Professor Avi Weiss on The latest Government Assistance Package
Author: Avi Weiss

The latest government assistance package to distribute 6 billion Shekels to all citizens equally has come under much public criticism. While the intentions are good, the argument goes, the money would have been put to better use had it been distributed only to those who need it most. The idea behind this decision was to be able to get the money into the hands of consumers quickly, leading to increased spending which could spark increased growth of the economy (a “Keynesian multiplier effect”).

Distributional issues aside, the policy suffers from a more serious flaw – it ignores the implications of the “permanent income hypothesis” first developed by Milton Friedman. According to this hypothesis a one-time increase in income will not greatly affect spending because it will be divided over a long period of time. While those with low incomes may, indeed, use the entire sum in order to increase their consumption, it is likely that many will not do so, and so the goal will likely not be attained.

In a more general context, the government should avoid sending the wrong signals to the world capital markets. These are likely to “punish” Israel if they sense that instead of investing in growth enhancing measures the Israeli government uses the borrowed funds in an undiscerning fashion.

All of the above having been said, it is heartwarming to see the widespread discussion among people planning on donating these unexpected (and perhaps unneeded) funds to different charities or to use them to purchase things that they ordinarily would not in order to assist businesses that have been badly hurt by the pandemic.

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