This article appeared in the Patriot News, Dec. 28, 2012.
Four years ago, the housing market collapsed, the financial system imploded, and the country plunged into a recession the likes of which had not been seen since the 1930s. The magnitude of the decline, and the speed with which it occurred, was terrifying. Jobs were lost by the hundreds of thousands, households found themselves buried under mountains of debt, and the stock market went into free fall. On Wall Street and in little towns across America, banks and insurance companies were failing, while over in Detroit, the auto industry teetered on the brink of bankruptcy. Capitalism itself, the quintessential American economic system, lay imperiled.
The rest of the world was hardly immune. The developed countries of Western Europe-Greece, Ireland, Iceland-endured withering crises. The International Monetary Fund was summoned to help some of the flailing economies, as was the European Union. They arrived, promising loans to prop up weakened economies, and in return, insisted on severe austerity measures. But the medicine they prescribed-cut government spending, lay off public-sector employees, rein in budget deficits-turned out to be harsh.
The United Kingdom, under new (conservative) management, also preached the virtues of austerity, only to be rewarded with rising unemployment and tepid income growth. Not even a superbly-conducted Olympics could reverse the tide. In the meantime, the grim specter of recession was beginning to haunt other members of the European Union. Italy, Spain, Portugal-the fun-loving countries of southern Europe-faced growing joblessness, shaky public finances, and domestic discontent. Even France, Germany and the Netherlands-all countries that had managed to keep their economies growing in an increasingly unsettled neighborhood-were beginning to feel uneasy about their prospects.
In Asia and Latin America, on the other hand, things were a lot more rosy. Seemingly oblivious to the tremors in the developed world, Brazil, China and India posted robust growth year after year. Russia, too, enjoyed a spurt in prosperity as oil prices remained high. There was very little talk of austerity. Governments already played a significant role in these countries, and the likelihood of a slowdown only spurred them to increase spending. The disparity in the economic outcomes led some to conclude that the developing countries had “decoupled” from the developed countries. The suffering of the rich countries would have no effect on the fortunes of the developing countries.
But a rather curious thing has happened since then. In recent quarters, the United States has staged a recovery, with unemployment falling from a peak of 10 percent during the Great Recession to 7.7 percent in November. In 2008 and 2009, amid the throes of the economic crisis, the government was advised to leave the free market to its devices, practice austerity, and use monetary policy to fight inflation. Anything else, they were warned, would be an assault on capitalist principles, perhaps even treasonous. The Obama administration and Ben Bernanke’s Federal Reserve ignored the advice (and threats). They bailed out banks, insurance companies and the auto industry. They implemented an $800 billion stimulus package consisting of a mix of infrastructure spending, tax cuts for all, and funds to state and local governments to keep teachers and police officers in their jobs. And the Fed drove interest rates down to zero-and kept them there in an effort to encourage households and firms to take out loans and resume spending.
The results have been largely encouraging. The American economy is expanding, jobs are being created, and Inflation remains quiescent. Budget deficits as a ratio of gross domestic product have come down sharply. Meanwhile, the crisis in Europe remains unresolved, threatening to drag even mighty Germany into a recession. The economies of China, India and Brazil are still growing, but the pace has slowed in recent months, raising doubts about the decoupling hypothesis.
So once again, it is America that offers the best hope for growth in the global economy. It has demonstrated that austerity policies, whether self-imposed (UK) or imposed from outside (Greece), are inimical to general prosperity. But now, it must overcome the domestic political divisions that threaten to push the U.S. economy over the fiscal cliff. It is not just the living standards of Americans that are at stake, so too are the fortunes of the rest of the world.