Thursday, January 3, 2008

Incentives Count-Even for Palestinians

"Western financial aid to the Palestinians has, I showed last week, the perverse and counterintuitive effect of increasing their rate of homicides, including terrorist ones. ... [T]he late Lord Bauer and others have noted, foreign aid does not work. It corrupts and distorts and economy; and the greater the amounts involved, the greater the damage. ... Indeed, the Palestinian Authority offers a textbook example of how to ruin an economy by smothering it under well-intentioned but misguided donations. The $7.4 billion recently pledged to it for the 2008-10 period will further exacerbate the damage. .. To see why, consider the two models, hardship v. exhiliration, that explain Palestinian extremism and violence. The hardship model, subscribed to by all Western states, attributes Palestinian actions to poverty, isolation, Israeli roadblocks, the lack of a state, etc.. ... The exhiliration model turns the Abbas logic on its head: the absence of despair and overwhelming hope, in fact, feed extremism. ... Conversely, when Palestinians cannot see a way forward against Israel, they devote themselves to the more mundane tasks of earning a living and educating their children. Note that the Palestinian economy peaked in 1992, just as, post-Soviet Union and post-Kuwait war, hopes bottomed out to eliminate Israel. ... Palestinians must experience the bitter crucible of defeat before they will drop their foul goal of eliminating their Israeli neighbor and begin to build their own economy, polity, society and culture. No short-cut to this happy outcome exists", Daniel Pipes at, 27 December 2007.

I agree. Similarly, major US financial institutions must fail by the dozens before they will change their lending and borrowing practices. As long as they have Helicopter Ben to fall back on, they will continue in their profligate ways. The Fed "corrupts and distorts" our economy, just as foreign aid distorts the Palestinian economy.

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