The "Blue Chair" section: This time, an interview with Prof. Karnit Flug, former Governor of the Bank of Israel • On the tension between the elected and professional echelons: "The reactions do not encourage the professional echelon to voice his position. It is a mistake that the decision to divide the six billion was made without a discussion "

• Prof. Karnit Flug

  Photo: 

  Joshua Joseph

Karnit Flug



Former Governor of the Bank of Israel



Professor of Economics, Vice President of Research at the Israel Democracy Institute and Lecturer at the Hebrew University

Prof. Karnit Flug, Prime Minister Netanyahu is not satisfied, to say the least, with the head of the budget department in the Ministry of Finance, Shaul Meridor. We seem to have reached a peak tension between the professional echelon and the elected echelon. Are statements such as "just not to be like Venezuela" worthy of reference to the original grant program?

"I will not address this or that statement, but it is very important that the professional echelon feel free to express its professional and well-founded position. Indeed, in the end the elected echelon is the one who makes the decisions, but it is important that it is based on open and genuine discussion. "The professional echelon is not encouraged to express his position openly, and the decisions that are made are less good if the professional echelon cannot experience his opinion in a professional manner."

But you will agree that in emergencies it is appropriate for the clerks to remove every possible barrier.

"It's important to understand - senior public officials do their job with dedication and professionalism. Treating themselves as the source of all bureaucracy and stacking difficulties has recently become a bon-ton, but it certainly does not reflect reality. It is true that interfaces and work processes need to be improved. They are serious, experts in their field, and it is very important that their professional opinion is heard. "

In the meantime, an updated plan is already in the pipeline that will provide double grants to Social Security beneficiaries. 

"I have not seen the new plan yet, but I will start by saying that the problem with the 6 billion plan as presented is not that there is no money - but that it is a bad, unjust and inefficient plan. It gives the same amount to those affected by the crisis and those not. For those who need money and those who do not, and it would also not lead to a significant increase in private consumption.Who whose income is not harmed and also generally not low, will not spend more money following receiving such a grant. 

"In the deep crisis we are in we will spend a lot of money, public debt will rise considerably, and reach very large proportions. There may come a point where investors who buy the debt will ask themselves whether the policy makes sense, or is it irrational - then may attribute a level of risk to debt. Higher and the interest rate on the debt will rise.We must not get there.Therefore it is essential that the policy be effective and rational;

Irregular repetition. Load on Ayalon lanes // Photo: Yehoshua Yosef

"We are designing policy measures that are naturally huge, and treat 6 billion as if it were small money. 6 billion shekels! This is a huge amount, I think some office problems could have been solved in the conditions of the previous reality with this amount. This public money should be treated with anxiety. "Holy. Although everything we do now is right to do on a large scale, the bill will come."

Any other way of giving grants involved bureaucracy.

"The only advantage in this program, perhaps, is the speed. Distribution to everyone without criteria can be done very quickly, but in my opinion distribution with criteria is possible - given the information and systems we have. In general, crisis management is very centralized, leading to many errors. "And the most problematic thing was recorded in the health field, when an epidemiological investigation system was not set up at the time to cut off the chain of infection."

This would reduce morbidity and possibly prevent the second wave.

"True, and prevents the economic and health prices we pay today. This is an expression of a real failure in the management of the crisis. Countries that have established an array, such as the 'complex' that was discussed at the time in Israel, are today in a completely different place."

Poor opening of the economy

What about opening up the economy? Did we open too fast? 

"The opening of the economy was poor, very irregular and unplanned, which was affected by such and other pressures, and it is a pity - because we pay a high price for it. If there was a mechanism to cut the contagion chain, the opening of the economy would not lead to a rapid increase in morbidity."

If you were a governor now, what would you recommend doing? 

"In my opinion, the Bank of Israel, in the area in which it is directly entrusted, is doing what it needs to do in terms of providing liquidity, reducing the cost of credit, and the steps taken in banking regulation that allows for significant credit increases, for households and businesses. "And to present the professional position, but for that you have to be invited to the discussions - and that is not obvious. The fact that the decision to distribute the six billion was made without a discussion with the participation of the governor is a serious mistake." 

Sounds like your hand is lighter on the trigger in a review.

"It is true that I express my opinion more freely, but my criticism is factual, professional and good to hear. I also express my opinion on the positive aspects of government programs. For example, that most of the components of the economic programs adopted by the government are compatible with components of economic programs adopted. By other developed countries.It was true that the government announced about two weeks ago the extension of the safety net for the self-employed and employees until the middle of next year, or until the unemployment rate drops by ten percent.It reduces the anxiety of a public who does not know whether to put food on the table. Basic needs, which in itself contributes to economic activity.

Fast recovery? The Berlin Underground // Photo: EP

"Also the grants given to businesses, and the compensation for fixed expenses when there is no income - these are right steps, which will help more businesses survive. There are also elements that exist in our programs but not to the required extent, for example the issue of retraining and vocational training. "400,000 unemployed at the end of the year, and there is a need to provide an upgrade of their capabilities that will allow them to reintegrate into employment; for example, digital capabilities, along with expanding the vocational training system with the involvement of employers in content formulation."

You mentioned those people who have no money to put food on the table. Should the grants program focus primarily on bankruptcies? We saw a 75% jump in the number of bankruptcy applications this June.

"It is necessary to help the households of the bankrupt, alongside supporting the self-employed whose businesses are still active but whose income from the business has shrunk, alongside supporting employees who have been fired or expelled."

Not to stingy policies

According to the chief economist at the Ministry of Finance, the austerity scenario speaks of a negative growth of 7.2% in 2020, and a growth that will stand at 2.2% in 2021. The deficit could reach 13% by the end of 2020. Are you worried about this data?

"The main scenario is a bit more optimistic. These scenarios mean first of all that we are in a deep economic crisis that we did not know existed, and the economic policies adopted, their effectiveness and scope, are critical to reduce long-term damage and accelerate recovery - also through grants, credit and state guarantees for good business. , Infrastructure investments, employee retention and more.

Tel Aviv Employment Bureau // Photo: Yehoshua Yosef

"But a necessary condition for reducing economic damage is, as mentioned, an effective system for interrupting the chain of contagion. Even today we must work hard to achieve this; in this matter, the idea of ​​the 'accordion' - imposing restrictions and closures, opening and repeating God forbid - is horrible and terrible in my eyes. "The chain of contagion is the way to prevent it. Of course we also have to transfer a budget. The fact that we are still running without a budget - neither for this year nor for next year - is serious." 

Recently, there was talk of an economic rescue plan worth about NIS 80 billion. Under the plan, a social safety net for employees and the self-employed will be provided in addition to an economic safety net for businesses. What do you think about it?

"Here we have the order of magnitude of the various plans announced so far is nine percent of GDP, and this is the order of magnitude of the budgetary measures taken in other countries. In all countries we see very large deficits which means a significant increase in public debt. In Israel, we entered a crisis with public debt. "60% of GDP, which is relatively low, has given the government considerable room for maneuver. However, we will emerge from the crisis with a much higher level of debt, on the order of 76 percent of GDP, and possibly even more. And the debt we are accumulating today will have to be paid."

The attitude towards debt is changing, it has become a global matter.

"Policy has a price. In my estimation, a stingy policy at this time will have an even heavier price. It is a choice between bad options. After the crisis, a plan will be required that will allow us to gradually reduce the debt, so that we are also prepared for future crises." Responsible with low deficits in the days as a correction, because low debt gave us the freedom to act actively to deal with the crisis. " 

"Points of light in the dark"

What about the tourism companies that are not expected to work in the near future? Is it right to give collateral from the Treasury to companies that we know have a low survival rate?

"The fact that the banks are the ones carrying out the underwriting process helps that those who receive the credit are companies with a cash flow problem, which are basically good companies that can survive later. The state-guaranteed credit given under these conditions reflects the increased risk, this is a very true move. 

Ben Gurion Airport is empty of people // Photo: Yossi Zeliger

"Regarding the tourism industry and other industries, I am not sure that the State of Israel has decided that we are ready for the complete elimination of the tourism industry, culture or other industries. It is clear that all activities of this industry can not be preserved with enormous uncertainty and continuous paralysis. "Is there a certain core in the activity of these industries that deserve continued support, so that when we get out of the crisis, we will not have to start building them from scratch." 

And what is happening in the world? An important element that is missing in our economic plans is a route for employee retention, and in this context it is customary to mention the German model. 

"True, this is what allows employers who currently cannot offer a full-time job but can offer a part-time job, to leave employees partially with completion from the state, which allows the employee-employer relationship to be maintained. This is a more flexible model, and the cost, from the state, is lower. The application. This will later enable the recovery of the economy more quickly because those businesses will have skilled workers. Almost all countries have a similar mechanism, and in the long run it will improve their situation. I am trying to persuade the system to add such a route, so far without success. "

Are there countries in the world that have given grants without criteria?

“In the U.S., grants were given on a very large scale, albeit with an income test, and the study showed that a large portion of the money that went to the more affluent people was saved and did not act to increase economic activity. This way of distributing money is suitable for developing countries that do not have information systems, do not have developed welfare systems and cannot be pursued in a more focused and effective policy. The IMF recommendation, quoted by the prime minister and his people, also addressed the need to provide targeted support. I am happy to see that the grant program is now being changed accordingly, and I hope that the grants will indeed focus on the victims of the crisis and the weakest population. "

Certainly there are also countries that are dealing with this crisis in an admirable way.

"There are several countries that have set up research, testing and amputation systems in a fast and efficient manner, such as South Korea and Denmark. This conduct on the health level has reduced the damage to the economy, and is reflected in lower morbidity."

Sweden and the herd model - would you put your trust in them?

"There is widespread agreement today that the Swedish experience has failed, both health-wise and economically. It is certainly not a successful attempt to learn from it, and the Swedes are aware of that as well."

What will our world look like after we emerge from the crisis?

"I am afraid that pre-crisis trends of retreat from globalization, for example, could intensify and this could hurt global economic growth, and particularly hurt countries that are small and open, like Israel for example. On the other hand, there are some positive trends that will surely be accelerated. "We see more remote work, less traffic jams and air pollution, we see more appreciation for the importance of quality public health services. In general, emphasis will be placed on the stability of various systems and crisis management mechanisms, as well as reducing bureaucracy and moving to digital processes." 

You almost sound optimistic.

"I'm not sure I would have defined it that way. Perhaps it is more accurate to say that I am looking for points of light even in the dark."



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