Nevertheless,
the US economy continued to surge ahead in growth terms over this
period. The demand increase was therefore entirely private sector-led,
fuelled by debt-driven household consumption increases which were
inspired by the capital gains made by those with some direct or indirect
investment in stocks and shares. Since the middle of 2000, however, such
capital gains have turned negative.
However,
fiscal policy has responded by becoming more expansionary only in the
very recent past, with expenditure increases of just under $100 billion
being announced in the wake of the terror and anthrax attacks. Instead,
over most of 2001, official policy has been directed towards a looser
monetary policy, with the US Federal Reserve announcing six interest
rate cuts over the course of the year. However the interest rate cuts
alone have done very little to push the economy out of the current
recession.
In
Europe, the attempts at fiscal compression seem to have gone much
further than even the fairly stringent requirements of the Stability and
Growth Pact. Both the actual and structural fiscal deficits (shown in
Chart 4c) since 1998 have been amazingly low, well below 1.5 per cent of
GDP, despite the evident recession and the continuing high level of
unemployment. Given the supposed political domination of Social
Democratic parties in most of the government of Euro area countries,
this pattern obviously requires greater political economy analysis.
But
the most striking pattern is that of the Japanese economy (Chart 4d), in
which the fiscal stimulus appears to have been used with much effort but
to little effect over the past few years. The Japanese government budget
has moved from the modest surpluses which characterised the decade until
1985, to very large deficits amounting in some years to nearly 8 per
cent of GDP. These were part of the efforts to pump-prime the system,
along with low nominal interest rates that have reached near-zero
levels. But still they have not been able to lift the Japanese economy
out of the deflationary spiral.
What
do these contrasting fiscal patterns and their even more contrasting
results suggest ? It would be wrong to infer from these that fiscal
policy is not an important means of changing levels of economic activity
in the advanced capitalist economies. However, these data do suggest
that the pattern of fiscal stance, of the kind of spending and taxation
decisions that are made, may be even more significant than the absolute
levels. Crucially, they are important because they can change levels of
employment, and these in turn play an important role in affecting
expectations of economic agents in the economy.
Thus,
in the US economy, the fiscal stance could be low because the
consumption boom was associated with employment growth which in turn
added to higher private spending. Conversely, in Japan the combination
of fiscal stimulus and interest rate cuts was not sufficient to reverse
the trend of declining employment opportunities. These led to depressed
expectations, which in turn meant that additional incomes tended to be
saved to insure against future job loss, and therefore did not translate
into higher economic activity.
The
role of unemployment and employment growth
Clearly,
therefore, it is necessary to investigate patterns
of employment and unemployment in the major advanced
economies more closely. Chart 5 show the unemployment
rates (as per cent of labour force) in the OECD economies,
and shows how in all the major countries except US,
unemployment rates have tended to increase over the
latter part of the 1990s.
However,
there are substantial differences in definition and
measurement of open unemployment across the OECD,
and therefore Chart 6 presents the standardised data
which tries to use similar definitions. This presents
a rather different picture. Thus, Japanese unemployment
rates appear to rise more sharply while European unemployment
rates appear to have fallen slightly.
Chart
6 >> Click
to Enlarge
A
major problem with such data is the growing presence of the
''discouraged worker effect'', whereby potential workers and long term
unemployed (especially but not exclusively women) tend to drop out of
the labour force and therefore disappear from both numerator and
denominator. This problem has been evident in Europe for some time, but
there are indications that it has been growing in the US as well in
recent times. Thus the slight fall in the unemployment rate in January
2002 from 5.8 per cent to 5.6 per cent, has been widely attributed to
the ''discouraged worker effect''.
Because
of this, rates of aggregate employment growth may
be a slightly better indicator of labour market conditions
than open unemployment rates. Of course, even these
do not give us an idea of the nature and quality of
employment, as most governments increasingly include
a range of part-time and casual employment as well,
which may reflect distressed worker involvement. Nevertheless,
Chart 7 presents the evidence on rates of employment
growth in the major OECD countries.
Chart
7 >> Click
to Enlarge
