‘In the long run, we are all dead’
The US economy had always been the holder of the lantern of capitalism, arguing for free markets and free trade, where deregulation and innovation are the main engines driving growth.
The system had been simple in its premise, if a company is financially or managerially inefficient, it will be forced outside the market through illiquidity and bankruptcy.
However, the severity of the Great Recession since 2008 forced the US government to acknowledge the social as well as the contagion issues, and thus, was forced to announce the biggest expansion of its federal power since the Great Depression. An expansion that had surely made the US closer to the socialist model rather than the animal spirits of a market economy!
After the onset of the financial crisis, the Troubled Asset Relief Program (TARP) was approved, allowing the US Treasury department to bail out banks and financial institutions via the purchase of troubled assets and preferred stocks as well as providing loans for up to $700 billion.
Heavyweights such as Citigroup, Goldman Sachs, Wells Fargo and Morgan Stanley were as such recapitalized by taxpayers’ money.
Various tax cuts coupled with an extension of the Bush Tax Cuts that benefited companies and households for a total of $150 billion were also included.
In addition, the Federal Deposit Insurance Cooperation (FDIC) temporarily raised the ceiling on deposit insurance from $100, 000 to $250,000, which limited the risk of massive runs on bank deposits.
On the employment front, the government has repeatedly extended the unemployment benefits for 1.3 million Americans that last for a maximum of 99 weeks.
Interestingly, the US Federal Reserve’s balance sheet has also been inflated by more than $3 trillion of printed money to assist ailing financial institutions and to inject liquidity.
In a nutshell, the US government have intervened in every market and sector, increasing its debt stock close to $17 trillion to avoid the ill fate that befell the world’s largest economy during the 1930s.
Obviously, the rules of capitalism do not apply when the social costs are too much to bear and it seems the three branches of government, namely the legislative, judicial and executive, believed in such direction that eventually stretched fiscal and monetary policies into unchartered territories.
The above-mentioned leads me to say that what the Saudi government did during the last three years, notably the royal decrees announced in February and March 2011, was in line with a trend of government support and intervention, especially for those countries that had the finances.
Drawing parallels between the Kingdom and the US, the measures that amounted to around $110 billion targeted the infrastructure, housing and labor sectors, reflecting an awareness of the important role of a government that accounts for 65 percent of nominal GDP and is the largest employer of Saudi nationals.
Surely, there are a multitude of differences between the two countries in terms of size, economic base and political structure.
Yet, it is clear that both heeded the advice of John Maynard Keynes, the founding father of modern macroeconomics, which necessitated proactive government support that reduces the severity and length of business cycles.
Markets will not adjust on their own during crisis, with businesses retrenching and people unwilling to spend and if we bet that they do, Keynes underscored the fact that “In the long-run, We are all dead”.
— Tamer El Zayat is a senior economist at the National Commercial Bank.