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Bouncing Back from the Great Recession: The United States Versus Europe
When the economic shocks that cause recessions in different economies have large
common components, there may be lessons to be learned by studying how different
economies respond.
The effects of the Great Recession of 2008-09 have been wreaking havoc on the
U.S. economy for nearly five years. Many authors have used the depth of the
recession and the sluggish recovery to compare the recent recession to previous
recessions, including the Great Depression. For instance, Glenn Hubbard,
chairman of the Council of Economic Advisers from 2001 to 2003, recently
compared the current recovery to the recoveries from the 1973 and 1981
recessions.1 Why is this the right comparison?
Certainly we cannot expect the shocks that hit an economy to always have the
same economic outcomes. Even if the causes of the Great Depression were the
same as those of the Great Recession, the economy of the 1930s is not the
economy of today, so we should not expect it to respond in the same manner.
When the economic shocks that cause recessions in different economies have large
common components, there may be lessons to be learned by studying how different
economies respond. This essay looks at six major economies in Europe—France, Germany, Italy, the Netherlands, Spain, and the United Kingdom—and compares them with the United States on two key economic variables: gross
domestic product (GDP) and unemployment. Since aggregate demand has been used
as the basis for the policy responses in the United States and Europe, this
essay also compares the paths of consumption and investment.
Figure 1 shows GDP in the United States and the major European economies. Several
findings are apparent. First, the size of the contraction was much steeper in
Europe: GDP in Germany, the United Kingdom, and Italy fell more than GDP in the
United States. Second, the recovery in the United States has been steady,
similar to the recovery in Germany. The other European economies are still
below their 2008 peaks.
Unemployment has been the persistent problem with the U.S. recovery.2 The table shows that the U.S. unemployment rate was initially lower than the unemployment
rate in most European countries. While the U.S. unemployment rate has been
falling from its high of 9.7 percent in January 2010, the unemployment rate in
European countries (except Germany) has been on an upward trend since 2008.
Many policy responses to the Great Recession and the associated U.S. employment
problems have been based on the notion that the slow recovery is due to
insufficient demand. For instance, Federal Reserve Chairman Ben Bernanke stated
on March 26, 2012, that “while both cyclical and structural forces have doubtless contributed to the
increase in long-term unemployment, the continued weakness in aggregate demand
is likely the predominant factor.”3 According to the Federal Open Market Committee minutes for the June 2012
meeting, “structural factors were contributing to unemployment, but…slack remained high and weak aggregate demand was the major reason that the
unemployment rate was still elevated.”4
Figure 2 suggests that the case for insufficient aggregate demand needs to be interpreted
with caution. Consumption expenditures and gross capital formation (i.e.,
investment) together account for almost 85 percent of GDP. When we compare the
time series of consumption plus investment in panel A, both the United States
and Germany are above their peaks. Private consumption expenditures in both
countries are more than 3 percent above their January 2008 peaks (see panel B).
Compared with most of Europe, the German and U.S. economies seem to be
recovering. Of course, policy responses have differed across countries.
However, given the common shocks, it seems likely that the differences in
various countries’ ability to respond to the shocks are structural.
Notes
1 See Segal (2012) and Cooley and Rupert (2012a) for further analysis assessing
recessions and recoveries.
2 While the current unemployment rate is high relative to previous recoveries,
Cooley and Rupert (2012b) suggest that “this may be as good as it gets.”
3 See Bernanke (2012).
4 See Federal Open Market Committee (2012).
References
Bernanke, Ben S. “Recent Developments in the Labor Market.” Speech at the National Association for Business Economics Annual Conference,
Washington, DC, March 26, 2012; www.federalreserve.gov/newsevents/speech/bernanke20120326a.htm.
Cooley, Thomas and Rupert, Peter. “How Bad Is This Recession and How Should We Assess the Recovery?” U.S. Economic Snapshot, February 3, 2012a; http://econsnapshot.com/2012/02/03/snapshot-fourth-quarter-gdp-estimates-growth-improves-concerns-remain-january-labor-market-update/#more-981.
Cooley, Thomas and Rupert, Peter. “This Economy Could Be as Good as It Gets.” The Great Debate (blog), Reuters, September 10, 2012b; http://blogs.reuters.com/great-debate/2012/09/10/this-economy-could-be-as-good-as-it-gets/.
Federal Open Market Committee. Minutes of the Federal Open Market Committee,
June 19-20, 2012; www.federalreserve.gov/monetarypolicy/fomcminutes20120620.htm.
Segal, David. “Romney’s Go-To Economist.” New York Times, October 13, 2012; www.nytimes.com/2012/10/14/business/glenn-hubbard-is-romneys-go-to-economist.html?pagewanted=all.
