IASPS - News Behind the News

New Finance Minister, Business as Usual

Israel's new minister of finance, Silvan Shalom, recently did the rounds of investment bankers in New York and political leaders in Washington, D.C.  But as is the case with the visit of every prime minister and finance minister of Israel to the United States, U.S. aid to Israel always becomes the most important idea on the agenda.

Recall that the former Barak government raised the issue of $800 million in additional aid over two years, above and beyond the $3 billion it routinely gets every year, with the Clinton Administration.  The new Sharon government has pressed the issue with the new Bush Administration.  Shalom met with Treasury Secretary Paul ONeill, National Security Adviser Condolezza Rice, and Representative Jim Kolbe, chairman of the House Subcommittee on Foreign Operations.  Kolbe advised Shalom that a supplementary budget request for the $800 million would be treated favorably.

So why is $800 million in special additional aid a problem?

While the ostensible use of this money is to sustain Israel's defense, the truth, as everyone knows,  is that money is fungible.  This money will be deposited in the Israeli Treasury's account and be used to settle unwarranted strikes, subsidize money-losing, state-owned enterprises, compensate farmers for past misallocation of scarce water, and so forth.  It will inhibit economic reform.

Worse, still, it keeps the focus of future Israeli prime and finance ministers squarely on sustaining ever-larger inflows of aid.  Their proper focus should be on privatizing state-owned land and state-owned companies, cutting taxes, curtailing wasteful social spending, deregulating monopolies, etc.  But all of these long-postponed reforms will remain on the back burner as long as Israel's government continues to concentrate its energy on getting unearned money.

Since 1974, when U.S. aid to Israel began in earnest, U.S. taxpayers have shipped over $100 billion to Israel (not to mention another $60 billion to Egypt).  This money has played a major role in blocking free-market reforms in Israel.  It seems contradictory for the U.S. government to promote capitalism around the world as U.S. aid retards economic freedom in Israel.

It's likely that Shalom will deliver the bacon, all $800 million, after which, hopefully, he will turn his attention to pressing forward with much-needed economic reforms.  Bringing bacon to Israel seems incongruous with its Jewish identity.  But, as IASPS has argued for more than a decade, it's more than incongruous; its detrimental to economic freedom and long-run growth.