The US economy is soaring. It grew at an annualised 4.9 per cent pace in the third quarter. That followed three quarters where growth exceeded the 2 per cent or so many people see as the long-term speed limit. . . . Meanwhile, Europe is stagnating. . . .
Since the pandemic . . . the two regions have diverged massively. Both recovered better than anyone had expected — but the US much more so than the EU. . . .
Let’s first note that the two have had pretty similar monetary policy. . . . The obvious other suspect is fiscal policy. And here there is a big difference. The next chart shows one measure of fiscal stimulus: the change in the government’s primary (before debt service) deficit in the US and the EU. America’s increase in 2020 was more than 2 percentage points of GDP larger than the EU’s. . . .
Some US policies were more progressive than Europe’s. They focused on unemployment benefits, which were temporarily made very generous, for those who lost their jobs rather than on wage support for those who kept them but were temporarily furloughed. The US also saw significant wage compression as the strong labour market in the recovery raised wages faster at the bottom than at the top. All this, plus the direct cash distributions Washington opted for several times, made for a much larger accumulation of unspent money in the US than in Europe . . .
At least one lesson for policy can be tentatively drawn. It seems clear that the size and nature of Washington’s pandemic fiscal stimulus is still bringing the American economy significant benefits. Despite the chorus of criticism from the pillars of the economic establishment that the fiscal response was too big, that response is still holding up the US economy at no greater inflationary cost than what the EU has experienced.
Source: The Bulwark
