Why US Workers Are Better Situated to Confront Economic Turbulence

Why US Workers Are Better Situated to Confront Economic Turbulence

Why US Workers Are Better Situated to Confront Economic Turbulence

Europe directed more of its Covid aid to businesses, while the US supported workers. If a recession hits now, Europeans could be in even worse trouble.

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Inflation has come for Europe. In 2021, inflation concerns were largely specific to the United States, but after Russia’s invasion of Ukraine, energy prices skyrocketed on the continent. This winter, unless there is significant government intervention, families will struggle to heat their homes. But inflation goes beyond this: With ongoing supply-chain problems, prices have risen even if you exclude energy and food. As we enter this next dangerous phase of the post-Covid recovery, decisions made much earlier are playing an outsize role. And the United States made two choices that have left the country’s economy in a much better situation than that of Europe.

International comparisons of inflation rates are notoriously difficult to make, and even when one manages to compare the numbers, the environments are different. For instance, when new cars became more difficult to find, Americans were harder hit because we use cars more and spend more on them than Europeans do. Looking beyond the energy and food price increases caused by Russia’s invasion of Ukraine, the United States has a core inflation rate of 5.9 percent over the past 12 months. The rate is 5.4 percent in Canada and 5.5 percent in the United Kingdom. Across the G7 nations, the rate is 4.8 percent, and across Europe it’s 6.8 percent. “Rising inflation is a global problem,” according to the Economic Policy Institute.

Since there is an increasing possibility that Europe will enter a recession that will put the US economy at risk, it’s worth reflecting on two sets of choices 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 dramatically reduced child poverty and gave families and workers cash, ensuring that they would have money to spend during the reopening. This, in turn, accelerated the recovery and caused the unemployment rate to plummet.

Indeed, our recovery is significantly stronger than those of our peer countries. The International Monetary Fund estimates that US growth will average 1.4 percent from 2020 through 2023—well above the eurozone’s 0.7 percent. The government spending was also an insurance policy: The United States approaches this crisis moment with relatively stronger balance sheets and higher consumer confidence. Europe, on the other hand, will face these difficulties from a weaker, more insecure position in the event of a recession and a decline in incomes.

In March 2020, during the initial reaction to the pandemic, Congress made a second key decision about how to help workers. Most European countries chose payroll support, wherein the government gave money to businesses so workers would not be laid off. The United States, in contrast, turned to its creaky unemployment insurance system instead. (The US did provide payroll support to small businesses via the Paycheck Protection Program, which is best known for how little went to workers and how many of its beneficiaries became vocal critics of student debt cancellation.) There were several reasons Congress did it this way. The United States doesn’t have the formal sectoral bargaining found in many European countries, so it would have been difficult to arrange payroll support without allowing employers to control the terms of the resources.

The immediate result was that US unemployment numbers spiked and Europe’s did not, even though an equivalent share of people weren’t working during the early part of the pandemic. But the positives of the US plan became clear later. First, since unemployment insurance was increased by a set amount, those at the bottom of the income distribution scale benefited the most, reducing income inequality. With so many people applying for new jobs, there was additional churn and circulation that let people upgrade their skills and find better work. This meant that employers had to compete to get and train workers and offer better working conditions. Without this choice to support workers rather than businesses, it’s impossible to imagine the rapid wage growth and the increased union activity that we’ve been seeing.

It also means that US workers, with better jobs and higher incomes, are in a better place to confront the turbulence ahead. Little choices have big consequences. The same is true with the monetary economic policy-making that is happening now. As long as there’s a clear direction to support workers and ordinary people—and not just businesses—the benefits will continue to pay off down the road.

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