Minister Bezalel Smotrich, who spends most of his time at the Defense Ministry and is largely ignored there.

We, the people of Israel, are angry and united after the murderous sneak attack of Hamas. We should be willing to reduce our standard of living in order to engage in a lengthy war. It is up to our government, which has terribly failed us so far, to mobilize the populace so that the war machine can be funded without disastrous inflation.

Prof. Manuel Trajtenberg estimates that the government budget deficit is already 10% of GDP. During World War II, US defense spending rose from 1.4% of GDP in 1940 to over 37% in 1945, and the federal deficit rose from 3% of GDP in 1939 to 27.5% in 1943.

Israel cannot permit itself a deficit of this size. It will take responsible adults to run our economy, lest a mismanaged economy hamper what the IDF will accomplish. ■

The writer heads the Zvi Griliches Research Data Center at S. Neaman Institute, Technion. He blogs at www.timnovate.wordpress.com.