Inflation has reached Europe. in 2021, inflation concerns were largely specific to the United States, but after Russia’s invasion of Ukraineenergy prices it shot itself In the continent. This winter, unless there is significant government intervention, families will have a hard time heat their houses. But inflation goes further: with the continuous supply chain issues, prices have risen even if energy and food are excluded. As we enter this next dangerous phase of the post-Covid recovery, decisions made long beforehand are playing a huge role. And the United States made two decisions that have left the country’s economy in a much better situation than Europe.
International comparisons of inflation rates are notoriously difficult do, and even when one manages to compare the numbers, the environments are different. For example, when new cars became harder to find, Americans were hard hit because we use cars more and spend more on them than Europeans. Looking beyond the spikes in energy and food prices caused by the Russian invasion of Ukraine, the United States has a core inflation rate 5.9 percent in the last 12 months. The rate is 5.4 percent in Canada and 5.5 percent in the United Kingdom. In the G7 nations, the rate is 4.8 percent and across Europe it is 6.8 percent. “Rising inflation is a global problem,” according to the Economic Policy Institute.
Given that there is an increasing possibility that Europe will enter a recession that will put the US economy at risk, it is worth reflecting on two sets of options that will help determine how this will play out. The first is that the United States chose to enact a large fiscal stimulus in early 2021 with the American rescue plan. This spending slashed child poverty and gave families and workers cash, ensuring they would have money to spend during reopening. This, in turn, hastened the recovery and caused the unemployment rate to plummet.
In fact, our recovery is significantly stronger than that of our peer countries. The International Monetary Fund estimates that US growth will average 1.4% between 2020 and 2023, well above the 0.7% of the eurozone. Government spending was also an insurance policy: The United States is approaching this moment of crisis with relatively stronger balance sheets and higher consumer confidence. Europe, by contrast, will face these difficulties from a weaker and more insecure position in the event of a recession and falling incomes.
In March 2020, during the initial reaction to the pandemic, Congress made a second key decision on how to help workers. Most European countries chose payroll support, whereby the government gave companies money so that workers would not be laid off. The United States, instead, turned to its creaky unemployment insurance system. (The United States provided payroll support to small businesses through the Paycheck Protection Program, which is best known for how little was for the workers and how many of its beneficiaries converted Vocal critics of student debt cancellation.) There were several reasons why Congress did it this way. The United States does not have the formal sector bargaining found in many European countries, so it would have been difficult to organize payroll support without allowing employers to control the terms of the resources.
The immediate result was that Unemployment figures in the US skyrocketed and Europe is not, despite the fact that an equivalent proportion of people were not working during the first part of the pandemic. But the positive aspects of the American plan became clear later. First, since unemployment insurance was increased by a fixed amount, those at the bottom of the income distribution scale benefited more, reducing income inequality. With so many people applying for new jobs, there was additional turnover and circulation allowing people to improve their skills and find a better job. This meant that employers had to compete to get and train workers and offer better working conditions. Without this option to support workers instead of companies, it is impossible to imagine the rapid wage growth and the increased union activity that we have been seeing.
It also means that American workers, with better jobs and higher incomes, are better able to weather the turbulence ahead. Small decisions have big consequences. The same is true with the making of monetary economic policy that is happening now. As long as there is a clear direction to support workers and ordinary people, and not just companies, the benefits will continue to pay off in the future.