The US economy is recovering - so why isn't Britain's?

Feb 9, 2012

Lower household debt and more flexible labour rules help US economy rally while ours flatlines

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IT'S a tale of two economies. The latest job figures from the US show a significant rise in employment, leading to hopes of a recovery in the world's biggest economy. Meanwhile, the outlook for Britain is gloomy, with fears that we are headed back into recession. So why is the US economy doing better than ours?
Stimulus helps

The US is feeling sunny, while the UK still shivers, says Anatole Kaletsky in The Times. The official explanation for the UK's economic woes is the state of the global economy and, in particular, the eurozone crisis. But if this were true, Germany, which is more closely intertwined with ailing southern Europe, would be worse off than we are. The truth is Britain's troubles are almost entirely home-grown.
From 2008 to 2010 the US and the Britain followed similar policies with similar results, adds Kaletsky. In 2010 they diverged abruptly. Britain decided to pay down its debts, raise taxes and cut spending, the US took the Augustinian approach: "Lord make me virtuous, but not yet". Both countries have been conducting a controlled experiment - and "we can now see the results".
The boost in job figures vindicates the efforts of President Obama to continue stimulating the economy, writes Owen Tudor for the TUC blog, Touchstone. US growth may not be spectacular, in part because of the weak stimulus the Democrats have managed to push through a Republican-dominated Congress. But it does further demonstrate that "there are alternatives to the headlong austerity being practised in the UK and large parts of Europe".

Lower household debt is the key

It's not stimulus but debt reduction that is helping the US, says Jeremy Warner in The Daily Telegraph. The US has adopted a more brutal approach to household debt reduction. Household debt has been reduced by 15 per cent, as "growing numbers of households throw in the keys and default".

Britain, by contrast, has barely started to reduce household indebtedness, says Warner. The banking system is making better progress, but this has proved damaging for the real economy, meaning there is less credit for enterprise and consumption. "The bottom line is that the US has been better at unwinding the excesses of the property and consumption boom than the UK and Europe, and is now reaping the rewards."

Companies are hiring again

US businesses, which have been squeezing more out of their existing workforce rather than hiring more staff, now seem to have reached a limit and need to start hiring again, says Robin Harding in The Financial Times. Higher payrolls will in turn boost consumption. "Barring a devastating shock from the eurozone, the US economic recovery may gradually start to feel normal".  

Flexible labour rules help, too

Jacob Kirkegaard, economist at the Peterson Institute for International Economics, told AFP that the latest developments in the labour market show the resilience of the US economic model. "When you're a US employer, you barely hesitate to hire because you know if you take a worker for a peak in business, you can easily lay off that person if it doesn't turn out as planned." In Europe, however, "the costs for that are high".

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