US economy is stepping on the gas – Telegraph.co.uk

Automobile sales are at their highest level since the start of the financial
crisis, and there are even signs that the delinquent housing market is
finally beginning to turn. Sales to listings, a key measure of the health of
the US housing market, are at last moving in the right direction, while in
some states, prices have actually started to rise.

There are still plenty of reasons to worry about the durability of the
American recovery, but set against the still moribund performance of the UK
economy, and that of much of the rest of the Europe, the US already looks a
model of renewal. Unemployment is falling, and growth, though likely to slow
a little after a buoyant fourth quarter, remains robust. Output in the US is
back at comfortably above its pre-crisis peak.

In the UK, by contrast, the economy has gone nowhere for more than a year now,
with output stuck a full four percentage points below the 2007 peak.
Unemployment, moreover, is still rising and, with the great bulk of the
public spending cuts still to come, looks destined to go much higher before
it starts falling.

I should be careful not to over-egg the doom and gloom. There have been
encouraging signs even in the UK data. Retail sales surged in January,
according to figures published yesterday, beating the gloomy consensus by a
country mile. Nor is the overall picture quite as bleak as the headline
figures suggest. Strip out the oil and gas sectors, where production has
declined markedly – possibly because of the Government’s attempt to tax the
North Sea more – and growth in the rest of the economy, though still
subdued, isn’t so bad.

What is more, net trade is improving by leaps and bounds. Britain recently
recorded its best trade balance in nearly 10 years, which given that 40 per
cent of our commerce is with the eurozone, is commendable.

Even so, few here expect significant overall economic growth this year, while
in the US, things are very obviously on the mend. The country from which the
financial crisis sprung is emerging from the implosion’s economically
catastrophic consequences far more rapidly than us.

Why is this? Why is the US seemingly back in clover, while the UK is still
stuck deep in the mire?

For former US treasury secretary Larry Summers, the Labour Party, and most
others of a Keynesian persuasion, the reasons are clear. It’s largely
because of fiscal policy. While Britain and much of the eurozone have been
applying austerity, the US has kept the fiscal taps full on for much longer.
Seemingly ruinous deficits have been tolerated and public debt has been
allowed to rise, countering the adverse consequences for demand from private
sector deleveraging.

The position adopted by George Osborne, the Chancellor, has been quite
different. Not until we get on top of our debts, he has argued, can we
expect to see the economy return to significant growth. As long as the
deficit goes unaddressed, the economy will struggle. We need deficit
reduction to allow growth, he argues. Mr Summers has been scathing in his
analysis of this strategy. The idea of “expansionary fiscal contraction”, he
told an audience in Davos last month, is not just “oxymoronic”, but you
might think of dropping the prefix too.

No country came out of the Great Depression in the 1930s, he argues, except by
abandoning the gold standard and ultimately by rearming for the Second World
War. To his mind, it’s a powerful lesson. Reasonable growth won’t return
absent of demand. In circumstances where the private sector can’t or won’t
provide it, the state must step into the breach. Austerity cannot be a
viable growth strategy, as the eurozone is fast discovering to its cost.

It’s an argument that I find only partially persuasive. First, because it’s
not clear that the US has in fact had much of a fiscal stimulus. The
headline-grabbing size of President Barack Obama’s federal stimulus may have
been partially, if not wholly, offset by cuts in state and local government
spending. Most states are obliged to run balanced budgets, so expenditure
was cut sharply into the recession as revenues declined. The second reason
why the fiscal explanation doesn’t seem to carry much weight is that it is
not clear that Britain had any choice but to cut the deficit.

If governments could be sure that to spend more would carry no interest rate
penalty, then probably even George Osborne would have swallowed his
small-state beliefs and let rip. But, of course, we know that they cannot.

Britain’s abnormally large banking sector, in combination with exceptionally
high levels of household debt, make the UK particularly vulnerable to the
sort of sovereign debt and financial market contagion we have seen sweep the
eurozone. Given the UK’s monstrous overall level of debt, the Chancellor
cannot afford to take risks with interest rates.

It is this very level of debt that provides the best explanation as to why the
UK economy is failing to respond. Britain has barely made a start on paying
off its debts. In the US, where the downturn began rather earlier than
anywhere else, the process is more advanced, with sharp falls in household
and financial sector debt more than offsetting the rise in government debt.

There are two other factors worth noting. One is that the US is not nearly as
exposed to the eurozone crisis as the UK, whose fate is strongly intertwined
with that of Europe both through trade and the banking system. And the other
is that America is simply much better at “animal spirits” than Europe.
America’s private sector is considerably bigger as a proportion of GDP than
in Britain and much of the rest of Europe, and it has been quicker and less
sentimental about clearing out the detritus of the last boom.

Bad debts were written off, workers were shed, and uncompetitive business was
allowed to go bankrupt or, as in the case of the big automobile
manufacturers, brutally restructured. Unlike Europe and the UK, where
employment preservation has led to serious losses of labour productivity,
the US has been growing steadily more competitive right through the downturn.

Shale gas has been the icing on the cake. Sometimes, it seems, the short,
sharp shock is better than the long, drawn-out adjustment.