It can be hard to know how effective economic policies are because we don't experience the negative outcomes they may have prevented -- sort of the problem in the "saved and created" formulation or, as I heard someone analgoize the other day, after a doctor gives you medicine and you start to feel better, but not amazing, it's hard to compare that feeling to how sick you might have been without the help.
Luckily, there are are a ton of countries in the world, and one particular group has taken a different policy tack than the United States: The European Union. Their economy is suffering because policy-makers have shown little interest in fiscal stimulus and their central bank has been a grinch about lowering interest rates. And so:
Some private economists are even predicting that the American economy will resume growth in the fourth quarter, while Europe’s economy is expected to remain in recession well into 2010, after contracting an estimated 4.2 percent this year compared with an expected 2.8 percent decline in the United States.
Almost from the beginning of the crisis, the United States and Europe chose largely different paths to aiding their economies. The most stark was Washington’s willingness to commit hundreds of billions of dollars to stimulus spending — in addition to moving aggressively to shore up banks and keep credit flowing — versus Europe’s worry that similar spending would increase inflation in the future.
Not that either economy is out of the woods yet, or that they're a perfect comparison, but there is something to the two experiences that suggests the American response has been more effective. Caveats abound, of course, regarding future inflation expectations, but that's been discussed before, and the state of our financial system, which still disappoints. (On the other hand, Europe hasn't anything like our stress tests yet.) Meanwhile, Treasury Secretary Tim Geithner is meeting with the finance ministers of the top eight economies in Italy today, mainly to chat about what everybody's doing, but also to exert some subtle pressure on other nations to do more stimulus that will improve the overall global economy. Perhaps an EU-US compare and contrast will help him in his task.
-- Tim Fernholz