What's making US economy a worldbeater? 5 factors
WASHINGTON (AP) — How does the U.S. economy do it?
Europe is floundering. China faces slower growth. Japan isstruggling to sustain tentative gains.
Yet the U.S. job market is humming, and the pace of economicgrowth is steadily rising. Five full years after a devastating recessionofficially ended, the economy is finally showing the vigor that Americans havelong awaited.
Last month, employers added 288,000 jobs and helped reducethe unemployment rate to 6.1 percent, the lowest since September 2008. Junecapped a five-month stretch of 200,000-plus job gains — the first in nearly 15years.
After having shrunk at a 2.9 percent annual rate fromJanuary through March — largely because of a brutal winter — the U.S. economyis expected to grow at a healthy 3 percent pace the rest of the year.
Here are five reasons the United States is outpacing othermajor economies:
AN AGGRESSIVECENTRAL BANK
"The Federal Reserve acted sooner and moreaggressively than other central banks in keeping rates low," says BernardBaumohl, chief global economist at the Economic Outlook Group.
In December 2008, the Fed slashed short-term interest ratesto near zero and has kept them there. Ultra-low loan rates have made it easierfor individuals and businesses to borrow and spend. The Fed also launched threebond-buying programs meant to reduce long-term rates.http://www.yiqing001.com/
By contrast, the European Central Bank has been slower torespond to signs of economic distress among the 18 nations that share the eurocurrency. The ECB actually raised rates in 2011 — the same year the eurozonesank back into recession.
It's worth keeping in mind that the Fed has two mandates:To keep prices stable and to maximize employment. The ECB has just one mandate:To guard against high inflation. The Fed was led during and after the GreatRecession by Ben Bernanke, a student of the Great Depression who was determinedto avoid a repeat of the 1930s' economic collapse.
Janet Yellen, who succeeded Bernanke as Fed chair thisyear, has continued his emphasis on nursing the U.S. economy back to healthafter the recession of 2007-2009 with the help of historically low rates.
The United States moved faster than Europe to restore itsbanks' health after the financial crisis of 2008-2009. The U.S. governmentbailed out the financial system and subjected big banks to stress tests in 2009to reveal their financial strength. By showing the banks to be surprisinglyhealthy, the stress tests helped restore confidence in the U.S. financialsystem.
Banks gradually started lending again. European banks areonly now undergoing stress tests, and the results won't be out until fall. Inthe meantime, Europe's banks lack confidence. They fear that other banks areholding too many bad loans and that Europe is vulnerable to another crisis. Sothey aren't lending much.
In the United States, overall bank lending is up nearly 4percent in the past year. Lending to business has jumped 10 percent.
In the eurozone, lending has dropped 3.7 percent overall,according to figures from the Institute of International Finance. Lending tobusiness is off 2.5 percent. (The U.S. figures are for the year ending inmid-June; the European figures are from May.)
A MORE FLEXIBLEECONOMY
Economists say Japan and Europe need to undertake reformsto make their economies more flexible — more, in other words, like America's.
Europe needs to lift wage restrictions that preventemployers from cutting pay (rather than eliminating jobs) when times are bad.It could also rethink welfare and retirement programs that discourage peoplefrom working and dismantle policies that protect favored businesses and blockinnovative newcomers, the Organization for Economic Cooperation and Developmenthas argued.
Prime Minister Shinzo Abe has proposed reforms meant tomake the Japanese economy more competitive. He wants to expand child care somore women can work, replace small inefficient farms with more large-scalecommercial farms and allow more foreign migrant workers to fill labor shortagesin areas such as nursing and construction.
Yet his proposals face fierce opposition.
"Europe and Japan remain less well-positioned for durablelong-term growth, as they have only recently begun to tackle their deep-rootedstructural problems, and a lot remains to be done," says Eswar Prasad, aprofessor of trade policy at Cornell University.
China is struggling to manage a transition from an economybased on exports and often wasteful investment in real estate and factories toa sturdier but likely slower-growing economy based on more consumer spending.
Weighed down by debt, many European countries took an ax toswelling budget deficits. They slashed pension benefits, raised taxes and cutcivil servants' wages. The cuts devastated several European economies. They ledto 27 percent unemployment in Greece, 14 percent in Portugal and 25 percent inSpain. The United States has done some budget cutting, too, and raised taxes.But U.S. austerity hasn't been anywhere near as harsh.
A ROARING STOCKMARKET
The Fed's easy-money policies ignited a world-beating U.S.stock market rally. Over the past five years, U.S. stocks have easily outpacedshares in Europe, Japan and Hong Kong. That was one of Bernanke's goals inlowering rates. He figured that miserly fixed-income rates would nudgeinvestors into stocks in search of higher returns. Higher stock prices wouldthen make Americans feel more confident and more willing to spend — theso-called wealth effect.
Most economists agree it's worked.