Unhappy with the economic recovery in the United States? Could be worse.
Specifically, we could be literally any other country in the world that also just went through a major financial crisis.
Seven years after the credit bubble burst, just two of the 12 countries that went through systemic financial meltdowns in 2007 and 2008 have reclaimed enough ground to reach their previous peaks in per-capita GDP: the United States and Germany. And Germany isn’t looking so hot these days, given that it’s teetering on the edge of deflation.
Many of the other countries that also went through “systemic crises” — as categorized by the work of Harvard economists Carmen Reinhart and Kenneth Rogoff — still have years to go before fully recovering. The Netherlands, Portugal, Spain and Ukraine will likely wait until 2018 before reaching their pre-crisis peaks in per capita GDP, according to the International Monetary Fund. Even countries that didn’t technically experience a systemic crisis when we did (such as China and Japan) appear to be in serious trouble. As the Economist recently put it, the United States is looking increasingly like a “lonely locomotive.”
So what accounts for the American post-crisis economic exceptionalism, unimpressive though it may feel at home?
Some have credited serendipitous circumstances, notably the shale energy boom. That hasn’t hurt, but its contribution to the recovery has been relatively minor. Instead, the biggest factors explaining the divergence between U.S. fortunes and everyone else’s were policies undertaken by our improbably wise public officials, through some combination of ideology, necessity and luck.
First, monetary policy.
The Federal Reserve was far more aggressive — in both timing and magnitude — than its counterparts abroad, particularly the European Central Bank. And although the Fed’s “unconventional” measures stoked warnings of hyperinflation and other doomsday scenarios, inflation still remains quite low in the United States, and unemployment has fallen sharply. Note that just as the Fed has finally taken its foot off the gas pedal, the ECB appears poised to replicate the Fed’s strategy: In October, when the Fed announced that it was halting quantitative easing, the European bank began buying covered bonds, and recent comments from ECB officials suggest the bank may soon start buying sovereign debt bonds, too.
Second, fiscal policy.
Washington’s decisions on taxing and spending haven’t been ideal, but they were way better than those in Europe — especially in the immediate aftermath of the crisis, when Congress passed the Recovery Act. Even the budget cuts that Congress has enacted in the years since — which were premature and targeted with Mr. Magoo-like imprecision — have not been quite as draconian as they sound. In fact, in real terms, the government is spending more per capita today than in the year before the recession began. Compare this to European countries that have engaged in truly painful, and contractionary, austerity measures. In Greece, real government spending per capita fell 26 percent between 2008 and 2012.
To some extent, fiscal policy was more expansionary here than in other countries because of ideological differences about what countries should do when they’re deeply in the red. But mostly it was born of necessity. Presumably if enough new creditors had been willing to lend to the Greeks, the country would not have willingly undertaken such severe austerity measures.
By contrast, investors around the globe were crawling over each other to lend to the United States, since Treasuries were seen as a safe investment, and the dollar happens to be the world’s reserve currency. This made it much easier for American politicians to do the right thing for a while, fiscally speaking.
Crisis-stricken countries in the euro zone were also stuck with a relatively inflexible exchange rate, which meant they couldn’t count on a weaker currency to make their exports more appealing. Perhaps the most underappreciated advantage the United States has had, though, is that private deleveraging has been much more rapid here than in most of Europe. Although it’s always painful to lose a home to foreclosure, at least in the United States the mortgage debt is subsequently wiped out, since mortgages here are usually non-recourse loans. This is less often true in Europe. “Lack of deleveraging and write-downs (private or public) even half a decade later,” Harvard’s Reinhart says, is one of the key factors that protracted the crisis in many countries. She notes also that Europe’s ability to reduce its debt has been modest compared with other historical post-crisis experiences.
On many measures, particularly wage growth, the U.S. recovery has been profoundly disappointing. And there are lots of things our policymakers could have done, and could still be doing, to make it better. But a quick glance around the world shows that, in the land of the blind, we became the one-eyed man.
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