Draining Israel’s Red Sea

DRAINING ISRAEL’S RED $EA

IN discussions of the future of Israel, it has become almost axiomatic that the country is, for the foreseeable future, a losing economic proposition, dependent indefinitely on outside assistance. Yet Israel was not always an economic basket case. Economic growth in Israel averaged 10 per cent a year during the Bretton Woods era; inflation was below 7 per cent. Then, beginning in the early 1970s, living standards first stagnated, then declined, and triple-digit inflation has, until very recently, been the norm despite, or because of, a series of “austerity plans” imposed in response to U.S. pressure. Israel’s latest austerity scheme really began on December 26, 1984, when the New York Times reported that a letter from Secretary of State George Shultz to Shimon Peres threatened to withhold U.S. aid unless Israel deliberately engineered “a substantial lowering of living standards,” which would supposedly cut inflation. The truth is that Israel is a textbook example of the failure of the dominant premises of postwar economics, both Keynesian and monetarist.

About the Author

Alan Reynolds

Alan Reynolds, National Review’s economics editor from 1972 to 1976, is a senior fellow at the Cato Institute and the author of Income and Wealth.

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DRAINING ISRAEL’S RED $EA

IN discussions of the future of Israel, it has become almost axiomatic that the country is, for the foreseeable future, a losing economic proposition, dependent indefinitely on outside assistance. Yet Israel was not always an economic basket case. Economic growth in Israel averaged 10 per cent a year during the Bretton Woods era; inflation was below 7 per cent. Then, beginning in the early 1970s, living standards first stagnated, then declined, and triple-digit inflation has, until very recently, been the norm despite, or because of, a series of “austerity plans” imposed in response to U.S. pressure. Israel’s latest austerity scheme really began on December 26, 1984, when the New York Times reported that a letter from Secretary of State George Shultz to Shimon Peres threatened to withhold U.S. aid unless Israel deliberately engineered “a substantial lowering of living standards,” which would supposedly cut inflation. The truth is that Israel is a textbook example of the failure of the dominant premises of postwar economics, both Keynesian and monetarist.