Remembering Herb Stein: His Contributions as an Economist -- Address by Stanley Fischer
IMF News, January 6, 2001
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- Published: January 6, 2001
1. Introduction
- Prepared for delivery in a session commemorating Herb Stein at the American Economic Association meetings, New Orleans.
- Stanley Fischer recalls personal friendship with Herb Stein and summarizes Herb's professional roles: Committee on Economic Development, Chairman of the President's Council of Economic Advisers, academic at the University of Virginia, senior fellow at the American Enterprise Institute, and later columnist (Wall Street Journal and Slate).
- Fischer's focus in the address: the work he and Herb did as consultants on the Israeli economy to the State Department from 1983 through the stabilization program in 1985 and later.
2. Israel — background and crisis
- By mid-1983 Israel faced:
- "an economic crisis and an economic problem": triple-digit inflation and falling foreign exchange reserves (crisis); weak economic growth (problem).
- Timeline and key events:
- 1972: Herb represents President Nixon at Israel's Independence Day celebrations; meets Golda Meir.
- Mid-1983: George Shultz invites four economists, including Herb Stein and Stanley Fischer, to advise on Israel.
- March 1985: Herb and Fischer visit Jerusalem to firm up stabilization actions; Emanuel Sharon (Director-General of the Israeli Treasury) a key inside advocate.
- June 1985: Undersecretary Allan Wallis visits Israel; Prime Minister Peres appoints a small team including Michael Bruno, Eytan Berglas, and Emanuel Sharon to develop a stabilization program.
- July 1, 1985: After an all-night cabinet meeting, a historical stabilization program is adopted.
3. The stabilization program — design and results
- Core elements described:
- Massive budget deficit reduction (about 8 percent of GDP), mainly via a cut in subsidies.
- Fixing the exchange rate and tightening monetary policy.
- Heterodox elements: freezing prices and originally wages; these contributed to immediate inflation reduction and political acceptability.
- U.S. financial support tied to program adoption:
- Secretary of State authorized release of the $1.5bn two-year aid package requested by Prime Minister Peres.
- Measured outcomes:
- Monthly inflation: 30 per cent in June → less than 4 per cent in August → less than 2 per cent a month during 1986.
- Unemployment: rose from 5.9 per cent in 1984 to 7.1 per cent in 1986.
- The shekel stabilized on foreign exchanges.
- Process notes:
- Herb produced a "10 point stabilization plan" (later leaked as "Herb's 10 Points"); leak provoked press reaction but ultimately helped public discussion and acceptance.
- U.S. approach emphasized persuasion and ownership by Israelis rather than imposition.
4. Lessons on ownership and conditionality
- Ownership:
- Fischer emphasizes that programs are more likely to succeed if owned by the implementing country; ownership in Israel developed slowly and was likely enhanced by the prospect of receiving a $1.5 billion grant.
- Conditionality:
- The Israeli program was implemented without formal IMF-style conditionality.
- Anecdote about George Shultz's opposition to formal conditionality: Shultz refused strict conditions but allowed the U.S. to signal that he would be "very disappointed if they receive the aid without carrying out the program" — illustrating a softer, multi-dimensional enforcement mechanism based on bilateral trust and leverage.
- Fischer notes the ambiguity of lessons about conditionality given these circumstances.
5. Post-stabilization challenge: growth and structural reform
- The "problem" of weak economic growth remained difficult to address.
- U.S.-advocated growth strategy components:
- Reductions in government spending, tax cuts, privatization, deregulation, dismantling of monopolies, removal of subsidies, freeing capital and credit markets.
- Political resistance:
- Political resistance to structural reforms exceeded resistance to stabilization measures.
- Herb Stein’s pragmatic interpretation of political resistance (1990 quote):
- Compares politicians' behavior in Israel to Ronald Reagan's toleration of various controls and subsidies in the U.S.; argues that such choices reflect political incentives rather than ideological commitment to socialism.
6. Herb Stein — qualities, views, and memorable aphorisms
- Personal and professional qualities:
- Gifted, gentle, graceful and witty writer, modest, persuasive, strong convictions, intellectual honesty, loyalty.
- Comfortable as a Republican and market economist, but wary of ideological posturing; described himself: "There is a certain continuity, the absence of conservative convictions and also of liberal ones. I don't vote the straight ticket."
- Skeptical of deriving policy from general ideologies; favors case-by-case discrimination.
- Held that government should not intervene "in the heart of the market" but accepted complexity beyond that principle.
- Supported higher U.S. defense spending, and therefore did not view government spending as inherently bad.
- Skeptical of Reagan-era arguments that reducing tax rates would increase revenue: "I was affronted by the flimsiness of the evidence".
- Notable aphorisms and quotations highlighted by Fischer:
- Henry Simons (quoted by Herb): "Surely there is something unlovely, to modern as against medieval minds, about marked inequality [of income or power]".
- Herbism: "If something cannot go on forever, it will stop."
- Corollary observed by Herb: "Economists are very good at saying that something cannot go on forever, but not so good at saying when it will stop."
- Literary aside (Stendhal): description of kneejerk pundits: "If a plank creaks in the floor, he snatches up his pistols and imagines that there is a liberal hiding under his bed".
- Edward Denison on growth: "the difference between 2 percent and 3 percent is not 1 percent, but 50 percent."
- On the role of a policy adviser (lesson Fischer learned from Herb over dinner): after detailed analysis, ask "Well, but what do we want them to do?" — the essential question for advisers.
Remembering Herb Stein: His Contributions as an Economist -- Address by Stanley Fischer. January 6, 2001.