One year has now passed since Joe Biden was inaugurated as US President. He has been able to achieve some of his economic policy goals during this time – such as passing the major aid and stimulus package in March 2021 or getting Congress to approve infrastructure renewal in November. But recently, Joe Biden has also had to take a lot of economic criticism – some blame his expansionary fiscal policy for higher inflation, for example.
Yet there are also positive sides to the strong fiscal stimulus. For example, in contrast to the euro area, the U.S. economy has already returned to the pre-crisis level of economic output seen at the end of 2019 by early summer 2021. One important reason for this is probably the extremely expansionary fiscal policy during the pandemic. In total, three fiscal packages amounting to about 15 percent of U.S. gross domestic product were passed in 2020 and 2021 under Presidents Trump and Biden. These fiscal packages have stimulated private consumption, which already returned to pre-crisis levels by early 2021. But investment has also developed much better in the USA than in the euro area. The subdued investment trend in the euro area is likely to put the brakes on further recovery, especially as companies were already investing more cautiously than in the United States before the pandemic. At least there is reason to hope that the “Next Generation EU” fund will boost investment in the euro area in the coming years.
On the US labor market, these developments have been reflected in significant and rapid improvements. Admittedly, there are still far fewer jobs than before the pandemic because, for example, many people have to look after their children or relatives in need of care at home and have not yet returned to the labor market. But overall, the situation has nevertheless improved much faster than many had expected even as recently as spring 2021. Wages also grew more strongly than in the 2010s.
However, higher inflation has recently eaten up the nominal wage increases again. Although inflation – at an annual rate of 7.0 percent in December – is now expected to ease gradually, also in view of the expiry of the fiscal stimulus, it is likely to remain high this year. For example, the price-driving problems in international supply chains will not disappear any time soon in view of the omicron wave.
In principle, there is no need to fear somewhat higher inflation than in the years before the pandemic. It can be a positive sign of a dynamic economy in which low- and middle-income people also participate via higher wage increases. Nevertheless, there is a risk that inflation will remain long and well above the Fed’s average two percent target and can only be controlled with strong monetary tightening.
The comparatively favorable development of the U.S. economy despite continuing problems is not an isolated case. It has already proved resilient in the past and, for example, grew more strongly than in the euro area after the financial crisis until the start of the pandemic. In the United States, the economy grew by more than a quarter in real terms from 2009 to 2019, compared with only around 15 percent in the euro area. Even Donald Trump’s unpredictable and confrontational leadership has not led to the economic crash that has occasionally been predicted.
To be sure, it is quite possible that the euro area economy will grow more strongly than the U.S. economy in 2022. But this is mainly due to the fact that the US economy is at least one step ahead of the euro area in recovering from the pandemic. For the coming years, the United States has a good chance of leaving many economies in the euro area behind, despite the ongoing domestic political polarization.
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