The US has the upper hand

Europe and the United States have their economic problems, but the latter is in a much better position.

In a speech on 27 April, the presumptive Republican candidate for the US presidency, Mitt Romney, told students that the policy of his opponent, Democratic President Barack Obama, “takes us down a path to becoming more and more like Europe”. And he didn’t mean that comparison as a compliment.

It was not the first time, nor is it likely to be the last, that Europe’s economic troubles will be pejoratively invoked on the US campaign trail this year. Europe has become the bogeyman of American politics in 2012, evoked to scare voters about the perils of the US’s impending decline.

And Europeans, cognisant of their own failings, have become increasingly defensive about such criticism. In focus groups organised by the German Marshall Fund in Berlin, Brussels, Paris and Warsaw over the past two months, again and again participants have claimed that the US’s problems are even worse than those in Europe.

The US’s economic challenges are indisputably daunting. The public debt is large and growing. Inequality is on the rise. The current-account deficit threatens to balloon again. The infrastructure and educational system are deteriorating. But European schadenfreude does not reflect reality. Whether measured by the tractability of public debt, growth prospects or demography, Europeans would be fools not to trade their problems for the US’s.

To be sure, US federal, state and local indebtedness is expected to equal 106.6% of the economy in 2012. Despite all the current problems in Greece and Italy, eurozone governments’ debt will total only 90% of gross domestic product (GDP) this year.

But the US debt challenge is more tractable than Europe’s. General government revenue will equal only 31.9% of US GDP in 2012, two percentage points lower than before the crisis. By comparison, the eurozone’s tax burden is 45.9%, a proportion that has remained relatively unchanged throughout the crisis, suggesting that Europeans have ‘maxed out’ on their economic and political toleration of taxation.

Washington, DC has more flexibility than do European governments to increase taxes to contain indebtedness.

And the US has more economic growth potential than Europe. The US is expected to grow by 2.1% this year and by 3.3% by 2017. In comparison, the eurozone will shrink by 0.3% this year and expand by only 1.7% by 2017.

The US’s economic future is brighter because of its growing labour supply, its workers’ productivity and the availability of capital to fuel technological improvements. In each of these realms, American performance trumps that of Europe.

The EU will add only 4.9% more people by 2040 and then begin an inexorable demographic decline. Over that same period, the American population will grow by 30.7%, adding new consumers and workers to fuel growth.

US labour productivity will grow by 1.1% this year, while the eurozone’s productivity will increase by only 0.4%, continuing a superior American performance in annual average productivity performance that goes back a decade and a half. And the US capital stock will grow by 2.5% this year, compared with only 1.5% growth in available capital in the eurozone.

Better growth prospects translate into more job opportunities. Joblessness in the eurozone will average 10.9% this year and drop to 9% by 2017. American unemployment will be 8.2% this year and is expected to be just 5.8% in five years’ time.

This is not to say that the United States does not face serious challenges. But, as Obama argued in his 2012 State of the Union address: “Anyone who tells you that America is in decline…doesn’t know what they’re talking about.”

Bruce Stokes is the senior transatlantic fellow for economics at the German Marshall Fund of the United States.

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