Why Are US Job Numbers Better Than Europe’s? Thank the Deficit!
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Last Friday, Eurostat released the latest European unemployment data for November 2011. The results were horrific, with unemployment rates in Spain now close to 23 percent (as at November 2011 and rising) and Greece 18.8 percent (as at September 2011) and rising. Greece’s unemployment rate rose 4.8 per cent in the first 9 months of last year. By contrast, the US jobless rate dropped to a near three-year low of 8.5 percent.
Looking at the US data one certainly does not see a boom, but there is a pervasive pattern of improvement that is not consistent with anything seen in Europe. So why would the US data look better even though we are programmed for some fiscal restriction, the household savings rate is too low, the global economy has weakened, and there is no big increase in equity and home prices?
The answer could be very, very simple. Three years of “horrible” budget deficits in excess of 8 percent of GDP have managed to do something critical to help the economy. How? Mainly in the form of what economists call “automatic stabilizers” – things like unemployment insurance and food stamps that put money in the hands of consumers during a downturn. By running deficits, we have been able to put a floor on demand and generate at least a modicum of economic momentum, which is slowly leading to an improving job situation.
Of course, you wouldn’t know this if you turned on the TV.
When it comes to federal budget deficits there only appear to be two respectable positions in the mainstream media. The first is the “deficit hawk” position that argues that budget deficits are never acceptable because they only lead to complete crowding-out: every dollar of government spending is offset by a dollar of private spending. The second view—“deficit dove”--is that deficits are probably acceptable for the short run, and perhaps even necessary to save the economy from another depression. This view maintains that the benefits we receive today are partially offset by costs in the future when we will need to “tighten our belts” to repay the debt.
But neither view is correct: Right now, the US economy faces such strong headwinds that a huge fiscal expansion is required—and this will mean deficits even larger and perhaps more prolonged than those now projected. Contrary to the position of the fiscal deficit hysterics such as billionaire Pete Peterson and the Concord Coalition who endlessly repeat the fiction that deficits are always evil, it’s better to think of the deficits as the one thing which is saving us from the grim fate now experienced in Europe, where double digit unemployment is the norm virtually throughout the continent. And we don't have to worry about eliminating them in the future, as growth (with correspondingly higher tax revenues and lower social welfare payments) will take care of the "deficit problem," much as it did following World War II and also during the early 1980s.
Let’s be clear: I’m not a Pollyanna hailing the rebirth of the US economy. There have been over 15 million jobs lost since the financial crisis of 2008 and today’s growth is insufficient to bring up back to full employment. If you like, the US economy is the least ugly person at the dance, and a lot more fiscal stimulus likely necessary to turn the American economy into the belle of the ball.
How We Recovered From the Great Depression
We have had the biggest recession since 1932, but no strong recovery. By contrast, in the four years after 1932, the US economy had its strongest economic growth on record. Why? In the mainstream media, you’ll often hear that the slow nature of the current recovery is a consequence of the overhang of private debt and the unwillingness of banks to lend. But wait, in the early 1930s the ratio of private debt to GDP was higher than it is now because inflation-adjusted GDP fell by fifty percent in the Great Depression. Additionally, bank lending continued to contract until mid 1935. Yet the economy grew at a rate in excess of 10 percent of GDP in the first two years of the recovery.