Monday, January 30, 2012

U.S. Economy Grew at 2.8% Last Quarter; Europe is Entering into a Recession; What’s the Cause of the Difference

Republican European Policy vs Democratic U. S. Policy

As expected, U. S. economic growth increased in the 4th quarter of 2011, according to very preliminary data released by the Commerce Department.

The nation's gross domestic product -- the value of all goods and services produced -- grew at an annual rate of 2.8% between October and December, the Commerce Department said Friday. The reading was up from 1.8% annualized growth in the third quarter, but below economists' forecast of 3.0% growth.

Ok, not great, not even very good, but certainly good and better than it has been.

In Europe which has an economy similar to the U. S. in size and structure and composiiton, economic growth, with the exception of export dominated Germany is not growing, and many forecasters are of the opinion that the continent will have negative growth in 2012, or what is technically called a “recession’.  So why is Europe not doing well and the U. S. is improving?

The answer to that, as every first year student of economics knows is that Europe has pursued a different policy than the United States.  In Europe the policy makers believe that reducing budget deficits by lowering government spending (and to a much lesser extent raising taxes) will stimulate the economy because, well, because they believe so.  They think that a lower budget deficit will produce an explosion of confidence by consumers and business and that this will lead to higher growth.

The fact that this has not happened and does not seem to be happening now and is not expected to be happening in the future doesn’t seem to discourage anyone over there.  Despite a policy failure that is destroying Greece, reducing economic activity in Spain, Portugal and Italy and is becoming a near disaster in Britain, Europe intends to carry on with the same. 

The United States is worried about the budget deficit, but so far policy makers here understand that if you introduce austerity you will get austerity, and that it is economic growth that is necessary to reduce the budget deficit and to increase employment.  The growth that is taking place now is the result of a significant, albeit, inadequate stimulus package enacted by the present administration.  Why has it taken so long to show effects?  Well in economics there are things called “lags” which mean that the economy takes a while to respond to changes in basic components.

Now the ironic thing is that the Republicans, who are criticizing Mr. Obama for being “European” as though that were some type of huge character flaw are themselves urging the adoption of European policies.  They want to drastically cut government spending, a policy which is European in design and will produce European results.  

One wonders if they are smart enough to know this and just don’t care.  The impression one gets is that they are not smart enough to know this, but they still just don’t care.

No one should get too excited about the numbers, there are plenty of bad signs ahead.

Trade, which was a drag on fourth-quarter GDP after being a positive factor the previous two periods, could further hinder 2012 growth if a European recession cuts into U.S. exports.

Also, government spending fell substantially in the fourth quarter, down 4.6%, a trend that's likely to continue as Washington prepares for mandatory cuts aimed at pushing down the budget deficit. The slowing of spending at all levels of government held back economic growth by nearly a full percentage point in the final months of 2011.

But the good news is that at least for the next 12 months the country does not have Mitt Romney and his European economic policy prescriptions to worry about.  

1 comment:

  1. Yes, DPE, it continues to amaze that those who push the politics of austerity continue to believe that people worry so much about budget deficits and that solving the deficits will make them feel good and want to buy more things. When, in reality, what makes people feel confident and want to consume is job prospects, a good jobs, or job retention. Fiscal austerity and constant yammering about deficits makes people feel insecure and tighten their pocketbooks in order to save and be ready for the worst.