France, Germany, and most European nations are pulling out of the global recession faster than the U.S. Euro-zone GDP is down 0.4 percent: French and German GDP measures are up 1.3 percent and 1.4 percent, respectively. Sadly, it looks as if the U.S. economy is flagging: U.S. GDP is down a full one percent and leading indicators — like consumer confidence — are showing weakness.
What does Europe have that we don’t have? Aggregate demand.
The first reason Europe is doing better: Unemployed Europeans have more buying power.
Although unemployment rates are still high in Europe (like in the U.S., they have the highest levels in decades), their unemployment insurance — and other forms of social support — are more generous and help boost consumer spending when consumer spending needs the most boosting.
It’s shocking that only about a third of people unemployed in the United States are eligible for Unemployment Index benefits. And the average weekly unemployment benefit in the U.S. is around $300. The 2009 stimulus bill temporarily increases payments by $25. But that doesn’t go very far when the average weekly wage is over $800.
The second reason is that European government spending was bolder and quicker. Cash-for-clunkers programs were adopted early in Germany and France. Looks like the US Cash for Clunkers boosted auto sales by 2.4 percent last month.
But the mother of all reasons the Europeans are doing better is that they don’t use voluntary, individual financial accounts to pay for retirement and college education like we Americans do. They use mandatory universal programs. What is the unintended result? The recession wiped out many American’s retirement and college funds so Americans, unlike the Europeans, are curbing spending now to build up that savings.
Because the micro isn’t the macro, this private virtue turns into a public vice: High savings rates hurt aggregate demand and prolong the recession.
8 Responses to What Does Europe Have That We Don’t?
crunchycon - August 18, 2009 at 9:37 am
How simplistic. European leaders have repeatedly urged Obama not to spend so much, not to put the huge initiatives into effect, not to increase the country’s debt so rapidly and dramatically. I suppose that their (European) frugality had NOTHING to do with their faster recovery…
22235928 - August 18, 2009 at 9:53 am
This article is flagrant in its foolishness. Once again, we’ve got a pointy-headed academic, probably with no real-world experience telling the great unwashed public that Europe is just plain better; that if we would do like they do, everything would be a utopia, even though thoughtful, common sense folks know that no such place exists. We are in this fiscal mess for one very simple reason – we spend too much money as individuals and as a nation. The answers are not additional government spending, something the author seems to be advocating (surprise, surprise). The best solution in my real-world opinion would be to: expell all sitting members of the US Congress who’ve participated in this spending free-for-all, cutting the federal and state bureaucracies to half their present levels, freeze government spending at 2005 levels, start rolling back the areas of the US budget that are 1) not constitutionally supported, and 2) are the biggest drains on the national budget. Then cut corporate tax rates to match those of the lowest nations in the world (that incidently are enjoying significant business growth). Last, cut individual tax rates on the state and local level. Finally, don’t pay one dime of support through any social program to any individual capable of working a job.
jms948 - August 18, 2009 at 10:14 am
It’s simply impossible for me to respond to this woman without using nasty, negative terms.It seems to me that there are a (large) number of people in this country who want to see our Republic go down the tubes. I sincerely believe Ghilarducci to be one of those people. jms–H.R.I.M.
kathden - August 18, 2009 at 11:20 am
The responses so far are good examples of ignoratio elenchi, missing the point of the argument. The blog asks a pretty narrowly drawn comparative question about how rapidly the US and Germany and France are pulling out of the recession. Undoubtedly there are other factors at work than the buying power of the unemployed, but every economist knows that this can have more than a little significance. Only one of the three responders think that thinking about this requires anything other than insults, and the one who has more to say gives us normative political and constitutional theory rather than factual and causal considerations. When you have nothing to say, argue from very large principles!
robertrashton - August 18, 2009 at 11:43 am
I am disappointed in the opinions expressed in response to this article (although early posters do tend to be knee-jerkers). There is not factual problem with the author’s argument, and right-wingers appear to be resorting to ad hominem attacks on her patriotism and intelligence. “Crunchycon” calls her argument simplistic, while “22235928″ argues it is overly complicated, and the reason ofr our economic difficulties if “very simple.” (The author, of course, published in her own name: the scabrous right wing hides behind anonymity.)It seems to me that the point of this rather lucid piece is not to assign blame for the current economic situation, but to point out that in consumer-driven economies a wealthier consumer base is going to help pull the economy out of the basement faster. Not a brilliant, but nonetheless important, observation.Upon clse reading “jms948″, there doesn’t appear to be any comment one way or the other about the American form of government, although I’d happily point out that the current recession has deep roots in the anti-regulatory attitude of the Bush oligarchy. So reassuring that democracy has finally returned our republic to us.
crunchycon - August 18, 2009 at 12:07 pm
robert — you are free, as a liberal, to post under your name without fear of backlash at your institution, but those of use who fall anywhere right of center (and even somewhat left of center) cannot. I listen to liberal diatribes in my department daily, with the right being trashed verbally, continually, and knee-jerkily.
mivail - August 18, 2009 at 1:02 pm
The original post was correct; the weakness of American aggregate demand is an important reason that our recovery is more sluggish than Europe. Governments do not operate like personal checking accounts. Those who seem to find so much objectionable in her post might should consider consulting a basic macreconomics textbook before they start insulting people and pontificating about things they evidently know little about.
goxewu - August 19, 2009 at 10:28 pm
Irrelevant introduction: What’s with all the eight-digit pseudonyms? Did CompuServe come back from the dead, or are all the holders of them doing time with Bernie Madoff? Yes, “goxewu” is nonsensical (it’s simply the wiggly letters that were in the verification box when I registered), but at least it’s word and a serendipitously memorable one at that (“Goxy Woo”). Anyway, as to 22235928: “Expell [sic] all sitting members of the US Congress who’ve participated in this spending free-for-all.” O.K., as long as that includes anybody who voted for that useless $2 trillion war in Iraq.”Cutting the federal and state bureaucracies to half their present levels.” Does this halving (as opposed to, say, cutting by 20 percent, or three-quarters, etc.) come out of thin air, is it sheer rhetorical flourish, or does it come from some study that puts the needed cuts right at 50 percent? If it’s the last, then O.K., too, as long as those “bureaucracies” include the Pentagon, faith-based initiatives, trade missions, the DEA, censors at the FCC, and their imitators at the state level, especially police bureaucracies concerned with “vice.”"Freeze government spending at 2005 levels, start rolling back the areas of the US budget that are 1) not constitutionally supported, and 2) are the biggest drains on the national budget.” Well, since “constitutionally supported” includes all legislation not deemed by an appropriate court to be unconstitutional and all court decisions currently in effect in defining constitutionality, (1) is more or less meaningless. That is, unless 22235928 wants to invoke the Founding Fathers, “original intent” and perhaps African-Americans being counted as three-fifths of a person. (2), of course, is rather subjective; I mean, any expense on the war in Iraq, or the more-than-half (!) of the budget of the Afghani government that the U.S. supplies, is to me a “drain on the national budget.”"Then cut corporate tax rates to match those of the lowest nations in the world (that incidently are enjoying significant business growth).” This is actually pretty clever, if syntax-challenged (what exactly does “the lowest nations in the world” mean?). Those “low nations” with “significant business growth” don’t include many developed Western countries, do they? I’d guess many of them are the “nations” equivalents of mail drops, i.e., offshore tax havens.”Last, cut individual tax rates on the state and local level.” Isn’t this a matter for the states? Some states need more, or at least to maintain current levels (e.g., California), and some don’t even have state income taxes to cut. And cities with municipal income taxes, such as New York, are highly complex entities, as New York’s billionaire, free-enterpriser mayor will gladly tell you.”Finally, don’t pay one dime of support through any social program to any individual capable of working a job.” How about, as well, not giving one dime in tax breaks–or maybe even penalizing–any business capable of supplying jobs to the job market but which outsources them or slashes them instead in order to a) pump up the stock price and/or to compensate its CEOs with tens of millions of dollars? (The head of one major health insurer gets eight figures in salary and bonuses and its call centers are in India.)