The American Wager

Even without blowing up, American growth could make some on this side of the Atlantic envious: At the moment when the Euro zone once again falls into recession, American GDP continues to grow at a little more than 2 percent a year.

This (relative) dynamism derives, partially, from different budgetary strategies. Conscious of the difficulty to jumpstart an economy where the excess of private debt has a big effect on monetary policy, the United States, unlike Europe, has kept budgetary support in place until now.

If the failure of European strategy is nevertheless obvious, the success of the American bet is not so assured. First, in order to bring the unemployment rate under 6 percent, the United States still has to create more than five million jobs; at a clip of 150,000 a month, this underemployment will not be reabsorbed before… 2015!

The housing market is also far from having found its normal state and foreclosure sales are going to weigh on housing prices for a long time. By waiting, the situation of the most disadvantaged has every possibility to deteriorate further. The average income of 40 percent of households on the low end of the ladder is 35 percent less than it was in than in 1995 (while the incomes of the top 10 percent of earners has grown 140 percent!).

Finally, this recovery is fragile: if a shock derailed it, economic policy could be something bigger this time. The principal rates directors are in effect on the ground; after three years of a public deficit of around 10 percent of GDP, the budgetary lever may be harder to pull again.

The principal risk is, however, that the state cannot continue its strategy of gradual return gradual to budgetary equilibrium. What must be dreaded here isn’t an eventual pressure of the markets: if the obligatory rates threatened to brutally rise once more, the Federal Reserve would not hesitate to intervene, its statutes (the Federal Reserve Act) giving it explicitly the mission to maintain “moderate long-term interest rates.”

In the example of Europe, the U.S. has to first factor a political risk. In 2013, the budget could become very restrictive due to the expiration of the Bush tax cuts, but also from diverse measures of support put in place during the crisis from 2007-2009: if there is no change in legislation, the contraction would be close to 4 percent of GDP. Of course, a compromise between Democrats and Republicans could avoid this “budgetary shock.” But the debate over increasing the debt limit in summer 2011 recalls that, on top of that, a political impasse can quickly lead to drama.