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Dispatch From Israel

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By Herbert SteinPosted Wednesday, March 25, 1998, at 3:30 AM ET

Fifteen years ago, when I became involved as a consultant to the U.S. State Department on the economic problems of Israel, inflation in Israel was running at the rate of 400 percent a year. In the past 12 months, inflation was 5.6 percent. That is a remarkable achievement. To get the rate down from triple digits to the teens by a dramatic stroke, as the Israelis did in 1985, is not so unusual. To keep on the path of a declining inflation rate for 14 years is remarkable. It is a tribute to the persistence of Israel's monetary authority, the Bank of Israel, and the self-restraint of the government politicians who did not pressure the bank into more expansionary policies.
But Israel has not left her stabilization problems behind her. She has only moved from the world of economic crisis to the world of constant dilemmas that all central banks face. Israel is experiencing an economic slowdown. The rise of total output, which had been 7 percent in 1995, was about 2 percent in 1997. The unemployment rate has risen from about 6.5 percent to 8 percent. So now policy-makers receive two kinds of advice.
Some say: "Enough already! Stop fighting the inflation wars of 15 years ago! We can live with today's low inflation and even with a little more. If you would relax and cut interest rates, we could get output up and unemployment down."
Others say: "Press on! The call to relax is the siren song luring you on the slippery slope up to double-digit inflation again. [Can a slippery slope go up?] You know how hard it is to get the inflation rate down once you let it go up."
There is a modicum of truth in both positions. As a veteran of the U.S. inflation of the 1970s and the Israeli inflation of the 1980s, I lean toward the second view. But saying that leaves a lot of operating questions unanswered. How far down do we want to get the inflation rate? How fast do we want to get there? What policy measures will achieve that path? These are the questions the Bank of Israel has to answer.
As I interpret what is going on, the bank is following a neutral policy. It has lowered interest rates three times in three months. It is following actual and expected inflation down, cutting nominal interest rates but keeping real rates, adjusted for inflation, constant. It is not trying to pump up the economy. But neither is it trying for now to push the inflation rate down. It is biding its time and will resume the disinflationary policy when circumstances are more favorable.
I don't know whether this is the bank's thinking. It is only my projection from what it is doing. And I don't know whether, if that is the policy, it is the right policy. But I am gratified to see that Israel faces this kind of everyday problem rather than the crisis she had 15 years ago.

* * * * * *

Yesterday I went by car from Tel Aviv to Jerusalem. I am always very affected by this drive. I remember making this trip with my wife 26 years ago, on our first visit to Jerusalem, having just arrived at Ben-Gurion Airport. I looked out at the rocky fields we were passing and thought it was where we Jews had walked and worked in Old Testament times. I think that still, with awe. Tel Aviv is a new city. Jerusalem has remnants of Old Testament times, but they are overwhelmed by millennia of later construction, most of it quite recent. But these fields, except where there is irrigation, must be as they were in the time of King David. Amazing to see them!

* * * * * *

I am near the end of my stay in Israel. I am impressed by the feeling that Israel is becoming more American but less American-Jewish. Israel is becoming more American in the sense that the whole world is becoming more American--Coca-Cola, McDonald's, MTV, and all that. But it is sliding away from American Jewishness and American Jews in many senses.
I was first struck by this thanks to a trivial incident. I went to the Tel Aviv Hilton, which must be patronized by many American Jews, to have lunch at the deli, which holds itself out as the place for New York delicatessen. The special on the menu was osso buco. The only thing on the menu that sounded like what I think of as Jewish delicatessen was pastrami. So, I ordered a pastrami sandwich on rye bread. It came in what I suppose was a French mini-baguette. It was then that I said to myself, "Toto, you're not in Lindy's anymore!"
But there is much more serious evidence. Most American Jews had their origins in the shtetl culture of eastern Europe. Most of the first settlers of Israel came from that same culture. Now the American Jews are three or more generations away from that culture, and so are the Israeli descendants of the earlier settlers. They have grown away from that tie that once bound them. Moreover, half of today's Israelis are of Middle Eastern origin and never had eastern European culture anyway. Both the American Jews and the Israeli Jews are, I believe, less religious than they were. At least, their lives are less governed by religious observances that they once shared, so that tie has weakened.
The conflicts in Israel between the Orthodox variety of Judaism and the Conservative and Reform varieties have puzzled and alienated many American Jews. Also, I think many American Jews are at a loss to deal with the bitter disagreements among Israelis about the peace process. I used to say to myself that although I didn't know what the Israelis should do, they are very smart people, their survival is at stake in their relations with the Palestinians, and I will be for whatever they are for. Now I don't know what to think, I don't even feel entitled to have an opinion. I can no longer be an absentee participant in Israeli politics.
In a way, that is all sad for an American Jew. It was gratifying to us to think that we had this offspring over there, like us but even more courageous, accomplishing great things and yet requiring our help and acknowledging its dependence on us. It is a little sad to see that this child has grown up. It is a country of its own. We can still be proud of it and we can still try to help it. But we have to recognize that it is not us and will go its own way.

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By Herbert SteinPosted Wednesday, March 25, 1998, at 3:30 AM ET
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Herbert Stein, a senior fellow at the American Enterprise Institute, was chairman of the Council of Economic Advisers under Presidents Nixon and Ford. He is a member of the board of contributors at the Wall Street Journal.
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