Three Economies + Three Policy Paths = Several Lessons

December 2, 2013

The report cards are in for the world's biggest developed economies: The United States grew at an annual rate of 2.8 percent in the third quarter, Japan at 1.9 percent and the euro zone at a measly 0.4 percent. Their contrasting economic policies offer a few lessons, says David Wessel, economics editor and columnist for the Wall Street Journal.

In United States, the Federal Reserve has put the monetary gas pedal to the metal while Congress is putting the brakes on spending.

  • Yes, the U.S. economy is growing, but for the past year and half, the growth rate has averaged less than 2 percent -- and that's not nearly fast enough to return the country to prosperity.
  • The United States still has 1.5 million fewer jobs than it did before the recession and there are 775,000 more adults.
  • There's a strong case the economy would be doing better if Congress eased up on the near-term spending cuts, perhaps as part of a deal to slow future spending growth.
  • Economists say spending cuts and tax increases create what they call "fiscal drag," slowing an economy's growth.

In Japan, by contrast, fiscal and monetary policies have been largely in sync -- and the early results are positive.

  • Although the pace of growth slowed in the third quarter, Japan is growing again and displaying some welcome self-confidence and optimism.
  • The aggressiveness of the new leadership of the Bank of Japan is making tangible progress against the deflation -- or falling prices and wages -- that have plagued Japan for years.

And then there is the euro zone.

  • It is seeing lousy growth and high unemployment accompanied by inflation of only 0.7 percent over the past 12 months, well below the European Central Bank's just-under 2 percent target.
  • It has one monetary policy, but not one fiscal policy. Archaic regulations are choking growth, and changing them is tough given the disparate national interests.
  • Unlike the United States, Europe hasn't forced its banks to shore up their capital footings, further undermining confidence and credit.

The ultimate lesson: Policy is not impotent. But it has to be used wisely.

Source: David Wessel, "Three Economies + Three Policy Paths = Several Lessons," Wall Street Journal, November 14, 2013.

 

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