liquidity trap scenario would tend to generate higher inflation without significant reductions in unemployment if the structural impediments scenario were true. conversely, policies that are optimal for the structural impediments scenario would leave the economy unnecessarily mired in depression and deflation if we were actually in the liquidity trap scenario. a middle ground proposal fortunately, between these two extreme scenarios, there is a robust middle ground policy approach. the fed could sharpen its forward guidance in two directions by implementing a state - contingent policy. the first part of such a policy would be to communicate that we will keep the funds rate at exceptionally low levels as long as unemployment is somewhat above its natural rate. the second part of the policy is to have an essential safeguard – that is, a commitment to pull back on accommodation if inflation rises above a particular threshold. this inflation safeguard would insure us against the risks that the supply constraints central to the structural impediments scenario are stronger than i think. rates would remain low as long as the conditions were unmet. furthermore, i believe the inflation - safeguard threshold needs to be above our current 2 percent inflation objective – perhaps something like 3 percent. now, the “ 3 percent inflation ” number may seem shocking coming from a conservative central banker. however, as kenneth rogoff recently wrote in a financial times piece, “ any inflation above 2 percent may seem anathema to those who still remember the anti - inflation wars of the 1970s and 1980s, but a once - in - 75 - year crisis calls for outside - the - box measures. ” 5 i agree wholeheartedly with professor rogoff. and actually, this middle ground policy guidance is not as out - of - the box as one might think. importantly, it is consistent with the most recent liquidity trap research, which shows that improved economic performance during a liquidity trap requires the central bank, if necessary, to allow inflation to run higher than its target for some time over the medium term. such policies can generate the above - trend growth necessary to reduce unemployment and return overall economic activity to its productive potential. in fact, i have seen model simulation results that suggest to me that core inflation is unlikely to rise as high as 3 percent under such a policy. see eggertsson and woodford ( 2003 ) ; krugman ( 1998 ) ; and werning ( 2011 ). rogoff ( 2011 ). bis central bankers ’ speeches but suppose the structural imp

need to keep budget deficits small, and we need to keep growing. government spending as a share of gdp in israel is still very high by international standards, and needs to be reduced. tax rates should continue to decline, as already planned. it is possible to do all that while leaving room in the budget to increase social and other essential government spending. we can help alleviate poverty in the short run by restoring some of the cuts in welfare spending, particularly for the elderly and for the disabled, which were undertaken to get us out of economic crisis three years ago. but in doing so, we need to maintain and strengthen incentives to work for those able to do so. in the long run, the best way to improve the welfare of the poor is through growth. and in the long run, growth comes primarily through technical progress, through improvements in knowledge and the ability to apply that knowledge to production. that is obvious in israel, where the high - tech sector has played such a prominent role in our growth. here is where higher education and the universities come in. the creation of the hebrew university is in many ways a miracle. it was no small matter to establish a university that meets international standards in a community as small as that of the yishuv in palestine, as far as it then was from the centers of academic life. idealism, zionism, and – sadly – the destruction of the jewish communities in europe, helped strengthen the university in the pre - and post - world war ii periods. it is also no small matter to have established a system of higher education as good as that in israel. but the university system is under serious strain. at one time almost all israelis who went abroad for ph. d's returned. now most do not. that is partly a matter of relative salaries, it is also a matter of the unavailability of positions. if the universities are to remain strong, indeed to become stronger, and to help keep israel at the scientific frontier, they need more money. that money does not have to come from the government. some of it can come from the licensing and sale of intellectual property, an approach in which the hebrew university has been very successful. but that will not be enough. to strengthen the universities, it will sooner or later be necessary to charge more to the students receiving university education. that can be done without compromising the right to a higher education of any qualifying student, for instance through some variant of the australian plan which provides