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Thu April 26, 2012
Weekly Standard: Borrow And Spend Vs. Austerity
Irwin M. Stelzer writes for The Weekly Standard.
We're all in this together. The globalized economy, that is. We Americans worry that the eurozone crisis has returned, and will abort our fragile recovery, while Europeans worry that America's none-too-robust economy and its weak dollar will make it difficult for EU export industries. America's policymakers think their European counterparts are mad to believe austerity will restore economic growth, and Europe's policymakers sniff that no country ever became prosperous by printing money, borrow-and-spend, and depreciating its currency. Europeans find the falling dollar especially galling: Other things being equal, the cheaper dollar makes it about 10 percent cheaper than it was a year ago for Europeans to buy and visit America, and more expensive for Americans to tour Italy, ease into a Mercedes, or uncork a bottle of French wine to accompany France's now-more-costly (to us) brie.
There is more to this than a different reading of the prescriptions of the great economists. Economies reflect the history and cultures of each country, something the core countries of the eurozone are finding to their amazement and pain: surprise, Greeks are not Germans. And Europeans are not Americans. Americans by and large accept the creative destruction wreaked by entrepreneurs, while Europeans put greater emphasis on preserving the status quo. And "union," as in European Union, is different from "united," as in United States. The differences between conservative Texas and liberal New York are nothing compared with the differences between, say, Germany and Spain, or even between Italy and Spain.
The differences between the U.S. and the EU are reflected in attitudes towards fiscal policy and income transfers. Here is how they are playing out.
The U.S. economy is recovering, slowly and haltingly. The Federal Reserve's latest survey of current business conditions reports, "Manufacturing continued to expand... Demand for professional and business services showed modest to strong growth... Reports on retail spending were positive... New-vehicle sales were reported as strong or strengthening across much of the United States. Tourism increased... Residential real estate showed some improvement... Agricultural conditions were generally favorable. Mining activity expanded."
Good but not wonderful news. If the economy grows at the 2.5 percent rate most analysts expect, there will still be some 22 million workers looking for full-time work or too discouraged to do so when the year ends.
Right now, Europe would settle for 2.5 percent growth rather than the recession into which it is falling. Germany is slowing. The Dutch economy is not what it once was. Unemployment in France is mounting. The U.S. and European economies are moving in opposite directions.
This divergence has its roots in history and institutional arrangements. Germany, the largest of the eurozone economies, has an understandable fear of inflation, rooted in the rise of Hitler. America, in the view of Federal Reserve Board chairman Ben Bernanke, has an understandable fear of deflation and mass unemployment, rooted in Bernanke's studies of the Great Depression. As a result, the European Central Bank has a single mandate: to maintain price stability. Even Mario Draghi, its inventive managing director, can develop only limited tools with which to stimulate the economy. The Fed, on the other hand, has a dual mandate: to maintain price stability and full employment. Bernanke is as imaginative as Draghi, but less restricted in the tools he can use to get the economy moving, one of which is a printing press that assures creditors they will be repaid, even if only in depreciated dollars, the sort that stimulate exports.
The eurozone's founders learned that a single monetary policy grafted onto wildly different fiscal policies could not withstand the pressures of a major problem in the world's financial markets. Troubled eurozone countries do not have a currency to devalue, as does America.
Nor does Europe have a seamless method of transferring income from flush to stricken areas. America does: cash flows automatically to troubled states with falling tax receipts and rising welfare costs, from states that are doing better. Not so in Europe, where every euro sent from prosperous Germany to struggling periphery countries is fought over both by the bailer and the bailee. "There are still no meaningful fiscal transfers among member states, despite much talk about them," the Lindsey Group points out in its latest client advisory. German citizens don't really see why they should fund the early retirement of Greeks, and Greeks don't really see why Germans should set tax and labor market rules in their country. Texas oil workers might not want to support California surfers, but they are barely aware they are doing it. Besides, these automatic income transfers are one of the things that unites the United States.
The greater unity, and accompanying centralization of control over its banks, also allowed America to confront the financial crisis our flawed regulatory system could not prevent. Banks were bailed out. America, the country that often talks derisively of over-regulated Europe, imposed stress tests on its banks severe enough to make those imposed by Europe's often-squabbling national authorities seem remarkably unstressful by comparison.
Most important to many Americans and Europeans are the differences in the way our labor markets work. As a general rule, the unemployment rate in America stays well below that of the EU. From 1990 until 2008, the U.S. unemployment rate averaged 5.5 percent, Europe's 8.4 percent, with the rate in America well below that in Western Europe in every year. More than 50 percent of Spain's young workers are unemployed; in America that figure is 16 percent.
But there is a trade-off — back to culture and politics. America's unemployed have a far less generous safety net than do the unemployed in European countries. Americans say that because unemployment is a less unpleasant experience for Europeans, they don't rush to find a new job; Europeans say that America's miserly benefits are a defect of its devotion to free markets — "the law of the jungle," as one leading French politician described it to me — and its flexible wage rates too unnerving to tolerate. Nevertheless, countries such as Italy and Spain are trying to introduce some American-style flexibility into their labor markets by making it easier to fire so that employers will be more willing to hire. The trade unions are opposed, and it is still an open question just how much of the reform programs of such as Italy's Mario Monte, the unelected technocrat prime minister, will survive the resulting general strikes and, possibly, riots. Or whether the Greek election next month will produce a government devoted to carrying out the reforms and austerity measures promised in return for the bailouts.
Finally, Europe has chosen austerity as the path out of recession, while America has chosen borrow-and-spend. Austerity hasn't quite worked as well as Dr. Angela Merkel thought it would when she wrote the prescription, while borrow-and-spend has arguably contributed to the modest growth in America, as President Obama claims.
But it is early days. Europe's cold turkey approach to spending might in the long run produce a healthier body than will America's continued addiction to debt. True, as John Maynard Keynes pointed out, in the long run we are all dead. But the next generation of Americans won't be, and it will need all its strength and resourcefulness to scale the debt mountain it will inherit.