Thread by @jasonfurman

A little more on the US-Europe comparison. Key points:

1. Output trajectory *appears* to be the same for both (with some possibility the US is ahead).

2. Inflation is much higher in the US.

3. Fiscal support likely considerably larger in US.

A 🧵.

OUTPUT. The Euro area was well behind the United States but seems to have mostly caught up as vaccinations, caseloads, and social distancing rules came closer.

3 ways to compare economic recoveries: relative to the OECD's pre-pandemic forecast, relative to pre-pandemic trends and relative to pre-pandemic levels. (The last overly favors the United States because we should have had more growth due to more favorable demography.)

Labor markets seem to have had similar recoveries too although in different ways--with more hours in the United States and higher labor force participation in Europe. (See these from the BIS and OECD, I intend to look into it more myself.)

Now the caveat to the above: it might understate the comparative strength of the United States. Gross Domestic Income showed much higher growth in Q3. And Q3 was a while ago in GDP-time, US real GDP likely much higher today than the Q3 average.

https://twitter.com/jasonfurman/status/1463507544320708610?s=20

INFLATION. The United States has had both regular and core inflation running 2pp+ higher than the rates in the euro area. I look at 24 month changes to avoid base effects. Europe close to 2% avg, US is not.

(Some people show 12 month inflation but that's a mistake. Europe had much more negative inflation last year so some of what they're experiencing now is bounce back. Eg, Germany lowered its VAT in 2020 and raised it back in 2021. That lowers 2020 inflation and raised 2021.)

Here's another way of looking at inflation: where prices were in Q3 compared to pre-COVID forecasts, pre-COVID trends and pre-COVID levels. (Remember Q3 was a while ago inflation-wise, in the US CPI up 2.1% from Q3 through November.)

FISCAL SUPPORT. The most dramatic *suggestion* of how different the fiscal support is comes from looking at disposable personal income. See those two big humps in the United States? Those were the checks. Plus UI generally replaced >100% of earnings in US and <100% in euro area.

Note in the previous the US also had stronger consumption, a lot of that is probably that people had more money but maybe different social distancing rules and practices mattered too. Here is retail sales and durable volumes in US and OECD. Unlike

Of course that wasn't fiscal support. Direct comparisons are hard, I've talked to a number of experts. You can look at what countries announced or claimed but not everything got spent, lending programs sometimes counted as spending, sometimes not, some is base. Etc.

You can look at actual/projected deficits. The problem is that the 2021 numbers appear to rely a lot on what countries say. In the case of Germany, it is claiming more 2021 spending than it is really doing as part of a complex debt brake gimmick. Seems to affect the numbers.

Regardless, even taking the published numbers as given the cumulative 2020 & 2021 deficit/GDP increase in US compared to euro area is about 3pp of GDP using OECD numbers. But The US had much much more support for DPI and for businesses So believe this understates the difference.

Now some interpretation. Many differences between the US and Europe: fiscal policy, job retention programs, COVID response and timing, pre-existing institutions. Plus they are two data points among many, would not infer too much from just this one comparison.

But, roughly accords with a mental model that IF a country mostly protected disposable income in 2020 and reduced consumption then it was in a position to recover in 2021 as COVID receded and it became safe to fully engage in economic activity again.

Fiscal stimulus in 2021 could help speed the resumption of economic activity in 2021 but not by a huge amount.

Much of the difference in stimulus goes into prices.

Use your multiplier to solve for *nominal* (not real) GDP, real GDP will be what it is, & the residual is prices.

(This also roughly works for the UK where COVID constrained real output in 2021-Q2 and Q3 more than it did in the US or the euro area, so less recovery in real GDP and more of an increase in prices, see the comparative bar charts above.)

That isn't all to the story. Is possible job retention worked well in Europe to keep people connected to jobs by reducing the value of the outside option of being unemployed and giving employer's more power to push employees to return. But not sure because labor inputs similar.

Note to the degree job retention worked better in Europe it says their level of potential was less temporarily depressed in 2021 than it was in the US. So more stimulus would have been appropriate.

I'm thinking out loud here and may be overly stuck in my paradigm. Doing more work on this. Look forward to reading more careful comparative work from others--as much trying to spark discussion as provide a clean, simple answer.

FIN

P.S. No, it's not all just a shift from services consumption to goods consumption due to pandemic, policy matters too. Both goods and services are much higher than they are in Europe. h/t @RiccardoTrezzi ecb.europa.eu/press/key/date…