More on stimulus vs. austerity discussion

The Economist is currently hosting a debate about the nature of the current economic situation in the US and the possible ways to improve it.

The pro-stimulus advocate describes the nature of the current recession as follows:
"... a rare type of recession that happens only after the bursting of a nationwide asset-price bubble financed with debt. In this type of recession, now called balance-sheet recession, the private sector is actually minimising debt instead of maximising profits because the liabilities it incurred during the bubble days are still on the books while the assets it purchased with borrowed funds have collapsed in value, leaving its balance sheets seriously underwater and in need of repair." [Emphasis mine]
(This was a subject of one of my earlier posts.)

The stimulus-based solution to the problem is then formulated as:
"Since the government cannot tell the private sector not to repair its balance sheets, the only way for the government to keep the economy from collapsing is to borrow and spend the unborrowed savings in the private sector and put them back into the economy's income stream. And this stimulus must be maintained until the private sector has regained enough financial health to borrow money again."

On the opposing sides, the doubts regarding the value of the stimulus and temporary tax cuts are summarized as follows (see my other recent post regarding the tax cuts):
"A main implication of their work is that permanent tax cuts have a lasting effect, but temporary tax cuts do little or nothing. Recipients of a temporary windfall reduce debt or save. The same is true of a one-time increase in spending. The teachers and firemen who kept their jobs for a year because states received large transfers from the federal stimulus in 2009 did not run off to buy a car or furniture. Most of them knew that temporary assistance comes to an end quickly, as it did. Many of their jobs ended. By saving instead of spending, they prepared for an uncertain future." [Emphasis mine]



Hence, the proposed austerity measures are:
"Here are some useful first steps. Reduce uncertainty about future tax rates by adopting a long-term plan to reduce entitlement spending. Declare a five-year moratorium on new regulation, except for national security. Adopt an inflation target with enforcement to make sure that high inflation will not return. Pass the trade agreements. And pay for reduced corporate tax rates by closing loopholes."

Middle-Eastern logical twists

In view of the recent violence in Israel and Gaza, there are some who perceive as strange the fact that Israel retaliated against the Popular Resistance Committee (PRC) in Gaza, despite the latter's denial of any complicity in the Eilat attacks.

While there may be no proof (in the open media) of the PRC responsibility for the attack, it seems that even the critics of the retaliation against PRC are so deeply absorbed by the situation that they take for granted many things that must seem awkward to an objective observer.

Let us try to evaluate the situation objectively:
A group of armed men from country A entered country B, murdered several people, and escaped back to A. Elsewhere this would be considered and act of war, and B would demand an investigation and compensation from A, threatening a just retaliation. A resolution by the UN Security Council would follow as well.

In practice:  
A (Egypt) demands an investigation from B (Israel), while B carries out strikes against C (Gaza). And even those who oppose strikes by B against C, agree that A has nothing to do with this, and don't mind A to mediate between B and C.

There is an underlying assumption here that the terrorists certainly were not Egyptians, but Palestinians. And curiously this is accepted without questioning even by those claiming that the strikes against PRC were unjustified.

Even those who agree with this, however, should not forget about the responsibility that still lies with Egypt: It is Egypt's obligation as a state to fight the crime in its territory, whether it threatens Egyptians or the citizens of other countries. And it is Egypt who has to prove that the terrorists were not Egyptians and that Egypt did not have hostile intentions towards Israel. And even then Egypt still would have the responsibility towards the families of the victims.

All this does not happen, and the Israeli defense minister, Ehud Barak, has correctly hinted that Egypt is a failed state (just by definition of a state failing to exercise such state functions as fighting crime and protecting its borders.) Yet, in an awkward twist, it is Israel that has apologize for stating this fact. And it is Israel that has to carry out an investigation into the deaths of several Egyptian soldiers, who were caught in gunfire when the Israeli border guards chased the terrorists.

Let us note that the lack of the Egyptian complicity in the terrorist attack is far from obvious: some commentators claim that, in order to remain unnoticed by the Israeli guards, the terrorists infiltrated into Israel in front of an Egyptian outpost, with likely knowledge of the Egyptian army. The fact that the infiltrators were retreating towards a group of the Egyptian soldiers, which resulted in several Egyptians killed, raises questions regarding the Egyptian army possibly covering the terrorists's retreat.


However, the worst thing that has been made obvious by these events is the Israel's fear to alienate Egypt, which prevents Israel from demanding from Egypt the actions that are required by the international law (i.e. the investigation and the compensations to the victims.)
I don't blame the government for this - it just shows how bad the geopolitical situation is for Israel.