George Gilder has written a fascinating and sweeping article titled, “Last to First: Israel's Economic Miracle.”
I take no credit for the words indented – they are 100% Mr. Gilder’s. I cannot help but notice, however, that no matter how many such examples are presented – and Israel is but one of many that has turned from a statist, centrally-controlled economy to free markets – we still manage to elect leadership in America that believe:
- Bigger is better in economic projects; the small grass roots businesspeople “out there” are not to be trusted to do the right thing for the economy, which must therefore be directed by government,
- The National Government attracts the elites of society; therefore they must know what is better for an Iowa farmer, a California vintner, or a Louisiana fisherman than those persons themselves do, and
- It doesn’t matter so much whether something will work or not (the result) as long as the elites can show they “care” about others (the intention.)
I have edited Mr. Gilder’s article for length. If you are interested, the entire article is available from The Jewish Press here.
Mr. Gilder writes...
… it might seem foreordained that after World War II the rising Jewish nation in the Middle East would emerge not only as a financial power but also as a scientific and technological leader. Yet surprisingly, for all the talk of deserts in bloom, the predictable miracle did not occur. Forty-some years on, Israel by 1990 was still mostly barren of technology and finance.
Apart from military breakthroughs, the scores of thousands of brilliant Jews assembled in Israel generated few significant companies or technologies, no significant financial institutions, and little important science.
[In fact] “…its leftist assumptions actually inclined it toward the Soviet model. Professor A. J. Meyer of the Harvard Center for Middle Eastern Studies in 1959… cited 'welfare state concepts [that] often dictate that incompetent workers stay on payrolls.'
… Fleeing oppression in Europe, they buried their heads deeply into the sands of delusional ideologies. They created fatuous communal experiments called kibbutzim and put intellectuals to work with hoes and shovels for all the world like a voluntary version of Chairman Mao's Cultural Revolution. In a truly menacing démarche of ideological madness, they attempted to abolish the family and private property... They assigned close to a third of the economy to the ownership of Histadrut, a Socialist workers' organization prone to threatening nationwide strikes…
Under Histadrut pressure, they created minimum-wage levels that stiﬂed employment for decades and propelled inﬂation... as high as 400 percent for a period of months in the ﬁrst half of 1984. Then they imposed more controls on wages and prices and rents, making everything scarce.
In a general enthusiasm for public ownership of the means of production and ﬁnance, the government through the 1990s owned four major banks, 200 corporations, and much of the land. Stiﬂing any private initiatives that might miss these sieves of socialism, Israel's taxes rose to a conﬁscatory 56 percent of total earnings, close to the highest in the world… creating a country as inhospitable to Jewish genius as any anti-Semite could contrive.
Israel's redemption came from unexpected directions. In the mid-1980s, Yitzhak Shamir's Likud government…deployed tax-rate reductions that… increased the rewards of work and investment by some 30 percent and dramatically boosted economic growth and reduced inﬂation.
At least as important to Israel's technology sector, however, was the fact that beginning in the late 1980s, the country committed itself to absorb close to a million immigrants, chieﬂy from the former Union of Soviet Socialist Republics (USSR)… the USSR released the bulk of the Soviet Jews who, despite constant oppression, continued to supply most of the technical skills that kept the Soviet Union aﬂoat.
… Largely barred in the USSR from owning land or business, many of them had honed their minds into keen instruments of algorithmic science, engineering, and mathematics…. At the same time as the ﬂood of former-Soviet immigrants, a smaller but seminal wave of returnees arrived in Israel from such companies as IBM and Bell Laboratories, with a knowledge of Silicon Valley and an interest in opportunities in Israel. Capping off and capitalizing these catalytic outsiders were a generation of eminent American retirees, either making aliyah in the late 1980s and early 1990s or focusing on Israel after successful careers in U.S. business.
…Collectively these newcomers wielded billions of dollars of available capital, petawatts of imperious brainpower, a practiced disdain for bureaucratic pettifogs, and Olympian conﬁdence in their own judgment and capabilities. Mix the leadership of these dynamic capitalist retirees ﬁnding new birth in Israel with a million restive and insurgent Russians in a tiny Mediterranean land, and the reaction was economically incandescent.
…Such an inﬂux could not be clamped or channeled, tapered or intimidated into the existing economic framework. To deal with this overwhelming transformation of the human capital of Israel entailed radical entrepreneurial creativity and initiative.
…Many of the Russian newcomers commanded elite technical skills and scientiﬁc degrees. Such capabilities are best applied to innovation. Planned creativity and innovation are an oxymoron: creativity always comes as a surprise... Today, on a per-capita basis, Israel far leads the world in research and technological creativity.
…By 1999, Israel ranked second only to the United States in invested private equity capital as a share of GDP. With 70 percent of its growth attributable to high-tech ventures, by this measure Israel went in twenty years from last among all industrial countries to lead the world.
…It is a rigid rule of capitalism that overfunded businesses, like overfunded banks, are disasters waiting to happen, while small sums in the hands of a few exceptional men can yield equally unexpected riches.
A 2008 survey of the world's venture capitalists by Deloitte & Touche…showed that in six key ﬁelds - telecom, microchips, software, biopharmaceuticals, medical devices, and clean energy - Israel ranked second only to the United States in technological innovation. Germany, ten times larger, roughly tied Israel.
These valuations registered absolute performance. Adjusted for its population, Israel ranked massively ahead of all other countries - including the United States. As it approached the end of the ﬁrst decade of the new century, Israel was a global center of microchip, telecom, optics, software, biotech, and medical-devices research, the country's development and entrepreneurship rivaled only by its partners in Silicon Valley.
What lessons might we draw from Israel’s remarkable turnaround from socialist drivel to entrepreneurial success? May I submit:
- Underfunded (hungry) entrepreneurs will grow market share at the expense of bloated, overfunded, government-bailouted companies 8 ways to Sunday,
- Smaller and nimble is better than bigger, club-footed and ham-handed,
- “Skin in the game” is important, whether it is a small business person, a homeowner with a mortgage, or a taxpayer willing to vote out those who would “redistribute” the fruits of their hard work,
- Legal immigrants revitalize any nation and contribute to the wealth of all,
- Most of those “Making a Difference” do so one soup kitchen, one homeless shelter, one community at a time. Big Government has never succeeded, in spite of good intentions – unless, of course, you are one who believes that Social Security, the Post Office, the VA, the IRS, Fannie Mae (FNM), Freddie Mac (FRE), and other Brave New World programs are resounding successes,
- “I’m from the government and I’m here to help you” is an oxymoron. “I’m from the government and I know what’s better for you” is an oxymoron. “I’m from the government and I have some clue about what your life is like” is an oxymoron,
- An Iowa farmer, a California vintner, or a Louisiana fisherman know more about their business than some government politician ever will,
- It does matter whether something will work or not. (The "result".) If you want to show you care, start a philanthropic foundation or pick up litter along the highway or join your local volunteer fire department. Don’t just sit at a desk where you take money from one citizen so you can give it to another to make you feel good about yourself,
- As James Madison said, when the first Congress figured out it could raise money from one group to buy votes from another, “I cannot undertake to lay my finger on that Article of the Constitution which granted a right to Congress of expending, on objects of benevolence, the money of their constituents.”
- Entrepreneurs and workers built this country. Not Wall Street traders and politicians claiming we need to “spread the wealth.” Shouldn’t we make some before we spread it?
You can play the Israeli miracle via the iShares MSCI Israel Capped Investable Market Index Fund ETF (EIS) and the First Israel Fund (ISL). Among my favorite stocks there are Teva Pharmaceuticals (TEVA), Elbit Systems (ESLT), and Israel Chemicals (OTCPK:ISCHY).
If you think the Dubai kerfuffle, with $60 billion being just 3 times what Goldman Sachs (GS) is planning to pay in bonuses this year, is a short-term opportunity to invest in US markets, you might consider the iShares S&P 500 Index (IVV). For those even more confident, ProShares Ultra S&P500 (SSO) may be more to your liking. And, for those with serious conviction and nerves of steel, have a look at Direxion Daily Large Cap Bull 3X Shares, (BGU).
Author's Full Disclosure: We have taken profits on all our Israeli holdings and would be delighted to re-enter at lower prices. We and clients for whom it is appropriate are, however, currently long IVV, SSO or BGU.
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