U.S. and Israeli Elections

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1:02Adam Tooze: Hi, and welcome to Ones and Twos' FP's economics podcast. Every week we take a couple of data points, use them to try to explain the world. I'm Cameron Abadi, FP's deputy editor with you in Berlin, Germany. Joining us as always is FP's economics columnist and Columbia University professor Adam Twos in New York. Hi, Adam. Okay. So a couple of data points for you all. Today in the second half of the show, we're going to be talking about Israel and its politics after its recent election. First, another election that just occurred and that we wanted to talk about. Obviously, the one in the United States, the midterm elections.

1:41Adam Tooze: But first, a quick announcement for everyone. I've mentioned this before, but we are having a live show in Berlin. It's happening on Tuesday, November 10th. That's one week from now. That means it's your last chance to get tickets. We are very excited to see you all. It's at Festseil Kreuzberg in Berlin. Tickets are available at the link in the show notes. Get them while you can. And we hope to see you all there on Tuesday. But as I mentioned, we have a data point for you all. That is 13. That is the number of percentage points by which the electorate, the voting electorate in the United States, has shifted towards Democrats in the midterm elections that just occurred this week.

2:33Cameron Abadi: A political reckoning as Democrats take back control of Congress, delivering a stunning rebuke to President Trump, flipping seats in states that have been...

2:42Adam Tooze: Democrats across the country are celebrating this morning after picking up some major wins in the midterm. It was a landslide victory in the midterm elections. A big defeat, of course, for Donald Trump. Now to put that in some context, the size of that shift is bigger than any such shift in a midterm election since 1974. You know, U.S. political observers use metaphors of waves when it comes to midterm elections and the shifts of the composition of Congress. They were really sort of struggling to capture that in that metaphor, the size of this shift. Tsunami is what was thrown around as a potential size of this wave towards Democrats.

3:29Adam Tooze: And yeah, wherever you look, the kind of significance of this shift is apparent. There were senators elected by Democrats in states ranging from Kansas, where Democrats have not been elected in 100 years, to Texas, a solidly red state for decades. perhaps even Mississippi, a state that no one had on their map as a potential democratic state. And so we'll soon see what exactly the fallout is when it comes to policy, likely to be a lot of gridlock while Donald Trump is still in office for the remaining two years. And yet markets are already reacting with the stock market increasing in the United States.

4:10Adam Tooze: So yeah, we thought we'd try to unpack what exactly the economic significance of all this is. And yeah, Adam, to start off with, what exactly just happened? Obviously, this was a significant political event. Is something of this magnitude possible to emerge from something as mundane as a kind of cost of living issue as Americans seem to have mostly been bothered by right now in the United States? I mean, is this the stuff that political tsunamis are made of? Well, the cost of living issue in the 70s reference is useful in this context in the sense the cost of living issue and the shocks, continuous shocks of price increases and the felt experience of just the exorbitant level of prices has probably

4:54Cameron Abadi: not been as pressing as it is in the current moment in many parts of the US since the 1970s. So at that level, there's a kind of epochal quality to this. And the other thing, Shirley, to say is that nor have we had a government, an administration, and a supportive Congress so blithely refusing to just simply take seriously any of those issues in a meaningful way. And it's that combination, I think, which creates this outcome. It would have been damaging to everyone's sort of self-understanding as a rational political analyst if something like this had not happened. Because how can you have this level of dissatisfaction over prices and price increases and the government committed to protectionism, to starting a war, to incredibly unequal tax breaks, to promoting a growth model that is so K-shaped, that is so promoting of wealth inequality and not get a backlash?

5:56Cameron Abadi: You know, that would have tested the ongoing debate about whether the 90s formula, it's the economy stupid. you know if we had this would really have put a state through the heart of that theory and with garlic on top if if we had not seen this backlash so i agree it's a huge historically anomalous break but the convergence of those two factors a genuine deeply felt sense of a cost of living shock or crisis or sort of perma stress and on the other hand an unprecedentedly solipsistic, self-enclosed, self-celebrating administration that just really doesn't show any sign of getting it. And so at that level, it's a basic kind of check of rationality and a reality test.

6:45Cameron Abadi: And it's mundane at that level, but in the current state of the United States, you know, the mundane confirmation that there still is political gravity is not a mundane experience. It's a huge relief.

6:57Adam Tooze: Yeah, you know, this kind of epochal shift inevitably sparks debates about, yeah, political taxonomies in the United States. And we've talked in the past about new ideological groupings or kind of renewed ideological groupings. you know, when Mamdani was elected mayor of New York, we talked about sewer socialism as a ideological grouping. The term that is now being used to describe a lot of the new senators and governors elected by Democrats in unlikely places is prairie populism. And I'm curious what that term might mean when it comes to economic policy more generally.

7:39Cameron Abadi: Yeah. So the Mamdani effect is real, I think, in the sense that if you look at evidence such as somebody just been circulating a rather good graph, counting the number of times that emails from sitting members of Congress to their constituents mentioned the word affordability, and it shoots through the roof with Mamdani's success in the mayoral election in New York City. So I think that nuts and bolts, what's called this sewer socialism, this delivery-orientated nuts and bolts, everyday social democratic politics has impacted in the US. But going all the way back to the late 19th century, when that model of sewer socialism was pioneered, you also see an alternative brand of radical, challenging, anti-status quo politics, which was populism.

8:31Cameron Abadi: And that came out of the prairie it came out of the west it came out of not the west west california of the midwest of the of the of the prairie states of the agricultural constituency because it was about the way in which the gilded age economy in the united states was rigged in the interests of coastal elites at that point basically new york and the east coast elite the currency system which was the gold standard which enabled a deep connection to the city of london and the flows of capital from europe which had been very important to New York's prosperity in 19th century American development.

9:04Cameron Abadi: And the entire supply chain of agrarian capitalism in the US, which gouged farmers at every single level, starting with the granaries and the mills and the railways, all of which were taking their cut out of the hardened margins of Midwestern farmers who were facing a continuously deflationary price trend with mortgages that didn't adjust, the mortgages they bought the farms and developed the farms with. And that sparked this wave of populism and a popular third party in American politics, People's Party, which in certain parts of the Midwest really attained real power. And North Dakota, I think, is the place where it really makes the big breakthrough.

9:48Cameron Abadi: And that's the echo that's being picked up upon in this sort of talk. It's a little exaggerated because there's a huge difference between present day, you know, consumer orientated cost of living type of politics, and the sort of radicalism, the deep structural changes that late 19th century populists were demanding, who were really challenging the fundamental structures of the American political economy of that moment. We're not in that moment. And I do think that's one of the fundamental questions for the Democrats right now is that coming out of the midterms of 2018, which were also a Democratic break, so they're not on the current scale against the first Trump presidency, there was a real sense that the discourse of American politics shifted.

10:34You've got figures like Jake Sullivan kind of

10:37Cameron Abadi: spiraling to the top of the Democratic pile on an agenda that was an explicit break in neoliberalism. And I don't quite know where that goes right now, whether there is a mood on a large part of the Democratic Party to resume that kind of quite more fundamental questioning of the orthodoxies or whether we take all that for granted now and we're going to just focus on trying to deliver. Tim Wu, also a former member of the Biden administration, was tweeting this morning that the Democrats ought to launch a kind of general affordability agenda in Congress that would center on deregulation and liberalizing markets and competition, not big fiscal policy or really structural challenges, but a series of important fixes to the hugely rigged and unequal system in the US right now.

11:22Cameron Abadi: I think we haven't quite got the bearings yet of what this victory means, which was predicted, but I haven't so far seen on the part of the Democrats a kind of coherent, new, comprehensive agenda, even in the sense of like defining what its limits would be and how far one wants to go emerging at this point. It'll be very, it's very interesting, and that's putting it rather blandly. It's very important that that conversation should start.

11:49Adam Tooze: Yeah, it is hard to put one's finger on also the composition of this new coalition that the Democrats are building, which ranges from, yeah, bringing back certain kinds of working class white voters, but also bringing back young voters, also bringing back minorities that had shifted away. I mean, it really is more than anything, it's seemingly a dismantling of the Republican coalition that Trump had built and now is very quickly overseen a kind of implosion of. But yeah, with that comes a kind of question mark when it comes to the agenda. But polls suggest that one thing that a lot of voters in the United States agree on is a skepticism about artificial intelligence and the role it's playing in the economy, specifically the proliferation of data centers.

12:40Adam Tooze: And that has become an important sector of the economy and one that's increasingly politicized with many of the kind of tech industry leaders shifting their support prominently to the Republicans since the most recent Trump administration took office. So what is the future of AI potentially with this new Democratic Party in Congress?

13:05Cameron Abadi: Yeah, this was quite something to behold, the anxiety running through Wall Street over the last couple of days and kind of climaxing last night about the potential threat to the data center buildout. Because America's, you know, we've spoken about this plenty of times on the show, but America's path to the AI future is very compute heavy. It's all about data center buildouts. And if you look at the states where this is happening, apart from Virginia, Ohio, Pennsylvania, I think the central play is Texas. and there was a lot of big tech money mobilized, I guess, in Ohio as well, I think, against Sherrod Brown on this issue of trying to ensure that a group of AI-friendly politicians were elected.

13:51Cameron Abadi: And on the contrary, then the groundswell of democratic mobilization was around AI and data centers as kind of a bundling issue, right, where it's about local pollution from the noise and everything else. It's about local electricity rates and the impact that these huge consumers have on local energy prices. And it's about AI as AI. And it's about AI as the symbol of an irresponsible, unanswerable kind of oligarchy that just stamps itself on the face of American society. And these were a very powerful combination. And I think Wall Street analysts were counting 40 or 41 kind of local referenda, local motions that are being passed, all of which I think went to the anti-AI side.

14:35Cameron Abadi: And in Texas, we're talking about 60 gigawatts of build out. So an absolutely gigantic build out valued at$200 billion, I think. And now the Democrats have a much more powerful hold on Texas politics than any time recently. And as we know, like in the regional political economy of the United States, Texas and Florida are the two great red state kind of counter examples to the New York, California visions of America's future. And so for this break to happen is really very dramatic. I mean, one shouldn't overstate it in the sense that Texan voters are trying to drag Texas back, perhaps something you might call closer to normality.

15:14Cameron Abadi: They're also voting on the rank misogyny of Texas abortion laws and so on. So there is an urgency, not just for people, single issue voters around AI, but on a broader range of issues to try and stop the onslaught of what one has to describe as far right politics in that crucial state. But yeah, AI is a real flashpoint. And it brings all these things together. And it does form a connection. And it's between this electoral result and the market. So I mean, I'm watching the data all morning, we're recording at 10.20am on Wednesday morning, So the morning after the election, and though the S &P 500 as a whole is doing fine, Tesla has sold off, CoreWeave, all of these cloud companies have sold off quite hard.

16:06Cameron Abadi: Trump's media platforms are down, unsurprisingly. So there does look as though there is a selective shakeout happening across stock that are very exposed on the AI issue, very exposed to this blowback and are in any case over the last couple of months looking increasingly fragile from a financial point of view.

16:26Adam Tooze: Yeah, it'll be interesting to see how their own, that is the AI company's own political interventions will change, whether they'll try to now gain favor with Democrats and with the American public, maybe more broadly, how they'll go about doing so. Because, yeah, as I mentioned, it does seem like they have made their bets in ways that they may now regret. Yes.

16:51Cameron Abadi: And I think there's also now a credibility issue in that they also previously, after all, there's a lot of trolling going on online today. You know, many of these executives were down on one knee during Black Lives Matter, you know, were fully signed up, they said, to the ESG, the environmental, social and governance agenda. And man, did they pivot. And all of a sudden now, you know, the question is, where do they go from here? I mean, presumably somebody like Elon Musk has burned his boat, so there's no way back for him. But what about the other players in this system, Jensen Huangs and so on, that have engaged in truly sycophantic behavior towards the Trump administration?

17:30Cameron Abadi: Anyway, you know, it's not as though the Democratic Party is full of a bunch of, you know, upstanding people who have never engaged in any hypocrisy of their own. That would be absurd. But nevertheless, there is a real credibility issue after all at this point. And as you say, they did make surprisingly large open-ended unhedged bets essentially on Trump dominance.

17:52Adam Tooze: Yeah. Now with Democrats taking control of both houses of Congress, you know, we've talked about how it's not entirely clear what their agenda will be aside from two points, perhaps. One, they promised to address corruption that they claim the Trump administration has been engaging in. And there has been plenty of reporting on that. So we can imagine there will be investigations of various kinds into Trump and the officials around him. But the other point that they emphasize is they want to make, to bring this conversation full circle, life for ordinary Americans more affordable. And how they'll do that, I guess, is still somewhat of an open question.

18:33Adam Tooze: But one way that they could do so, as sometimes been talked about, is finding a way to reduce interest rates on things like mortgages. But, of course, that raised the question of how to go about doing so, what that would look like, whether deficit reduction would be a part of that. That has not really been a part of the campaign. So, yeah, what could that agenda look like? I mean, could interest rates be something that Democrats in Congress now turn their attention to?

19:02Cameron Abadi: I think this is a really interesting question. I was talking about it on the newsletter that I wrote spontaneously this morning. I mean, there's a real tension between kind of projects of trying to address the cost of living crisis through concrete interventions on particular prices and market structure and price gouging on drugs and this kind of thing. microeconomic, sectoral, market policy kind of strategies, and the bigger macroeconomic picture. And of course, Congress doesn't shape that bigger macroeconomic picture, really except through fiscal policy. It doesn't have a direct influence on interest rates.

19:41Cameron Abadi: If it wants to see interest rates come down, the way to do that presumably would be to adopt tough fiscal policy. That was one of the kind of tensions I was pointing to this morning. It doesn't necessarily mean you slash spending, but you would need to raise taxes and you'd need to actually build a coalition that was willing to do that. And there's lots of ways of doing that in a progressive way, but that's not something the Democrats have been keen to do recently, really, is to push redistributional taxes. Or you have to require the Fed or put the Fed in a position where it has no option but to do various, you know, very unconventional intervention, which again is perfectly logical and sensible from a left Keynesian point of view.

20:18Cameron Abadi: But it's a breach of the kind of orthodoxy which the Democrats have embraced all the time outside moments of absolute crisis. So I do think this question of what the agenda of the Democrats is really macroeconomically is quite unclear, because we're clearly no longer in the Larry Summers, Bill Clinton 1990s era. We left that behind in the Biden administration. But what the agenda, what the paradigm now is, I think is very open-ended. Take the issue of AI. One of the effects of the AI boom is to suck foreign money into the American equity markets. It's one of the fundamental ways in which the American balance payments now currently balances.

20:57If that goes away, and there's very good reason

21:00Cameron Abadi: for wanting to embrace that as Americans' future, slow this down, try and close the two legs of the K-shaped economy, the most likely prediction is that the dollar depreciates, the dollar devalues. And again, you'll find people saying, well, that would be great for industrial policy. That's exactly what we need. American producers are more competitive. Who needs tariffs if you have a devaluing dollar? But the dollar is also American purchasing power. And so if the dollar devalues appreciably, seriously, this raises the price of American imports. It raises the cost of buying foreign goods for American consumers.

21:36Cameron Abadi: it isn't a way to increase purchasing power and address the cost of living crisis. It does the opposite. It restricts imports by way of raising the price of foreign goods. Now, this isn't one to one or simple, but there's just a series of tensions here that are not squarely addressed at the current moment. There hasn't been any cause to address them. But I also think there was an agenda around the Biden administration that pretty clearly spelled out some of the trade-offs here. For instance, we would slow down the renewable energy surge in the US because it involved Chinese solar panels, and that wasn't the priority, actually.

22:11Cameron Abadi: So what are the new priorities? What is the new set? If the cost of living is the absolute priority over everything else, then you would think that a radical free trade agenda would be the way to go. But a Congress can't do that without a compliant White House and which Democrat is actually going to run on that, given what we know the Biden administration did, which was to maintain Trump's tariffs from the first administration. And big parts of the Democratic coalition, notably what's left of the blue collar trade unions, are, shall we say, pro tariff, broadly speaking, not Trump's crazy ones, but they're not.

22:43Cameron Abadi: They are not interested in ensuring that America consumers can have the cheapest possible affordable family car. That's not their agenda. So there's a whole series of really quite complicated trade offs here that will have to be faced again. And whereas in the 2010s and the Biden administration, there was this sort of post-neoliberalism momentum of like, okay, this is how we're going to frame this problem. Didn't necessarily resolve all the contradictions. You can't ask for that. But at least there was the energy of wanting to actually face these trade-offs and think hard about them. I don't see that currently.

23:17Cameron Abadi: Other than this, we've got to do something about the cost of living. But what follows them that directly at the macro level with regard to trade, macro finance policy and so on, I don't feel we've really fully spelled out.

23:31Adam Tooze: Yeah, and it's perhaps not going to be addressed until...

23:35Cameron Abadi: Very unappetizing, apart from anything else. It's like these aren't easy trade-offs.

23:40Adam Tooze: Yeah, and it's hard to see what leaders in the Democratic Party would even have the standing to address them head on. Obviously, there will be the presidential primaries that start soon, and that's where the Democrats will inevitably pick a leader for the forthcoming election, and that will become the party's leader going forward. But even then, it's not like presidential campaigns are the basis for the most kind of nuanced policy discussion. So it may be a while yet until these tradeoffs are addressed head on. But yeah, for now, the entire country and I guess the rest of the world as well will be trying to observe what Democrats do when they take office in Congress and how they deal with Trump.

24:24Adam Tooze: Obviously, that will have ramifications for everyone. But for now, we should take a break because we're going to return in a second to talk about Israel.

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26:05Cameron Abadi: Hi, I'm Laura Ross-Broutellum.

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27:14Adam Tooze: And if you don't have eligible insurance or you live outside the United States, you can still get 20 % off your first month. Sign up and get 20 % off at betterhelp.com slash ones twos. That's betterhelp.com slash ones twos. Hi, welcome back. Our next data point is 61. That is the number of seats that represents the majority of the Israeli parliament. After the most recent national election, neither bloc in the israeli parliament has reached that 61 seat threshold the coalition led by current prime minister netanyahu won 53 seats while the opposition bloc won some 48 seats the remaining seats went to arab parties who won a record of 19 seats they are not a member of either of those coalitions and negotiations are underway, though, to see if that 61 seat threshold could be achieved one way or another by some of those parties in those separate blocks.

28:28Adam Tooze: Yeah, as Israel faces this gridlock, it's become clear that markets had been betting on a change of government. Stocks fell sharply, bonds weakened. And yeah, the currency, the shekel lost against the dollar, some of its value. But yeah, more broadly, this is an occasion to consider the state of the Israeli economy more generally. It's been a while since we've discussed it, Adam. And going into this election, it seems like the economic baseline in the country seemed pretty strong. You know, the Bank of Israel said it expects the economy to grow by 5 % next year. That's pretty impressive and, you know, pretty low debt to GDP ratio.

29:18Adam Tooze: So, you know, the country is paralyzed despite all this economic strength in the country. So, yeah, I mean, it seems like an unusual situation. Are there other governments that come to mind as a comparison with a kind of paralyzed state and a kind of strong economy underlying it?

29:34Cameron Abadi: Well, I mean, I think it's fitting and appropriate that we're doing this as a joint segment with the American midterm because the obvious parallel is the United States. And I don't even mean that just simply as sort of a formal comparison, but there's a real connection between the two. I mean, the Israeli economy is driven by fundamentally a tech boom at this point. And obviously the links between Israel and the United States are deep, not just at the level of policy and at the level of subsidy from the US, but also culturally between the universities, between the tech ecosystems, the big AI players in the US all have big presence in Israel and are proud and committed to that.

30:20Cameron Abadi: We've discussed that kind of connection before on the show. And they are together involved in this war against Iran, which is one of the principal disturbing factors in the world economy, which if it has a kind of rationale from Netanyahu's point of view, is hard really to see as a sustainable strategy for Israel's geopolitics going forward. And he's even more absurd and self distracted from the American point of view. So in a sense, they're kind of like, they're joined at the hip. I mean, the Israeli economy is really a remarkable story. So So its current growth rate is 5.6%. The forecast for next year is 7.5%.

31:02Cameron Abadi: So this is extraordinary growth. Since the Hamas attack on Israel of October 2023, and despite Israel's then multi-year project of mass destruction and mass murder, by the October 2026 election, the Tel Aviv stock market gained roughly 130 % compared to only 80 % in Wall Street. And the shekel appreciated by 25%. So if you had bought Israel on the day of the Hamas attack, you would have made out like gangbusters in the interim. It's a truly staggering demonstration, as the United States is in its current moment, that there is simply no correlation between capitalist prosperity and growth, speculative gains, technological progress, and any, I think, conventional understanding of political rationality, geopolitics, sustainable politics, conformity to basic standards of law.

32:00Cameron Abadi: I'm going to say it, human decency. This is a pretty shocking indictment of anyone who comes to the game with a naive assumption that those things go together well. It ain't true. So the short answer is we shouldn't probably see this as a contradiction. This is what a kind of, as the Germans will say, ungehempt, like unfettered kind of techno industrial project looks like. But is it sustainable in the wrong world? Almost certainly not. We'll have lots to say about that, I'm sure. But can it work over the short run? Absolutely it can. And are we in the United States living in a slightly less excessive version of what's going on in Israel?

32:43Cameron Abadi: And in some senses, yes. And our tax dollars, after all, have helped pay for it. Now we're actually involved in a war side by side against Iran. So it's, yeah, that's the obvious analogy. You could think to other cases like Belgium lived for a long time famously without national government. Italy has had a much less successful capitalist experience with very weak governments over long periods of time. And people formulated theories about how not being governed was better. But I just don't think that does it justice. I really do think the kind of, you know, there's that great new grantor title called American Berserk.

33:17Cameron Abadi: Well, I mean, that title goes very well for Israel as well. The kind of Israeli-American berserk, I would think, characterizes our current moment quite well. So I would see those as, and this isn't in the American case for lack of government. This is, you know, this is things playing out and it's not a partisan thing, right? And that's the crucial thing to say, is that if America has enabled this amok kind of behavior on the part of the new government, that started with Biden. And the Democratic Party now in opposition, but now with the majority in Congress, is going to have to do very serious working through about that.

33:52Cameron Abadi: We are just seeing the beginning of it with the election of brave candidates who are willing to actually stand up and say the obvious that America's position with regard to Israel ought really to be untenable. So I would see them as both in the process of very, very dynamic, unstable growth with huge unresolved political questions, which are actually joined together.

34:12Adam Tooze: Interesting. I mean, like, and, you know, narrowly when it comes to this specific election, as I mentioned, you know, it did seem like markets were hoping for a change. I mean, obviously, there's been some market reaction to the lack of clarity coming out of this election. And I'm curious to unpack the perspective of financial markets. I mean, like, what was informing, yeah, those hopes for a change of government? I mean, from the perspective of financial markets, what are the relevant considerations here in this election?

34:47Cameron Abadi: Yes, I think there was, generally speaking, a slight favor in the Israeli markets for Gadi Eisenkot's coalition over Netanyahu. And, you know, on the day of the election results, the index fell by, you know, between two and four percent. And we've seen wobbles in the U.S. market as well this morning. We'll have to see how they develop going forward around the AI stocks. but in the Israeli case I don't think one should exaggerate this I mean what were the factors driving that preference well there was some hope that an Eisenkot led government would aim towards geopolitical de-escalation but really how much room for that maybe on the settler side there was some hope that because of the different composition of the coalition that there would be more concessions but the war with Iran is actually you know has powerful majority backing and the broader escalation of Israeli hostility towards the Palestinians is now a cliche.

35:45Cameron Abadi: I think there's also deep doubt on the part of financial markets about institutional credibility and Netanyahu's utterly ruthless willingness to just put the institutions of the Israeli state and Israeli government through the meat grinder of political opportunism and his own personal political survival is after all remarkable and um what the markets are worried about as they are in the us as well is the role of the central bank which the israeli central bank is a powerful institution is relatively independent netanyahu has shown his willingness to subvert all the other institutions of the israeli state and so there is there's real worry about that i think and then From that follows the same lability, which is that since Netanyahu is always ready to do a deal with the devil, though early in his career, and we'll talk more about this, he had a formidable reputation as a strategist of Israeli finance.

36:43Cameron Abadi: when it comes to actually staying in power and staying out of jail he's a man who will you know will not shrink from any bargain and his coalition partners are not responsible actors by anyone's you know stretch by stretch of anyone's imagination and so that combination of like cynicism on his part and the need to put together small party coalitions with you know radical jewish groups orthodox Jewish groups, leveraging their small stakes of the overall electorate for outsized gain is very worrying from the point of view of anyone interested in the long-run stability of government there. And then finally, there's international isolation that may follow from this, right?

37:23Cameron Abadi: So there's no appetite in either Europe or the United States to take strong action against Israel. I mean, for heaven's sake, how much more evidence do you need of that? They're not on the knife's here. This is not the 1980s when Israel was in desperate trouble and was seriously actually in the doghouse after its assault on Lebanon. We're in a different world from that. Nevertheless, the actions of the Netanyahu government and its broader circle, notably in the West Bank, are beginning to raise heckles. And that's uncomfortable. And of course, Netanyahu will hype this up in various ways, which works politically, but is not music to the ears of the financial markets.

38:02Cameron Abadi: So I think in all of these respects, there's a sort of preference for the same, but just slightly less cynical and slightly less radical and slightly less offensive to global public opinion. And Netanyahu's just personally conflicted because of his legal risks. So that's why I think there's that preference there.

38:24Adam Tooze: Okay, but if we were to take a step back and I guess maybe consider how the Israeli government more generally finances its budgets and how financial markets also play a role there. I was reading about how Israel had come to pay a risk premium, so to speak, on its borrowing. Basically, it had been assessed as a risky borrower because of its geopolitical standing and the possibility of conflict always being on the horizon. I'm curious whether it's still paying this risk premium. and yeah, more generally, what are then the overall options for Israel to finance its budgets going forward?

39:12Cameron Abadi: I mean, the crucial thing to put in the sort of broader historical context here is Israel's trajectory, which in the living memory of the senior leadership in Israel, you know, begins in the 70s and 80s when Israel's situation was truly critical. It was a failing emerging market economy with a hyperinflation rate in serious problems with its major allies in the West, including the Americans during the early 1980s, and basically subject to massive external pressure over that. And part of the strategy that Netanyahu is a key figure in from the late 1990s onwards and the early 2000s is proofing, solidifying Israel's situation so that it's no longer subject to the sorts of pressures that it was then when it desperately needed outside aid.

40:06Cameron Abadi: And that involves a series of compromises, which are worked through at different points, including a massive restructuring of the Israeli state, the privatization, the stripping away of the old welfare promise of the first generation of labor Zionism, the retreat from certain strategic weapons programs to reliance on American kit, buying the submarines from the Germans, focusing on the hardcore. This is also part of the degeneration of Israeli grand strategy as a military power. But in the first instance, it builds this capacity to build a local economy, to become a powerhouse regional tech economy, to build the basis for the Abraham Accords with the super rich Arab states over the head of the local Palestinian problem, which can then be repressed.

40:49Cameron Abadi: And the fiscal side of that is get get your house in order so that you can't have pressure from the outside. So this talk about the risk premium that Israel pays has to be taken with a pinch of salt because it's not the premium it was paying in the 80s and 90s. Its current debt to GDP level is below 70%. So the vast majority of Eurozone members would kill to have Israel's finances. Its GDP per capita, when measured in international PPP terms, is higher than that of Germany at this point. This is a rich society, huge inequalities within Israel, and one with a relatively tight fiscal ship and huge foreign exchange reserves and solid current account surplus.

41:28Cameron Abadi: So the risk premium is there, of course, relative to Germany, but is not the sort of crippling risk that you would assume that Israel would be concerned about. It borrows abroad and it rallies external support because why not? Why not play the brand? right but it's not a it's not a necessity in any way right i mean there are certain pieces of hardware the israelis can't manufacture and the only people that can manufacture them the americans and you need to get in the queue to you know ensure that you get that equipment i don't know when they were shelling gaza really intensively they needed 155 millimeter shells and only the americans had big deposit stocks of those which they were holding in israel that was supposed to go to Ukraine, but they ended up being used by the IDF.

42:13Cameron Abadi: But the problem is not paying for them, right? The Israelis can pay. The problem is, can you get on the list for that kind of manufacturing? So this is not a story really of a precarious financial situation. The story, the persistence of the Israel facing existential threat meme from 50 years ago in the 1970s, when in some senses, that was real into the present day is a well-cultivated ideological tool. It has very little to do with the realities of the current moment, where Israel is a truly affluent, highly advanced economy with huge internal inequality, but nevertheless vast resources, and therefore stretched away from an Egypt or Syria in a way that was not true for the first part of its existence.

43:07Cameron Abadi: So no, risk premium, put it like, I wouldn't worry about it. You've done well if you bought Israeli bonds in 23.

43:15Adam Tooze: Then I'm curious then from a domestic perspective, what exactly is at stake in the composition of the next government that's formed? We've mentioned some of the various parties that could be parts of these coalitions that are trying to be negotiated right now. Ultra-Orthodox parties have been part of the existing Netanyahu government, but may not be part of the next government if the opposition takes power. That raises questions about ultra-Orthodox participation in labor markets, whether they are sufficiently participating, that is to say. The question of whether Arab parties will be part of any such government is also an open question.

44:01Adam Tooze: And I guess I wonder whether that raises questions about distribution, redistribution in the Israeli economy towards Israeli Arab communities. Yeah, generally, what are the kinds of domestic stakes here?

44:12Cameron Abadi: It's super interesting, because, you know, we normalize Israel, and we just treat it like a conventional, I mean, if you look at the GDP numbers, and so on, it's tempted to do that. And it's a long time since I've been in Tel Aviv. but I mean you know that's one world which is very modern very very western facing you might say and then there's a very different Israel I mean broadly speaking pushing 40 percent of the Israeli population does not belong to the mainstream in two very distinct senses so one part 15 heading towards 17 percent of the Israeli population are the so-called Haredi so these are the ultra orthodox jews who you know quite legitimately don't think of their culture as participating really in the zionist project though de facto they have to because you know the place which they live in because of a devout commitment to a certain very orthodox form of judaism is now also the site of the zionist project and they're an extraordinary population because they they have very big families because they live by conventional you know well not conventional but conservative Jewish visions of family life.

45:19Cameron Abadi: Their population growth rate is one of the highest in the world, which is why the population's share is rising so quickly. And yet they're exempt from the norms of Israeli conscription, which is the core of the people's army model. And they demand and have very successfully leveraged their power as Israeli politics has shifted rightwards towards Likud as the anchor of right-wing coalitions, their power goes up to extract fiscal resources for special schools, which don't, however, effectively teach a modern curriculum featuring English and math, but prepare their students overwhelmingly for a religious life.

45:59Cameron Abadi: And according to the IMF numbers, they're one of the most bizarre populations in the world, because whereas the female employment rate amongst the Haredi is over 80%, so high and very comparable with secular Israeli women, the employment rate of men within this community hovers around 50%. So it's kind of a gender inversion because the Hireni men commit themselves to this life of yeshiva and to the study of the Torah and to the religious existence. Without judgment on this choice, it's remarkable to have such a large percentage of your population, and the male part of the population, opting out of modern society on this scale.

46:36Cameron Abadi: It's as though, I don't know, the Amish are industrious. So this is like literally a kind of choice to exit towards bookish learning away from either being soldiers or working. And that has these kind of ripple effects through Israeli society because their young men don't serve, and I guess their young women don't serve either. the Israeli army then when they have a call up has to rely more heavily on reservists and reservists are people say of the age of 30 who are in the workforce who make a very large contribution to GDP in Israel and so you have this huge hit where because you're exempting unproductive young men from military service you're conscripting highly productive you know mid-career adults and the hit to the Israeli economies they're partly the Israeli central bankers calculate.

47:26Cameron Abadi: It's like half percentage of Israeli GDP goes on as a result simply of this disparity. So it's a strategic issue and it's widely understood as such. And this population share on the Jewish side is rapidly increasing, whereas the non-Orthodox Jews have a much more modest population growth. And that's one segment of this excluded population. The other segment, roughly 20%, also rapidly increasing, is the Arab population. And the Arab population, the two blocks now of the Zionist votes have decided, as far as the last time I looked anyway, to not include in their coalition arithmetic. The last government that did in the early 2020s, before the recent Netanyahu coalition came in, actually had a very interesting program, which was to bring one of the Arab parties into government.

48:14Cameron Abadi: And then in the interest of national economic development, but also, of course, convergence between the different communities, a systematic program of investment and education spending for the Arab minority, which is disadvantaged in so many ways, de facto disenfranchised quite a lot of the time, though these voters turned out bravely on a huge scale to vote in this particular election in the face of all sorts of racism and vituperation. And now they're de facto exclusion from the political system. So there was actually a realization on the part of that Israeli coalition to say, well, this is unsustainable, right?

48:49Cameron Abadi: We can't have this segment of the Jewish population opting out of modern history and this large Arab population that's not included. The way to go here is not to try and do deals with the Haredi. The way to go here is actually to build a solid Arab coalition around growth and prosperity on their side. And of course, all of that spending has been axed by the right-wing Netanyahu coalition. They're cynically shifting the spending that was supposed to go into education and investment in Arab communities, into security policy and policing of those Arab communities. So like a switch from investment and growth to coercion.

49:24Cameron Abadi: So, you know, and I think this is, you know, we haven't talked here about the obvious geopolitical questions facing Israel going forward, which it seems resolved to just answer with force or the question of the Palestinian future. But even if we just looked narrowly at these domestic issues, it's profoundly uncertain, because these are the two most rapidly growing parts of the population. Will, within the foreseeable future, exceed half of the population between them? And neither of them is effectively assimilated into the modern political system, except in an extractive way when we're talking about the ultra-Orthodox groups.

50:00Adam Tooze: Yeah, I mean, as you sort of suggested, the two main blocks, when it comes to relations with the rest of the region, seem not to have enormous differences from one another, with perhaps the exception of war with Iran, where, you know, the Netanyahu government seemed more enthusiastic about continuing such a war. But I guess it does merit asking a bit more about what Netanyahu's plans might be if he remains in office right now. It seems like that would be the less likely scenario. But in the kind of waiting days of the campaign, it was, I think, a remarkable intervention he made in an interview on Israeli television, where he said if he remains in office, Netanyahu did, he said that he would prepare Israel to become a bypass economy to deal with what he described as perhaps greater international isolation and sanctions.

51:01Adam Tooze: This was then rebuked by the head of the Israeli Central Bank. But I'm curious what exactly Netanyahu might have meant. I mean, economically, what would it mean to create a bypass economy exactly?

51:16Cameron Abadi: Yes, it's an extraordinary latest stage in Netanyahu's remarkable career, which, as I was saying a minute ago, starts with him in the 90s as this strategist of hardening Israel for the arrival of an unthinkable future, but for which it needs to be prepared. which is the moment where his right-wing vision of Israel's future, his racially exclusionary vision requires Israel to make choices that mean that it will face this moment of truth. And what that initially meant was a pattern that we saw across the world in the 90s and the early 2000s which is so-called self-insurance. In other words, you switch your fiscal politics into austerity mode, you ran a current account surplus, so you run a trade surplus, You accumulate foreign exchange reserves and you build a kind of hard nut capacity that means you can withstand that sternal pressure.

52:09Cameron Abadi: So along with Israel, you might think of China. You might think of Putin's Russia as all following a kind of strategy of this type. Israel, obviously, on a much smaller country, but huge foreign exchange reserves. And the question, of course, is when does this get triggered? and because de facto Israel actually enjoys the connivance and support of Europe and the US, it isn't until the current moment that it has begun to get triggered because the extremity of Netanyahu's policy since October 2023 is really pushing the envelope of what's working. And in September 2025, he came out with this extraordinary statement that Israel needed to prepare to be a super Sparta, which would be a kind of self-contained, hard nut, militarized economy that was able to assert its interests.

53:01Cameron Abadi: Then, of course, things pivoted in its direction. It found that it could manipulate the Trump administration. After all, I think that super Sparta claim came at the moment when they were having their wrists slapped about the attack that actually hit Qatar. And now we've had this bypass thing, which seems to be a kind of idea that somehow Israel's leadership and key parts of its economy can be insulated from external pressure by essentially bypassing into crypto and using various types of fintech, which Israel has huge strengths in to bypass sanctions. And it's a total illusion. And it's no surprise that the responsible financial authorities in Israel said, what the hell are you talking about?

53:48Cameron Abadi: This makes no sense. Because Israel is hugely dependent on the outside world for foreign investment, for markets. This is not an economy that can easily cut itself off. Its exports are 60%, are high tech. Its business R &D is heavily financed from abroad to the tune of about 47%. The venture capital investment in Israel, which drives its tech sector last year, was over 70 % from abroad. The idea that you can bypass this through some Bitcoin crypto wheeze and somehow sneak your way past, international attention is just silly. The calm fact of the matter is, are the numbers that we started with over the period since October 2023.

54:38Cameron Abadi: The Israeli stock market has boomed. Money has flown in. The shekel has been strong. The idea that somehow it's liable to be punished for anything other than the most egregious actions, which somebody might actually finally decide to take criminal action over, it might be a problem for Netanyahu and some of his cronies, but not for Israel as such. So there's a way in which he is dragging Israel into his own maelstrom of increasingly acute legal issues.

55:06Adam Tooze: That's fascinating because it does raise a question of what might be motivating that kind of rhetoric. I mean, in other words, is it, no one's accused Netanyahu of not being shrewd when it comes to politics and his interventions with rhetoric. So it's like, is he fantasizing here about a kind of isolation that some part of him would like? I mean, or -

55:30Cameron Abadi: He's circling the wagons, I think, yeah. I mean, that's surely the, it's kind of banal, but I think that's the core of his politics. I mean, this is a man after all, who rose to national prominence on the back of the heroism of his brother who was killed at Entebbe. Like he's the, you know, the survivor. This is a man whose entire identity is tied up with being a terrorism expert from the nineties onwards. And he lives for this dichotomy of the inside and the outside. And the, and I think, um, that's the game that he's playing. And, you know, in a sense, he's also a victim of his own success, namely once upon a time, perhaps for a beleaguered settler colonial Israeli economy, that might have made some kind of sense, though in fact, it couldn't ever make it work.

56:12Cameron Abadi: But for the incredibly prosperous society that Israel is now, I'm not saying there's some liberal teleology, which means that that coalition of liberal internationally minded Israelis is going to somehow swerve back towards a happy two state solution or something. I think that's 90s talk. We're not in that world. But the scenario that he's painting, I do think, is fantastical. It's certainly not a practical option for the Israeli. And I know, nor is there any, not even remotely, the prospect of that kind of comprehensive sanction. I mean, it may be staggering, but that's Russia's scenario, not Israel's situation.

56:50Adam Tooze: Well, we may or may not know soon what the composition of the Israeli government is or whether there'll be another election there if they can't manage to create a government. But otherwise, yes, we'll be, of course, otherwise be back in your feed soon with new data points.

57:12Adam Tooze: Ones and Twos is written and edited by Adam and me and produced by Claudia Tatey. The show is made possible through the support of foreign policy readers and Ones and Twos listeners. As always, we love getting listener feedback. You can leave voice messages on the Ones and Twos homepage on foreignpolicy.com or email us, that's podcasts at foreignpolicy.com, or you can tweet us, that's at onesandtwospod. I'm Cameron Abadi. Thank you very much for listening, and we'll be back in your feed next week.

57:57Adam Tooze: The world at this moment is more fractured than it's been in decades. More wars.

58:03Cameron Abadi: Iran will not have a nuclear weapon.

58:05Adam Tooze: More extremism. Germany could soon have a far-right political party running one of its regional... And deeper disagreements on a range of issues. On Season 3 of Counterpoint, we get to the heart of those disagreements with a series of debates. On each episode, two of the smartest people in their field face off over one question. Counterpoint is a production of Forum Policy Magazine in partnership with the Doha Forum.