If you're looking to explain how a man like Donald Trump came to occupy the most important job in the world, you have to also consider the bull market of the past eight years.
Both Mr. Trump and the S&P 500 owe their ascent to decisions made during the depths of the financial crisis. That was when policy makers decided to put helping Wall Street ahead of helping Main Street.
The choice seemed wise at the time. It has, however, resulted in a series of unintended consequences.
One is a stock market that now looks dangerously frothy. Another is widespread anger among voters. Yet another is a U.S. president who preaches a particularly nasty form of populist nationalism.
Canadians who want to avoid following a similar path should consider how we will conduct ourselves if – perish the thought – our own housing market ever comes crashing down.
We can learn a lot from the U.S. drama, which began in 2007 when housing prices collapsed and economic growth nose-dived. As the downturn picked up speed, policy makers mulled two options. One was to spur growth by using fiscal policy – in simple terms, spending more. The other was to employ monetary policy – in other words, lowering interest rates.
Policy makers and academics are generally dismissive of fiscal stimulus, at least as a first resort. It's too easy for governments to waste money on politically motivated programs. Even if good projects are available, it takes a long time to actually approve budgets and deploy cash.
Monetary policy seems like a much better notion. For one thing, it's fast: Central banks can slash interest rates overnight. As rates tumble, financial assets such as stocks and bonds become instantly more valuable. Wall Street jumps and, in theory, soaring asset prices then encourage more spending and more investment in the broad economy.
In keeping with that thinking, the Federal Reserve rushed to lower rates when the financial crisis hit. The cuts helped, but only to a degree. By the end of 2008, the key federal funds rate was touching zero. At that point, conventional monetary policy had exhausted itself because rates can't be cut significantly below zero.
In a perfect world, the job of boosting the sagging economy should then have passed to fiscal stimulus. So it did, but not to the level that was warranted. The American Recovery and Reinvestment Act (ARRA) took effect in early 2009 and deployed nearly $800-billion (U.S.) to help boost the economy.
Set against the biggest downturn since the Great Depression, the stimulus simply wasn't enough. Christina Romer, chairwoman of the Council of Economic Advisers, had originally calculated that at least $1.2-trillion was needed to fill the hole left by the recession. Her math was rejected on political grounds. White House strategists figured Congressional Republicans would never approve such a massive dollop of spending.
But Dr. Romer wasn't alone in thinking that $800-billion fell short of what was needed. Joseph Stiglitz, a Nobel laureate in economics, called for $1-trillion in stimulus. Paul Krugman, another Nobel laureate, calculated that, at best, the ARRA would reduce unemployment only to 7.3 per cent – a level still far above full employment. He pointed out that critics could easily claim that such a mediocre result qualified as a failure.
That, in fact, was pretty much what happened. Inadequate fiscal stimulus helped to ensure that the recovery was slow and grudging, with lingering high levels of unemployment that took years to erode.
Meanwhile, record-low interest rates were having their effect, too. Dwindling yields on bonds and savings accounts pushed investors toward shares, setting off the massive bull run of the past few years. In a zero-rate world, there was simply no alternative to stocks.
No wonder working-class Americans became frustrated. They were forced to compete for scarce jobs in an economy that was operating below potential. In contrast, people with significant financial assets made out like bandits as the value of their stocks soared.
To make all of this even more galling, policy makers rushed to the aid of big banks. They saved General Motors and Chrysler from collapse, and they bailed out American International Group, the huge insurer.
To be sure, all those corporate rescue missions helped prevent the financial crisis from spreading even further. But average Americans had to wonder why so much aid was lavished on banks, insurers and auto makers when so little went to homeowners and other little people.
The contrast between a soaring stock market and a lacklustre real economy created an environment that was ideal for the rise of a politician like Mr. Trump. His policies may not be coherent but they speak to Americans' sense that ordinary people have gotten a raw deal in recent years. There's justice in that complaint.
What lessons should Canada take from the U.S. experience? One conclusion is that monetary policy may be less powerful than we thought in a serious downturn. Low rates can send asset prices higher. It's not clear, though, if they can restore a woeful economy to health.
Even more important, we should learn that it's vital to ensure that economic policies benefit all sectors of society. We shouldn't shy away from fiscal stimulus in emergencies, and we should deploy it in a fashion that transparently helps households. If the United States had followed that path, its political scene would look far different today.