Another ancient model, which was last put into practice by Herbert Hoover after the 1929 Wall Street Crash, holds that an economy should be punished for its excesses. Hoover’s fiscal contraction turned the stock market crash into the Great Depression. George Osborne, the UK chancellor after 2010, and the Tea Party of Republican populists, which took control of Congress the same year, revived that old saw. The dampening effects of Osborne’s policy of “expansionary austerity” helped pave the way for the Leave vote in the 2016 Brexit referendum. Washington’s fiscal gridlock helped tee-up Donald Trump’s victory in the US presidential election later that year.
Yet the hubris persists. One of Trump’s advisers is Arthur Laffer, whose wife famously goes on long runs “because it’s the only way I can stay married to a lunatic”. Trump’s $1.6tn tax cut was the wrong medicine for an economy suffering from low investment. The tax cut has neither paid for itself, as Laffer predicted, nor lifted the US growth rate. With interest rates so low, it would be the ideal time to modernise America’s infrastructure. As Blanchflower quips, America’s failure to do so is the equivalent of leaving a trillion dollar note on the sidewalk.