Normative Narratives

Economic Outlook: America doing “The Least Worst Among Major Economies”

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The recession has been over in America for some time now, since about June 2009. However, lackluster growth and high unemployment (7.9% as of October 2012) has the U.S. in what is sometimes referred to as a “growth recession”. Although GDP growth is positive, so the economy is not technically in a recession, certain indicators have not returned to their pre-recession levels.

However, the U.S. is doing far better than the EU, which has by some estimates fallen into a “double-dip recession”. This is probably due to the constraints on monetary policy, forcing countries to pursue austerity to get ECB financing for their debt even though it is counterproductive in terms of growth and therefore debt/GDP ratio. Unemployment is much higher in the EU as well, above 11% for the region and as high as 25% in Spain and Greece.

There are a few reasons why the U.S. is doing so much better. For one, “Quantitative Easing” helped keep markets liquid despite a lack of private capital (as evidenced by the zero bound liquidity crisis). Printing money has not caused the dollar to inflate, nor driven interest rates up. Also, Obama’s stimulus package, often talked about as a failure, almost certainly prevented the recession from being worse. Perhaps it was inadequate in size, or money was not spent as efficiently as possible, but it was almost assuredly better than doing nothing or cutting important programs. If the U.S. can avoid the fiscal cliff, perhaps more stimulus spending will help bolster economic growth and further reduce unemployment.

Euro countries cannot print their own money, so they must borrow externally to keep their economies running. But nobody wants to lend to Euro countries right now, understandably, because they fear default. Both EU countries and the U.S. have high debt/GDP ratios, but only EU countries which cannot print their own money face the high borrowing costs that make this debt “unsustainable”. Recently, the ECB has signaled a willingness to engage in its own “Quantitative Easing” by buying unlimited amounts of Euro country debt at lower rates. But in order to unlock this financing, the countries must pass unpopular and economically unsound austerity policies.

So while things are not all sunshine and rainbows here in the U.S., you need to look no further than the Euro zone to see how bad things really could’ve gotten here had Ben Bernanke and Barack Obama listened to the tight monetary / fiscal policy people following the Great Recession. We are not out of the woods yet, with much riding on the so called “fiscal cliff” negotiations, however “America is doing the least worst among major economies”




One thought on “Economic Outlook: America doing “The Least Worst Among Major Economies”

  1. What is this “fiscal cliff” I’ve been hearing about?


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