When Will They Ever Learn?

By Shlomo Maital  

  Bob Dylan’s song Blowin’ in the Wind, asks:  When will they ever learn?

   Well – when WILL they?  

    After the 2008 global financial collapse, the US and EU poured massive amounts of purchasing power into the system, to bail out failing and failed businesses and banks.  The US provided more, and more prolonged, stimulus than Europe, which quickly embraced ‘austerity’, panicking because of growing levels of public debt.  (The US was not blameless – when Treasury Secretary Paulson let Lehman Bros. go bankrupt, due to personal animosity from his Wall St. days, the fallout was disastrous). 

      A study of the aftermath of 2008 shows this: 

    The Institute of International Finance says austerity probably damages economies trying to recover from the great financial crisis.  Since 2008, GDP growth in the US has been 10% greater than in Europe, the IIF says. In terms of GDP growth per capita, the reduction was 5%. Fiscal tightening in Europe was the main difference. Trend growth in the US was double what it was in Europe following the financial crisis, the IIF says. Prior to 2008, they had been the same.

    So – have they learned?  EU has, perhaps.  Despite the roadblock of Hungary and Poland, threatening a veto to keep the EU from demanding the rule of law in those two ultra-right Presidents Urban and Duda,  the EU will soon inject a massive stimulus package into the 27 EU countries. 

    But the US?   Congress is still haggling over a $900 billion stimulus package, that is probably too little, too late.   Pennsylvania Senator Toomey is a one-man wrecking crew, insisting the legislation halt the Fed from its emergency loan programs.  Looks like a way around Toomey has been found.

     So in 2010-12,  the EU imposed austerity, wrongheadedly.  Now, in late 2020, the Republican-controlled Senate is limiting the Democrats’ ability to help deficit-ridden state budgets and to provide long-term unemployment benefits.  Is this a replay of Senate Majority Leader McConnell’s avowed goal to wreck America, so President Obama would not get a second term? (McConnell failed).

    The macroeconomics here are pretty clear.  The demand side of GDP has four players: people, government, businesses and foreign buyers.  People are spending a lot less,   businesses are not investing, and foreign buyers are not buying much.  That leaves government.  Only government can pour purchasing power into the system and provide CPR to the economy. 

      Rising debt levels?  Sure —  but if the economy continues to stall and decline, the CURRENT debt will be burdensome, while if the economy grows,   rising tax revenues will help pay even higher levels of principal and interest.  Remember, tax revenues rise much faster than the overall economy. 

      Keynes wrote this in 1936 —  but nobody really listened (even the New Deal was a drop in the bucket) and only WWII ended the decade-long Depression. 

     When will they ever learn? 

      The answer, indeed, is blowin’ in the wind.