Lately I've been wondering as sorry as our picture is here in the U.S. are we as bad or worse than Europe? While people like Paul Voicker invoke the spectre of The Great Inflation of the fiendish 70s I have been skeptical that the Great Inflation was even as bad as The Great Moderation he ushered in that he an Greenspan are so inordinately proud of. This inflation as the bogey man of history premise is flawed.
As I pointed out in previous posts, at least in the 70s student loans weren't the strait jacket they are today-now unlike then you don't even have bankruptcy protection from them, and the inflation of the 70s made those loans worth a lot less which effectively is a wealth transfer from creditors.
In truth the example we should be consulting now is not the 70s but the 30s. Krugman suggests that we are living in a dark ages of macroeconomics that many things that we previously knew we have forgotten so that while in 1971 economists knew some things they hadn't known in 1931, today in 2011 that's no longer true.
Again, the 30s are relevant for comparison today but not the 70s. At least Bernanke is supposed to be a scholar about the 30s and not the 70s. While I'm not a fan of his monetarist background it seems that he is at least trying in good faith to stimulate the economy-which is separate from the question of how effective he has been or whether his prescriptions have been right-which is more than you can say for the Republicans in Congress; they may not be impressed by Bernanke's Operation Twist their plan is Operation Tank the Economy. They think this will be their trump card in 2012. Where we see high unemployment and weak growth they see a political opportunity. In light of this Perry's attack on Bernanke as being guilty of treason is pretty ironic.
While the 30s are the relevant historical analogy for today and we are in Krugman's liquidity trap, there is one other analogy that is apt. The true cautionary tale for today is Japan and their response to their recession of the 90s which they never came fully back from. The spectre of a future where we have much lower growth, permanently, where the new normal is much lower GDP growth and higher unemployment-there are those who are predicting that even after the recovery the unemployment rate will be 6 to 7 percent- which is higher than during the Bush years which were no bargain-is quite real. Speaking of a new normal of 6 to 7 percent unemployment, there are economists, like the dissenters in the Fed meeting back in August who think the new "natural rate of unemployment" is close to being reached already. Maybe the economy is already to0 red hot! Great to know that there are those in the Fed itself who honestly claim to think that there are too many Americans at work now.
http://seekingalpha.com/article/295445-the-fed-dissenters-examining-supply-side-logic
http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=4709
As pessimistic as things look right now-there were a few positive developments in Europe yesterday though the devil is in the details and it may still not be enough; in any case the market seems to have calmed down for now. Interestingly Barroso, the EU President just said that the proposed euro bonds-in my opinion they are a very good idea-would require greater Euro integration a prospect that will give red meat to the nationalists in many of the Euro countries but I actually think would be welcome as well.
The chance that the future looks like Japan is very real. It could be that Japan's experience will be replicated on a global level with all of Europe and the U.S. going the same way. It did occur to me that we here in the U.S. do have a few advantages over Europe after all and we are less likely to go that way than Europe.
As I see it we have at least 2 major factors that may end up saving us that Europe lacks. First is our demography, the second is our geography(we have a major spatial advantage and always have).
What Europe has in common with Japan is a declining population where most of these countries are more culturally homogenous like Japan. In Japan there is a low birth rate and low immigration, Indeed immigration is discouraged. To be Japanese is very different than our conception of to be American where in principle at least we believe in the melting pot and that x factor that defines Americaness is not ethnic. Anyone can be an American if they share our commitment to democracy and liberty. For Japan to be Japanese you must be ethnically so, the x factor of Japanese-ness is ethnic.
In this Germany-currently the most healthy Western nation-is much closer to than the U.S. Germany currently has a lower unemployment rate than in 2005 and also the best welfare state in the West. But their low birth rate and more homogeneous population is a disadavantage.
Our heterogeneous country, with a rising birth rate and good population growth, along with the browning of American and the increase of Latinos, bodes well for our future. Population growth and heterogeneous demographics are very conducive to GDP and job growth.
Our other advantage is geographic and spatial. This advantage is why we have emerged over 200 years-really 400 years staring in Jamestown-as such a wealthy and powerful country. As opposed to Japan or most countries in Europe we have a resource rich country and as opposed to all European countries we have tremendous size and breadth with the continental United States alone spanning a continent. The declining population of Europe is not helped by the anti immigration policies of most Euro countries either. The French who pride themselves on being the cradle of the Enlightenment and love to contrast their own historic love of darker skinned people to U.S. historic racism have now actually put in practice the new law whereby a woman is fined for wearing a Burqa in public.
This is also why the concern of someone like Kevin Phillips that the U.S. is gonna go the way of England, Holland or Spain to say nothing of the Romans is while, a legitimate concern and met yet prove right, the U.S is certainly different now from say England at the start of the 20th century. England is a tiny island which would not be close to being the largest state in our Union. It has always lacked resources which is the compulsion that led it to explore and conquer so much of the world. The U.S. such a large and resource rich nation and growing against England's decline is very different. This is not to deny a U.S. demise is possible, just that we have significant advantages that England lacked 100 years ago.
Still the prognosis is not all to our side. If we have advantages over Germany demographically and geographically, they have some major advantages over us. First and foremost they have a very healthy green energy plan in place where they plan to be fully using alternative energy by 2050-recently Merkel has had to consider moving the date up. In the U.S. we haven't really started and the opposition is shown most recently by the GOP attempt to tie cuts in a program for electric cars to funding Fema for disaster relief.
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