Economy

America Did Progressive Economic Policy Better Than Europe And Got A Better Recovery

While America’s recovery from the 2008 recession has hardly been booming — economic growth remains sluggish and unemployment is still a discouragingly high 7.8 percent — it’s actually been better than Europe’s. “The economy of the European Union will shrink by 0.2 percent this year, according to the International Monetary Fund. It is smaller than it was five years ago, while the American economy is 2.9 percent bigger,” noted New York Times reporter Eduardo Porter. Even two of Europe’s most impressive economies, Germany and Austria, are predicted to grow at half the U.S. rate over the next two years.

More strikingly, for all the stereotypes of Europe as a liberal haven, the United States actually hewed closer to the activist, Keynesian responses advocated by the American left-wing than did European policy makers:

Germany’s insistence that indebted Mediterranean countries cut government spending deepened recessions in those nations. […]

[The United States Federal Reserve was] far more aggressive than the European Central Bank, quicker to drop interest rates to zero and pump money into the economy, buying government debt and other bonds. Fiscal stimulus — an initial $800 billion package in 2009 followed by about $600 billion in payroll tax cuts and other efforts — was bigger and more sustained than in other advanced countries. Banks in the United States were forced to raise billions in new capital, which allowed them to cope with the turbulent financial markets better than their European peers. […]

Today, most economists say they believe that these policies provided vital support to the economy. In its most recent World Economic Outlook, published this month, the I.M.F. acknowledged that the fiscal stimulus was probably much more effective at bolstering growth than it had previously allowed.

While the sample size of developed western countries is small, comparing the different stimulus packages as a share of the economy with how much economic growth followed produces a positive correlation.

Of course, the effects of the 2008 crash were not distributed evenly across the international stage, and a few countries have bounced back faster than the United States. But those nations tend to be outliers in terms of their banking system or their reliance on exports. The Times article cites recent work by economists Carmen Reinhart and Kenneth Rogoff, which attempts to disentangle economies that suffered a systemic financial crisis from ones that merely suffered a boderline crisis. Under that apples-to-apples comparison, America’s per capita GDP has done noticeably better.

Higher economic growth does not necessarily translate directly into higher job growth, and as Porter also observes, one area where the United States has generally underperformed Europe is employment. But that’s largely because Europe has stronger unions, more regulations making it harder to fire workers, and because several European countries subsidize wages or subsidize companies to encourage them to keep workers on — hardly approaches advocated by American critics of left-wing economic policy.

Generally speaking, while the United States’ policy response to the recession was a watered-down version of what left-wing economists and advocates preferred, it came closer to meeting that model than the European response — which hewed closer to the right-wing austerity model. And since then, the U.S. recovery has noticeably outperformed Europe’s.