Daniel Schiffman

Shattered Rails, Ruined Credit: Financial Fragility and Railroad Operations in the Great Depression

The theory of “financial fragility” emphasizes the role of weak balance sheets in propagating and magnifying macroeconomic shocks. I use a new panel dataset to investigate the relationship between financial fragility and real activity on U.S. railroads during 1929-1940. First, I formulate a flexible accelerator model of maintenance expenditures and employment. Then, using the model as a benchmark, I ask whether a firm’s degree of leverage, bankruptcy status, and size affect the responses of employment and maintenance expenditures to changes in operating revenues. My results provide strong support for the predictions of the financial fragility theory. Leverage and bankruptcy status had the greatest effect during the worst years of the Depression and their impact differed systematically by firm size. Firm leverage had a large negative effect and generally affected small firms only. That is, firms whose fixed interest burdens were heavier than average exhibited lower than average annual growth in maintenance and employment; in general, this was true of small firms only. Bankruptcy effects were large and positive, and were present in large firms only. In other words, large firms that were in bankruptcy exhibited higher annual growth in maintenance and employment. Various categories of maintenance expenditure were not equally sensitive to financial effects; I find that highly indebted firms mainly used track maintenance to absorb revenue shocks. U.S. Government attempted to keep the railroads out of bankruptcy through loans from the Reconstruction Finance Corporation. I conclude that this policy was counterproductive.

The Triumph of Rhetoric: Pigou as Keynesian Whipping Boy and its Unintended Consequences

Before The General Theory (1936), John Maynard Keynes’ two most successful books had been The Economic Consequences of the Peace (1919) and The Economic Consequences of Mr. Churchill (1925). Both books used the rhetorical device of a ‘whipping boy’ — in the first book there were three (US President Woodrow Wilson, British Prime Minister David Lloyd George, and French Prime Minister Georges Clemenceau), and the second book was devoted to just one.1 All those whipping boys were politicians pursuing objectives that Keynes regarded as inept and shortsighted.2 Keynes was not a petty person: he sought to mobilize public opinion in opposition to what he regarded as disastrous policy blunders that were bound to undermine civilization.

The valuation of coins in medieval Jewish jurisprudence

The corpus of Jewish legal writings contains many discussions of economic issues and ideas. Yet, aside from a small group of scholars, historians of economics have tended to ignore the texts of Jewish law. As Ephraim Kleiman (1997) points out, the sheer size and inaccessibility of the Jewish law corpus presents a major barrier. Economic ideas are scattered across a vast amount of material. The canonical text of Jewish law is the Talmud, which spans 2,700 folio pages and two million words. Hundreds of commentaries have been written on the Talmud (or parts of it). There are three major codes of Jewish Law (based on the Talmud and selected commentaries), plus commentaries on the codes and lesser known codes (based on the major codes). About one million responsa (questions and answers in Jewish law) are known to exist; these are collected in hundreds of books. Today, new commentaries and responsa appear each year, in addition to multiple rabbinic journals. In order to understand these materials, the scholar must be well versed in Hebrew, Aramaic, and the reading of the Talmud.

The Office of the Chief Scientist and the financing of high tech research and development, 2000–2010

The Office of the Chief Scientist (OCS) provides public financing for high tech Research and Development. This article describes the OCS and its evolution since 2000, and assesses the governments response to crises in venture capital financing during 2001–03 and 2008–10. It finds that the governments response was inadequate in 2001–03; the OCS budget was reduced, and essential reforms were adopted belatedly. In 2008–10, the picture is mixed; the OCS budget was increased in 2009, then reduced in 2010. In July 2010, the government proposed a comprehensive package of reforms, whose impact remains to be seen.

Ex-officio Adviser: Kahn in Israel, 1957 and 1962

This chapter documents Richard Kahn’s role as an unofficial advisor to the Israeli government, using archival and published sources. In 1957, Kahn predicted that the EEC customs union would harm Israel’s trade and that the EEC would reject Israel’s application for Associate Membership. He proposed a major reform of the COLA that would significantly reduce real wage protection and move Israel closer to the Swedish wage system. In 1962, he took a neutral position regarding the sustainability of Israel’s international imbalances. He also criticized Israeli policymakers for overestimating the potential benefits of an Israel-EEC commercial agreement and argued that the EEC would make reducing Israel’s trade deficit more difficult, even if the UK did not join. Ultimately, Israeli policymakers ignored Kahn’s advice: they continued to push for EEC Associate Membership and failed to adopt his proposal for COLA reform. In that sense, Kahn was unsuccessful as an advisor, but he was probably successful in the more limited sense of helping government officials attain greater clarity on economic issues.

Adviser and Activist: Lerner on the Israeli Economy, 1953 and Afterward

Over the period 1953–1956, Lerner served as a resident economic advisor to the State of Israel. For most of this period, Lerner was a member of the Economic Advisory Service (EAS). He also served in 1956 as an advisor to the Finance Ministry. This chapter utilizes the Lerner Papers and the EAS papers in Israel State Archives to document Lerner’s activities and influence in these roles. Lerner analyzed export subsidies, the proposed legislation to establish the Bank of Israel, and the cost of living allowance (CLA system). He also played the unconventional role of critical public intellectual. He contributed to “the economic independence debate” and even launched a campaign to abolish the CLA. He continued his attacks on it after returning to the USA, albeit changing his views in 1974, after the oil price shock and its impact on the Israeli system of wage linkage. We conclude by conjecturing that Lerner’s views emanated from his observations of the operations of the National War Labor Board (1942–1947) and the problem of Federal Reserve independence (1942–1951).

Stabilization via Government Accounting Reform: The 2003 Program and Politicization of Recovery

In this chapter, we deal with the unique characteristics of fiscal policy in Israel, between the stabilization program of 1985 and up to 2007. This policy kept one of the largest and inefficient public sectors and directly led to another “lost decade” between 1995 and 2003 and to the return of the “great recession” in the Israeli economy. The crisis called for a new stabilization plan, which stressed drastic contraction of public spending and of tax burden, parallel to a significant reform in conduct, ethics, and norms of the government. The severity of the crisis allowed massive implementation of the reforms with significant results. However, a few years after its successful implementation and the high growth which was achieved, the central tenets of the plan were abandoned, and the Israeli economy deteriorated again.

Economic Analysis, Advice, and Stabilization, 1972–1992: The Stein-Fischer Nexus

In this chapter we provide an overview of the politico-historic setting and concern with foreign exchange reserves and government finance in Israel that set the tone for the inflationary spiral over the period 1980–1985. We deal with the long run economic background leading up to the crisis of 1984–1985 and 1985 stabilization plan that is starting in 1970 with a return to a “double-digit” inflation that characterized the years 1948–1954, accelerated by OPEC 1 and 2, and hyperinflation. We then focus on the crisis of 1984–1985 and the 1985 stabilization program itself and on the outcome of the stabilization program designed, in the main, by Stein and Fischer, its ostensible success, and the input of Stein and Fischer regarding 1992 US loan guarantees. Throughout the chapter, the emphasis will be on the views of Stein and Fischer and assessments, contemporary and retrospective, of the 1985 stabilization program and its outcome.

Economic Crisis and Policy Prescriptions: The Kalecki and Mikesell Reports, 1950–1952

In early 1950, the left-leaning Israeli government came under attack from opposition parties that denounced its quasi-socialist economic policies. They advocated the abolition of exchange and price controls, along with the introduction of a floating exchange rate. In response, the government turned to the well-known economist, Kalecki, who, in a September 1950 report, recommended not only the retention of exchange controls but of price controls. His advice was at first implemented, although it seems that he was initially approached to strengthen the image of policy decisions that had already been made. Later on, in a politically inspired economic reform, the government distanced itself from his recommendations. By April 1952, Israel’s financial position had deteriorated, due to a short-term foreign currency debt crisis. The US government decided to send an economic expert, Mikesell, to Israel. His main recommendation was the immediate implementation of a detailed and comprehensive foreign exchange budget, albeit over the initial objections of the then Israeli finance minister. This was eventually put into place, enabling continued US support of Israel’s “New Economic Policy,” which distanced the economy from the earlier quasi-socialist policies advocated by Kalecki and the Israeli government itself.

Politicization of Policy Prescriptions: Friedman and Israeli Economic Reform, 1977

In May 1977, a political sea change took place in Israel, when the Likud Bloc replaced the Labor Party that had ruled since 1948. The government invited Friedman to serve as an unofficial economic policy adviser. Friedman visited Israel in July 1977 and proposed a broad package of free market-oriented reforms. This chapter documents Friedman’s views, activities, and influence using a wide range of primary sources. He advocated gradual disinflation, floating the currency, phasing out exchange controls, reducing government expenditures and taxes, privatizing state lands, and abolishing subsidies and directed credit. However, before his visit, Friedman was reported as calling for “a free labor market and a certain amount of unemployment.” This led to opposition attacks; consequently, the government distanced themselves from his views. In October 1977, the government announced an “economic revolution.” It liberalized exchange controls, reduced subsidies and tariffs, and essentially floated the currency. Friedman was not informed of this in advance. Still, he lauded the government for its “courage and wisdom” and predicted a “reduction of inflationary pressures.” But the government again distanced itself from his views. The “revolution” did not succeed; inflation accelerated. Still, parts of his agenda were ultimately implemented by later Israeli governments.