Pethokoukis, Economics, U.S. Economy

The US has more austerity than Europe. So why is America doing OK?

Credit: Capital Economics

Credit: Capital Economics

So which economy in the world is “suffering” most from austerity? As Capital Economics notes, the combination of US tax hikes and spending cuts means that over the next two years the federal budget deficit is expected to fall by 3.6 percentage points as a share of GDP (3.2 percentage points if you add state and local government).

As the above chart shows, the forecasted decline will be bigger than the expected falls in Europe. So why is US growth expected to continue to be OK, while EU is suffering a long recession? Capital Economics:

The big difference, though, is that activity in the private sector in the US is growing by more than in Europe. This explains why US GDP rose at an annualised rate of 2.5% in the first quarter (we think it will eventually be revised up to 2.9%) while euro-zone GDP contracted at an annualised rate of 0.9%.

The US has a fundamentally healthier and more innovative economy than Europe’s. But I would also add the US has the advantage of a more accommodative monetary policy. Again, MKM’s Mike Darda:

Despite the U.S. dramatically outperforming Europe, “hating on” Ben Bernanke/The Fed seems increasingly unpopular in the financial press and on Wall Street with one side of the extreme arguing that the Fed is sowing the seeds of bubbles and inflation and the other arguing that the Fed is simply impotent at the ZLB (the liquidity trap view). However, the data would suggest both views are incorrect.

Tight fiscal policy with reflationary monetary policy would seem to be the optimal policy mix for an environment characterized by high unemployment, high debt but low NGDP growth and inflation. If the choice is between the current policy mix in the U.S. and/or the Eurozone/pre-2013 Japan model of tight money, zero nominal GDP growth, deflation and a chronic debt overhang, one would think the choice is pretty clear

Exactly.

4 thoughts on “The US has more austerity than Europe. So why is America doing OK?

  1. Economic growth is due to economic freedom. Until Europeans can start businesses freely, hire and fire workers freely, compete in the marketplace freely, and reap the rewards of their own efforts, they will not have economic growth. All the talk about austerity or spending is just blather. Probably they believe their own blather which is the root of their problems.

  2. And the US would be doing a lot better yet without obamacare, Dodd–Frank and Sarbanes–Oxley. Washington should repeal legislation in reverse chronological order until the economy picks up.

  3. As Capital Economics notes, the combination of US tax hikes and spending cuts means that over the next two years the federal budget deficit is expected to fall by 3.6 percentage points as a share of GDP“…

    Yeah, it’ll be just like Willy Wonka’s chocolate factory…

    Chris Cox & Bill Archer November 26, 2012 WSJ: Why $16 Trillion Only Hints at the True U.S. Debt

    The actual liabilities of the federal government—including Social Security, Medicare, and federal employees’ future retirement benefits—already exceed $86.8 trillion, or 550% of GDP…

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