TransAtlantic musings

The occasion of a family wedding took me to the United States just before Valentine's Day. I had lived in the USA for a decade or so in the 1980s, and had been in San Francisco for a few days last Spring. But having now lived in one place--London--for so long brought both places into a start contrast with one another. And the fact that both countries are now in the throes of economic recession made this contrast all the more intriguing.

During my week in the USA I spent several days in the Pittsburgh PA area followed by a few more in my old home town of Asheville NC. The weather in the former was a fresh, vibrant cold and lots of snowfall while the mountain resort of Asheville was sunny and mild. The sense of recession in the USA seemed to me much more tangible than in England. It was a hot topic of conversation, with everyone wanting to know how people in England were reacting to and dealing with an apparently severe economic downturn. From a purely central and north London perspective the recession has not yet had much of an impact. Apart from when I am at work, lecturing on Macroeconomics, the topic is rarely one for conversation. Most people seem to be continuing with their lives as beforehand, with no immediate panic about the future. The Tube trains and buses remain as overcrowded as ever; the shops continue to sell their wares to the same numbers of people, although this recession seems unusual in that many retailers have actually reduced prices (unlike past recessions, where such price flexibility was not so prevalent).

In the USA I felt that many prices continued to be significantly cheaper than for similar products in the UK. This was most noticeable with cars and petrol. In the USA the latter is selling for just below $2 a gallon, while in the UK it is around £1 per litre, almost 4 times as much. A saloon car which might cost £10,000 or more in the UK is currently selling for some $7,000 in the USA. Food prices in supermarkets seem much the same in both countries, but it still remains significantly cheaper to eat out in restaurants in the USA than in the UK. These differences are much the same as I first noticed when I lived in the USA, more than 20 years ago. But the recession seems to be much more marked in the USA, and it may well be that the price differences are due to this. Certainly, the greater flexibility and much less dependable welfare situation in the USA means that it is a more volatile economy, more prone to the swings of the business cycle. While people in the USA are more fearful of the recession—understandably so, as so many people rely on their employers for provision of health care insurance—the USA is also likely to be the first country to emerge from the recession, and probably at a faster pace of growth than any other country. This reveals that the USA's strength—its economic flexibility—is also a source of weakness, enhanced by the much more market-dependent health care there.

So what of this recession? It has probably come upon us much more swiftly than almost anyone expected or predicted, but neither is it as bad as some commentators have argued. At least not yet. We are a long, long way from a second Great Depression like the 1930s, and the recessions of the early 1970s and 1980s seem much worse for any ordinary people who lived through them. And although it would be churlish to begin to talk of "green shoots of recovery", there is every possibility that we have seen the worst. Unless there is a major catastrophe to derail the beginnings of recovery, it would seem that the end of the recession will begin in September (at the earliest) or by early 2010 at the latest. This recession, like so many others in the past, followed on the heels of a banking crisis. Banking, like the entire financial system, can only operate on the basis of confidence, which has become seriously eroded in the past year. Confidence, like any form of trust, takes years to build but can be destroyed in a matter of minutes. Lack of confidence is reducing slowly; full confidence will take years to restore. But as long as confidence is not being further eroded there is every possibility that uncertainty in the general economy will reduce and we will see economic growth restored in the near rather than the distant future. Some of this will be engendered by the various "stimulus packages" (i.e. expansionary fiscal policy) being put in place by governments around the world. That so many of these involve the bailing out of lame ducks concerns me as a precursor to further moral hazard; I would have preferred to see the stimulus in the form of reduced taxes for individuals, rather than a recurrence of policies which failed to be effective in the 1970s. But that is a discussion for another time. For now I must sign off and relive the memories of a recent wonderful holiday in the USA, and dream of going back there again as soon as my bank balance permits.