TFF Associates & Themes Blog

By Jonathan Power

Donald Trump is changing the right wing’s economic spots. He is doing what Franklin Roosevelt did at the time of the Great Depression by increasing government spending – although it was the rearmament brought on by entering World War 2 that was an even more important factor in lifting America out of the doldrums.

He is following what Hitler did so successfully before World War 2 when he rebuilt Germany’s economic strength with autobahns and industrial subsidies (not rearmament in the beginning, as is often said). He is walking in the footsteps of President Richard Nixon who when he changed course with a new economic policy said, “We are all Keynesians now”.

John Maynard Keynes was the greatest economist who ever lived.

For reasons that were shameful, politicians have not listened to his advice as often as they should. The Germans, with their urge to austerity, have gone the other way, carrying (or pushing) nearly every European state with them, apart from Poland and Sweden which did not follow the herd and now have the best economic growth record of the last few years.

But Obama has certainly been Keynesian. Inheriting an economy totally messed up by President George W. Bush and the collapse of the big bank, Lehman Brothers, he set about being a hands-on Keynesian.

He has achieved a lot although he would have achieved a lot more if his ambitious spending plans hadn’t been constantly opposed and thwarted by the Republicans in Congress. The US in recent years has by the year outshone the Europeans in economic development, apart from Sweden and Poland.

It is ironic that Trump wants to follow in the footsteps of Obama rather than the Congressional Republicans. He wants to prime the pump even more with a massive investment in infrastructure. Even building his “wall” (now to be a fence) on the border with Mexico will produce plenty of jobs! The Republicans will be compelled to support him.

What will the Europeans now do – refute him or emulate him?

Mrs Angela Merkel is holding firm, even as I write chiding Greece to continue with its debilitating austerity program. Germany with its amazing successfully exports can afford to make big mistakes by imposing austerity at home.

Other, less successful, economies can’t. Most economists agree on this. Most politicians including the top echelon of the European Commission have ignored their advice. Why did the politicians in power all over Europe do this? No one seems to have a satisfactory explanation. But, like lemmings, they took Europe over the cliff. Not even Obama could persuade them to turn back.

Austerity, a profoundly false concept, argues the Nobel Prize winner for economics in the New Statesman magazine, “has been pushed by politicians who have frightened people – orchestrated fear – with the idea that the economy could not but collapse under the burden of public debt…..Austerity in the days of the Great Depression could do little, since a reduction of public expenditure adds to the inadequacy of private incomes and market demands, thereby tending to put even more people out of work.

Keynes in 1936 with his book “General Theory” ushered in the basic understanding that demand is important as a determinant of economic activity, and that expanding rather than cutting public expenditure may do a much better job of expanding employment and activity in an economy with unused capacity and idle labour.”

In Europe over the last few years the austerity policy did not help in the announced objective of reducing the ratio of debt to GDP (national income), indeed, sometimes quite the contrary.

Neither was it necessary in order to get necessary reforms such as longer working hours in some countries, raising the retirement age in all and the elimination of institutional rigidities such as labour markets in order to impose austerity.

These are quite separate things from the policies of austerity but politicians have mixed them up. Hence, for example, they have pushed in Greece and a number of other countries for pensions to be reduced rather than encouraging people to work more years. (Indeed that would help in other ways- by reducing the demand for immigrants.)

At last, after causing enormous unnecessary damage to countless people’s lives, European leaders, eyes slowly opening, have started to change their policies. They have begun to pursue a hybrid policy of somewhat weakened fiscal austerity with monetary expansion, thanks in part to the vision of Mario Draghi, president of the European Central Bank, who has pumped trillions of euros into the economy.

Do policy makers understand that if they engineer rapid economic growth they will cut the deficits they worry about? It seems not, again with the exception of Sweden and Poland. Memories are short.

Presidents Bill Clinton and Obama did just this. Donald Trump is going to do the same.

Copyright: Jonathan Power