When the good news came about the second-quarter GDP growth in the American economy, some commentators used the relatively low jobs number of 209,000 to make a case that the economy is not at all very strong.
If the spending growth that drove the GDP number were of a more transitional nature, then I would agree with them. But as I explained on Wednesday, the numbers indicate strengthening confidence among consumers and entrepreneurs. It is very likely, therefore, that this is a sustainable recovery.
Not a perfect recovery, but a sustainable one. We should be happy for it. After all, things could be much worse.
We could be Europe.
Just like us, the Europeans took a beating in 2009 when the Great Recession began. Both the U.S. and the EU economies saw unemployment rise rapidly. Deficits swept through government budgets.
On both sides of the Atlantic Ocean, politicians made the wrong choices. The Obama administration and Congress thought massive government spending could save the day. As a result, we got the American Recovery and Reinvestment Act in 2009 but had to wait until 2012 for the recovery to begin.
In Europe, political leaders took to a statist version of austerity in order to save the welfare state from disastrous budget deficits. The outcome was thoroughly bad: while the ARRA “only” delayed our recovery, the European economy actually went into an even deeper recession.
The contrast is clearly visible in Figure 1, which reports the difference in inflation-adjusted growth between the U.S. economy and the EU. Blue columns show how much higher (or lower) the U.S. GDP growth rate was compared to the EU. Grey columns show the growth difference for private consumption:
- In nine of the 13 years covered the U.S. economy outgrew Europe;
- American consumers increased their spending faster than European consumers in 12 out of 13 years;
- On average consumption growth was twice as fast in America as in Europe, 2.12 percent per year compared to 1.07 percent per year.
There are other differences. Our unemployment rate is 6.2 percent; theirs is 10.3 percent. Our youth unemployment rate is trending down; theirs is basically stuck. Our federal deficit is declining while GDP is growing; the EU economy is barely growing and deficits are frustratingly persistent.
Those who complain that is not a perfect recovery should keep in mind what a perfect recovery would require: a perfect tax policy, perfect downsizing reforms of government spending and perfect deregulation.
We have none of that, so let’s celebrate the recovery we have. It is not that bad.
And as Europe reminds us, we could be stuck in an economic wasteland where the only future to hope for is one in the stagnant life of industrial poverty.
Methodological note: The GDP numbers reported in the attached chart are from the Bureau of Economic Analysis (the U.S. economy) and Eurostat (the EU). In both cases, GDP growth is reported in chain-linked, inflation-adjusted prices. The base year for the U.S. data is 2009 but 2005 for the EU numbers. This difference would normally preclude a comparison. For example, the apparent strength of European growth from 2005 to 2009 could be a statistical anomaly caused by the base year difference. However, due to limited availability of national accounts products from Eurostat, these two time series were the best comparison objects. The short time span covered is also dictated by limitations of the Eurostat database.