One of the key broad truths — called “stylized facts” in economic jargon — of nations’ long-run growth paths is their steadiness.
Nations’ living standards (as measured by their GDP per capita) tend to rise along uncannily steady trajectories. In the case of the United States, living standards grew at a 2 percent average annual rate between 1890 and 2007, the year before the onset of the Great Recession. Since that recession, the United States has been below its long-run path, with the pandemic only further delaying its return to it.
The underlying determinants of a nation’s long-run growth are its key infrastructures, ranging from physical and human capital (e.g., education) to its legal and bureaucratic systems. A nation’s priorities determine how much of its budget is focused on maintaining and improving these key infrastructures. As these progressively improve over time, productivity rises, bringing up living standards together with it.
Major events may cause a country to fall under the long-run path into a recession, or to rise above it into inflationary periods. Given the short time horizons of democratically elected governments, most of their attention tends toward smoothing out these business cycles and getting reelected. While governments may differ in their approaches to shortening recessions and reducing inflation, they rarely have the bandwidth to focus on the bigger questions regarding infrastructures that affect the height and the slope of the entire path. Consequently, policy changes in these realms tend to be less significant and long-lasting – hence, the steadiness of the long-run paths.
Israel has been beset by major events at a pace and magnitude experienced by few – if any – other countries. Major wars, hyperinflation, and massive waves of immigration increasing the country’s population by several orders of magnitude, have combined to give Israelis a sense of skepticism with regard to the applicability of economic “stylized facts” within the country.
And yet, Israel is no exception to this long-run growth rule – while also being a prime example of how a dramatic shift in national priorities can lead to a sharp pivot in the long-run path.
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