Bottom Line: Reaganomics for Israel

Israel's election, like many parliamentary votes in multi-party states, seems to have left open almost as many questions as it resolved. And yet, for investors, there was a strange and interesting clarity not present, for example, in the recent U.S. election -- one in which both major parties essentially agreed on a policy of $2 trillion plus in bailouts for the U.S. financial sector.

Reaganomics -- the mix of Kemp-Roth tax cuts and at least an effort at Gingrich-Clinton spending restraint, familiar to Americans who lived through the 1980s and 1990s -- was on the ballot in Israel, in the person of Likud Leader and likely Prime Minister Benjamin Netanyahu. And the Reagan-Kemp-Gingrich revolution won, albeit narrowly.

The results, as Netanyahu works to form a coalition mostly with smaller, orthodox religious parties, are not likely to bring the kind of massive legislative policy revolution America saw in the Reagan-Kemp-Gingrich era. But it definitely means that a program of Bush-Obama style spending sprees is unlikely. Netanyahu plans to ask for a freeze in government wages and looks charily at proposed bailouts. A continuation of his modest tax rate cuts, emphasized in the campaign, is quite possible.

Even after one factors in the state of turmoil in the Middle East, always present for investors in the region and higher today than normal, there is reason to hope for a policy of pro-growth policies both for Israel, and, perhaps, Palestine.

Israeli foreign policy

Most coverage of the Israeli election has focused on the differences between Likud, and the previous coalition headed by the Kadima Party, regarding policy towards Israel's Arab neighbors and residents. These are important, and yet, the differences here may have been overstated.

In Gaza and other territories under Israeli rule, most Israeli prime ministers wind up being hawkish moderates, and even the hawks -- such as Ariel Sharon -- wind up periodically launching a great dovish initiative.

"Would another Kadima-Labor Party government fail to respond to strikes from Gaza? I don't think so," comments one Israeli political observer. Indeed, the most recent one did not. "Will Likud have no peace process? Of course not." In fact it was Likud's Sharon who devised the bold (if tactical) proposal to withdraw from Gaza.

Nor is any Israeli government likely to stand by and watch Iran complete development of its nuclear program. Israel has already been given a go-ahead, should it need one, by the U.S. Congress, in the form of a resolution on Iran remarkably similar to those it passed on Iraq in the 1990s.

Growth for Gaza?

A far more interesting difference, though little noted, concerns plans for dealing with Gaza short of violence. Netanyahu, true to his Reagan-Kemp optimism, launched a proposal during the campaign to target 10 percent economic growth in the Palestinian regions in the coming years.

There's a real opportunity there. Choked by high tax rates and stifling regulation under their own machine-style rulers, and cut off at border crossings that make commuting to work a 5-6 hour ordeal for many, the Palestinian population has groaned for years under a cycle of poverty and violence. This fact does not justify the frequent outbreaks of violence against Israelis, but it does make them more likely.

By putting emphasis on bringing about economic health for the Palestinians, Netanyahu has thus based his policy at least a little less on retribution -- and redistribution, for that matter -- and a little more on hope. Given that he knows what is needed to make it a reality -- not more care packages and U.N. welfarism, but a thriving private Palestinian economy -- it might just work.

A mandate for Netanyahu-nomics?

Voter support for a proposed Netanyahu personal income tax cut program, to reduce Israeli income taxes to a top rate of 40 percent or lower from their present 47 percent, would be questioned by some. But it was a cornerstone of his election campaign, and with important differences from anything offered by Labor and the left in Israel -- or, by way of illustration, by McCain and the U.S. Republicans in 2008.

In part, the mandate was provided by his opponents. In the final days before the vote, Ehud Barak warned Israelis that "the man who ruined the economy" -- Netanyahu, in his view -- "cannot save it." Warnings about a continuation of modest tax rate cuts in recent years, pushed mainly by Netanyahu as finance minister, were also a major staple of the Kadima campaign.

If nothing else, their attacks make it fair for Likud to claim a mandate for Netanyahu's program. As in the U.S., where everyone expected the major issue to be the Iraq war, at a time of a depression in global asset prices, foreign policy was somewhat trumped by the economy.

"Unlike Israel's war on terror, a cause that all candidates share with equal zeal," Amotz Asa-El, the former executive editor of the Jerusalem Post, writes, "the economic crisis has generated a real debate, one with deep ideological roots and immediate practical implications." Israeli voters, he predicted, for the first time in decades, would be rendering a decision primarily based on the direction of economic policy.

Coalition politics

Netanyahu now faces a moment of existential choice. Though his policy instincts have always been highly conservative, as an operational politician -- and in particular, whenever he has served as prime minister -- he has often shown the personality of a dealer.

Those instincts have been evident in recent days, as Netanyahu strives to form a coalition that includes elements of the center and left, who have balked at his entreaties. He doesn't need their votes; he can achieve a majority without them. But a right-only coalition would seem to be -- with the emphasis on "seem" -- less workable, and less stable.

Is it though? In a trenchant analysis of the effort for the Jewish Times, Larry Gordon writes: "Today, the Right does not feel enough at ease with its own policies to feature such a narrow government." But to the extent Labor and Kadima simply won't join Netanyahu, he may have no choice but to reject a two-state solution for foreign policy -- and to turn away from a reliance on U.S. and international aid in favor of organic growth for the Israeli homeland and the Palestinians.

Indeed, one of Netanyahu's first meetings in the election aftermath was with Histadrut Labor Federation chief Ofer Eini, to discuss the economic crisis. "Netanyahu has chosen the form of dialogue with the Histadrut, in contrast to the behavior of the previous government," Eini said afterwards. "The economic crisis is the most important issue today. I'm glad that Netanyahu is carrying this issue seriously upon his shoulders."

Bottom Line

An emphasis on economic growth is not only what Israeli voters seemed to favor in the recent election, but may be a key to peace for Israel, both at home and in the region. True, as one fellow Republican scoffed to the aforementioned Mr. Kemp in the 1980s, "you can't defeat the Soviet Union with tax cuts alone." Nor will Israel's sound monetary policy of recent years bring about an end to the Iranian nuclear program, or the strikes by terrorists from Gaza.

But as Messrs. Kemp and Reagan proved in the 1980s, economic growth can go a long way towards making domestic voters happy, and foreign tyrants more reasonable. And while a reviving Israeli economy isn't sufficient to bring peace, it is certainly helpful, and perhaps necessary. We may ask, is peace possible at all in a global economy looking less like that of the 1990s and more like that of the 1930s?

Unfortunately, it's way too early, given the state of the global economy, and the not-yet-certain shape of Netanyahu's government, to be buying aggressively. The sluggish price of oil, likely to persist, doesn't help much either -- it depresses all the economies that surround Israel, and may, paradoxically, make some Arab states more aggressive. At a time when they can't even deliver oil wealth, Israel-bashing is one way to shore up domestic support for their failed regimes.

In other words, despite everything above, still out. But the time to invest may only be months or weeks away, as Netanyahu finds partners, and -- most important -- indicates how much emphasis he will place on the economy. Not invested, but crouching.

(Gregory Fossedal is a former investment manager and author and has been a UPI commentator since 2002. Fossedal is the author of numerous books on financial and political history, including "Direct Democracy in Switzerland," "Our Finest Hour," and "The Democratic Imperative.")

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