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Harvard expert: Israel’s dilemma – imperil economy or risk higher death toll

Leading economist says total shutdown may save ‘several hundred’ lives, but cripple Israel economically.

By Paul Shindman, World Israel News

A longtime observer of national economies says Israel faces a hard choice in its coronavirus fight. A total shutdown of the economy, causing severe damage, or less drastic measures that will still lead to less harm but at the cost of hundreds more lives.

Ricardo Hausmann, a Harvard economics professor, says the crisis facing Israel is similar to the recession that hit the country following the 1973 Yom Kippur War. Hausmann told the Calcalist economic newspaper on Monday that Israeli leaders had to step up and realize the economy could collapse.

“Just like the prime minister can send an army into battle knowing that many will die, decisions must be made boldly, otherwise we will become insolvent,” Hausmann said.

Israel is not alone in the crisis, he noted. “My rule of thumb is that the loss of Gross Domestic Product (GDP) is about 20% on average worldwide. There will be countries that will also lose 40%.”

Hausmann said he found graphs that explain the economic phenomenon comparing hospital admissions versus a recession. In the case of the coronavirus, health and economics are going in opposite directions: The more complete the closure, the more infection decreases, the more the load on the health system falls and the number of dead drops.

However, at the same time, the economic downturn expands and the damage to productivity jumps and with it the number of unemployed.

Israeli finance ministry officials estimated that the gap between partial and full closure to prevent the epidemic from spreading amounts to tens of billions of dollars. However, Ministry of Health officials fear without a total closure Israel’s health care system will totally collapse.

Hausmann said that unlike the 1973 recession when production collapsed, the coronavirus crisis will need the people to have disposable income to keep the economy moving while they stay at home to prevent infection.

Hausmann advocates the government directly transfer funds into the pockets of citizens to allow people to eat without working during quarantine, rather than trying to increase GDP. “They (the finance ministry) will have to put their hand deep into the pocket, and on a significant scale,” he said.

Treasury officials worked last week on financial scenarios of partial and complete closures of five, eight and 12 weeks long.  A partial closure of five weeks would cause a GDP decline of 2 percent compared to last year and the economy will go into recession.

The gap between full and partial closures is expected to grow to $24 billion in productivity loss if the closure lasts eight weeks.

Treasury officials told Calcalist that a long full closure scenario would massively increase Israel’s deficit to 9 percent of its GDP and the national debt to around 71 percent of GDP.

Where the money will come from to pay for economic measures has not been discussed at all, officials said. In a previous financial crisis in 2002-2003 in which the impact on GDP was only half of the current expectation, public sector salaries were cut by 15 percent.