http://chronicle.com/blogPost/What-Does-Europe-Have-That-We/7705/
August 17, 2009, 10:00 AM ET
What Does Europe Have That We Don't?
By Teresa Ghilarducci
France, Germany, and most European nations are pulling out of the global
recession faster than the U.S. Euro-zone GDP is down 0.4 percent: French
and German GDP measures are up 1.3 percent and 1.4 percent,
respectively. Sadly, it looks as if the U.S. economy is flagging: U.S.
GDP is down a full one percent and leading indicators -- like consumer
confidence -- are showing weakness.
What does Europe have that we don’t have? Aggregate demand.
The first reason Europe is doing better: Unemployed Europeans have more
buying power.
Although unemployment rates are still high in Europe (like in the U.S.,
they have the highest levels in decades), their unemployment insurance
-- and other forms of social support -- are more generous and help boost
consumer spending when consumer spending needs the most boosting.
It's shocking that only about a third of people unemployed in the United
States are eligible for Unemployment Index benefits. And the average
weekly unemployment benefit in the U.S. is around $300. The 2009
stimulus bill temporarily increases payments by $25. But that doesn't go
very far when the average weekly wage is over $800.
The second reason is that European government spending was bolder and
quicker. Cash-for-clunkers programs were adopted early in Germany and
France. Looks like the US Cash for Clunkers boosted auto sales by 2.4
percent last month.
But the mother of all reasons the Europeans are doing better is that
they don’t use voluntary, individual financial accounts to pay for
retirement and college education like we Americans do. They use
mandatory universal programs. What is the unintended result? The
recession wiped out many American's retirement and college funds so
Americans, unlike the Europeans, are curbing spending now to build up
that savings.
Because the micro isn’t the macro, this private virtue turns into a
public vice: High savings rates hurt aggregate demand and prolong the
recession.
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