Israel gets American Money to Buy American Weapons

Aside from the politics and the media coverage any economist would say that the deal is a cross subsidy of one’s own industries. I am referring to the announcement that after months of negotiating, the United States and Israel have signed a huge $38 billion deal for military aid.

This is not really aid in the sense that has been understood from previous arrangements and deals. Now the American government is primarily giving the Israel government money to purchase weapons from American companies, a substantial part of which is for the F-35 fighter aircraft.

The previous arrangement permitted Israel to spend 26 percent of the money in Israel on Israeli-made defence products. But that provision is being phased out over the first five years of the deal. Also: 1) Israel can’t lobby Congress for more money unless a war breaks out; 2) funds for missile defence are included in the $38 billion; and 3) Israel can’t use any of the funds for fuel.

So what does this all mean in true economics. First it is an agreement for $3.8 billion per year compared with the previous annual allotment of $3.1 billion. So here Israel gets more money to spend. However this doesn’t necessarily mean that the US is giving more money. Why?

As more money is spent in the USA than previously it means that the US government is getting a larger percent back through taxes. Why? Well the US defence industries receiving the money from Israel are selling goods to Israel. So that means they are making a profit and will pay corporate taxes on each sale.

Also the US defence industries will employ more people on their production lines, thereby reducing unemployment. These workers will also pay income tax. They will also have money to purchase so will pay VAT on goods. So here the US government through taxes could actually get up to 40 percent back of the money it gives to Israel.

This is not the only economic benefit for the US in giving more aid to Israel on condition that Israel spends more in the USA. As Israel is buying weapons that the US buys for its own military it means that there is a longer production run of weapons. No different from any other industry that means that the per unit cost decreases. So the American military will be paying less for their own purchases.

That means that the bottom line of the deal is really a cross subsidy of the American government for its own industries and its own military and a WIN-WIN for all except possibly the Israeli military industry.

Under previous aid arrangements the Israeli military industry would have been able to sell products to the Israeli military paid for by the US government. Now they can’t in accordance with the terms of the agreement. However they can. How?

The Israeli military industry can set up companies in the US and manufacture Israel designed weapons there. This of course is already happening. And of course they will pay corporate taxes to the US government, employ American citizens and so on!

About the Author
Dr Glen Segell is Fellow at the Ezri Center for Iran & Persian Gulf Studies, University of Haifa.
Related Topics
Related Posts