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America vs. Europe

Borrow-and-spend compared with austerity.

12:00 AM, Apr 14, 2012 • By IRWIN M. STELZER
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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.        

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