A free people under siege

I returned yesterday from a wonderful week in Israel where I participated in the fourth biannual Friedberg Economics Institute seminar (my second) at Neve Illan, just outside of Jerusalem.

My friend and colleague Richard Ebeling asked me the following questions. My answers appear below.  

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Since you've been in Israel during part of this new series of violent acts, I was wondering about any thoughts, observations, interpretations you might have of these events.

·         How are Israelis you talked to or saw reacting to this? What do they think (or fear) this may or may not lead to?

·         Do they consider these types of events a never-ending and recurring nightmare,  or is there any  belief (hope) that there is any "light at the end of the tunnel"?

·         Are there any rational, reasonable Palestinians, or is this near unanimous collective madness?

·         Is this making Israelis "hardened" against any deals and compromises with the Palestinians, is there sentiment that negotiations need to be restarted sooner rather than later?

All good questions. My impressions, purely personal, based on my very limited interaction with a small number of people.

Israel is a country under siege without a siege mentality. Soldiers everywhere, but where the civilian ends and the soldier begins is barely discernable. The equivalent of the Pentagon is in downtown Tel Aviv. There is an ongoing conscious effort to try and 'normalize' the life of a soldier as much as is possible. Some people I know in the military wear their uniforms for work only and are critical of the settlements and wary of the threat of Haredi political domination.

As to the stabbings, Israelis try to live their lives unperturbed, watchful but determined. No, they are not at all hardened to the prospect of peace but do not believe in current circumstances that this is a real prospect. Except for the radicals [some of the Haredi and the settler-types] all Israelis desperately want peace. Yes, they see it as a part of a never-ending series of violent strategies to destabilize and ultimately destroy Israel - not a cycle of violence because they do not see these and similar acts as bona fide responses to provocation as suggested routinely in the world media. They are not responses, they are politically orchestrated acts of violence. It would not make any difference if Israel reformed the severity of the checkpoint procedures tomorrow.

They don't see it as a nightmare, horrible as it is, because they have seen worse before and Israel day-to-day is a vibrant incredibly free society. Take your pick of multiple, candid talk shows on any subject, vigorous business activity, construction everywhere, highways, night clubs, shopping malls, technology, art, music, literature, sports, …

Definitely there are many reasonable Palestinians. It is surprising there are not more - there are formidable cultural pressures pushing for uniformity. Polls show that most Palestinians and Israeli Arabs want peace to enable them to get on with their lives and build better futures. And there are forces making for internal tensions. For example, Israeli Arabs who live and work in east Jerusalem get four to five times the pay available on the West Bank, so they are secretly not in favor of unification with the West Bank, and they don't want West Bank Arabs coming into east Jerusalem for obvious reasons. Israeli Arabs are fully integrated into the economy, though sadly not into the broader society. And the Arab members of the Knesset are incredibly hostile to Israel – some moreso than others. None of them condemns the current violence. In this they part company with many of their constituents. It is something of a sad mystery as to why Israeli Arabs continue to elect representatives hostile to coexistence while themselves (many of them) hoping for it.

The on-going, endemic biggest problem is the current Palestinian leadership - status quo bias – directly descendant from Yasser Arafat. Any effective deviation is brutally squashed.

I would describe the current mood as a mixture of realism and hope for the unlikely.

Once upon a time in the land of Machinea

Once upon a time in the land of Machinea there was a problem The economy was powered by machines produced by different factories and rented by producers. There were those machines that were distinguished by being a bit wider than their substitutes, the W’s. There were those that were distinguished by being a bit bigger than their substitutes, the B’s. And there was a third kind that was atypical, the A’s. Each kind of machine was produced by a number of factories. The largest number were the W’s, then the B’s then the A’s. The machines were difficult to construct and thus there was significant variation in their efficiency – by which is meant their productivity and reliability. Statistically speaking it was known that an A was likely to be more efficient than a W or a B, and a W more efficient than a B. As a result, since all they knew about the machines was their type and average efficiency producers were reluctant to hire them at the same rate as the W’s. And since it was frowned upon (and in some place illegal) to pay a lower rent to a B than a W, the likelihood of a B being rented was significantly less than the of a W being rented. The problem that the policy makers wanted to solve was that the rate at which B’s were hired, rented, was too low for their liking. The B factories were struggling to survive.

The proffered solution was to strongly incentivize the machine renters to hire more B’s, that is, to hire more than they would have given their expectations of their efficiency. The reasoning underlying this solution is that the low productivity of the B’s is endogenous, it is a result their low rental earnings feeding back into the budgets of the B factories, which, then, in turn, struggle to produce efficient machines. By intervening in this way, a judicious public policy could break the vicious cycle producing self-sustaining B inferiority. So, they instituted a policy of mandatory affirmative B rental requirements. Each producer had to produce a report showing that his B-rentals were at or above the proportion of B-machines in the market.

Though it seemed like a good idea, albeit at the cost of some inefficiency imposed on the producers and their customers, there were unintended consequences. The managers in the B factories realizing that the likelihood of renting their machines was now higher, regardless of their efficiency, faced a reduced incentive to produced efficient machines, and the quality of the machines actually went down, even as they produced more machines. This raised the hiring mandate under the policy and further reduced the incentive for quality production. So, the policy was actually counter productive and accentuated the negative cycle of B inferiority. The B factories now became wholly dependent on the government to enforce the affirmative rental of their machines.

A minority of policy makers and advisors pondered alternative policies. Perhaps the initial problem lay in a structural defect in many, though not all, of the B factories. These defects were endemic and though not irremediable would require substantial changes in the incentives faced by the B-producers. They suggested policies that would allow B’s to compete by offering lower rental rates, and the scrapping of all policies that deterred the B-producers from making painful but necessary changes.

There were other more wide-ranging policy change suggestions like those that pertain to the inadequate training that B-producers received in their training schools, but these are beyond the scope of this brief.