The basic Republican critique of President Obama is that he’s Europeanizing America. In the last campaign, Mitt Romney claimed Obama “takes his inspiration from the capitals of Europe.” Paul Ryan warned “we will turn out just like Europe if we stick with European policies.” Europe’s continuing economic stagnation—12 percent unemployment, near deflation, tepid growth—is certainly an unattractive model for the United States. You can see why conservative cartoonists like to draw Obama in a beret.
But the policies that created the mess in Europe are not Obama’s policies. They are the policies—especially tight money and fiscal austerity—that Republicans have pushed for America. And where economics is concerned, the GOP is still the party of croissants and lederhosen.
The big news in Europe this week was inflation dropping to 0.5 percent, which might sound like good news but isn’t. Yes, too much inflation can be bad, shaking confidence in currencies, hurting the purchasing power of workers and seniors with fixed incomes. But the European Central Bank has an inflation target of nearly 2 percent, and persistent “lowflation,” with a nagging risk of deflation, is exactly what the continent doesn’t need after a severe financial crisis and a brutal recession. It’s terrible for families (and governments) with debts. And it’s increasing the value of the euro, which hurts European exporters and discourages investment. As I’ve tried to explain, in tough times, a little inflation can be a good thing.
The problem is that the ECB—under pressure from the inflation-phobic Germans on its board—has kept its monetary policy much too tight. The Federal Reserve lowered its key interest rate to zero in December 2008 and has kept it there ever since; more than five years later, the ECB still hasn’t quite gotten to zero. The Fed has also engaged in three rounds of “quantitative easing,” buying bonds to try to juice the economy; the ECB has not yet tried monetary stimulus. Inflation in the U.S. is only 1.1 percent, below the Fed’s target, but at least former Fed chair Ben Bernanke and current chair Janet Yellen have tried to do something about it.
Republicans have fought them every step of the way. They have accused the Fed of “debasing the currency,” of fueling the next bubble by printing money, of trying to turn the U.S. into Zimbabwe. In 2011, the top four congressional Republicans wrote Bernanke to demand an end to quantitative easing. Most Senate Republicans opposed Yellen’s nomination, arguing that the Fed has kept monetary policy too much, that it has focused too much on creating jobs and not enough on squelching inflation. The Fed has a statutory “dual mandate” to maximize employment and stabilize prices, but congressional Republicans, led by Paul Ryan, have called for the elimination of the employment requirement, so it would focus solely on inflation.
In other words, they want the Fed to be like the ECB.
Fortunately, they have been mostly unsuccessful. The Fed has begun to “taper” its monetary stimulus, but the inflation hawks on the Fed board have been consistently outvoted. That’s one reason our inflation rate is more than twice as high as Europe’s, although it’s still too low, and our unemployment rate is nearly half as low as Europe’s, although it’s still too high.
The other main drag on European growth has been overly tight fiscal policy. After a short burst of countercyclical stimulus following the financial meltdown in 2008, Europe has embraced fiscal austerity, pushing spending cuts and balanced budgets throughout the continent. This has inspired riots, killed jobs, and depressed growth in countries like Greece and Spain, which now have jobless rates over 25 percent. The United Kingdom’s austerity after David Cameron became prime minister in 2010 turned a promising recovery into a double-dip recession.
Again, the contrast with the United States is instructive. President Obama’s $800 billion Recovery Act—sorry, I’m a stimulus bore—was the largest fiscal stimulus in history, a big reason the Great Recession ended just four months later. Obama passed more than $1 trillion in additional stimulus in 2009 and 2010, a big reason U.S. economic output is now 6 percent above its pre-crisis level, while most European countries have yet to return to their pre-crisis GDP. When private demand disappears, government needs to fill the gap.
And again, Republicans have been pushing for us to be more like Europe, railing against stimulus, demanding draconian budget cuts that suck money out of the economy. Only three Republicans in Congress voted for the Recovery Act. Republicans have bitterly fought unemployment benefits, small business tax cuts, and other stimulus measures they used to support. They even threatened to force the U.S. government into default if Obama didn’t agree to massive spending cuts; overall, cutbacks in local, state, and federal spending have reduced GDP by about 1 percent a year since the Republicans took back the House of Representatives. President Obama has pushed for the American Jobs Act, new research and infrastructure spending, and other stimulus measures, but Republicans have insisted on austerity. That’s why U.S. growth has been mediocre instead of strong.
Still, it’s been better than Europe’s growth, mainly because the U.S. has done more monetary stimulus and more fiscal stimulus. We also had a more aggressive response to our financial crisis, recapitalizing our financial system through government interventions like the $700 billion TARP; the Europeans never did a TARP, one reason its banking system is in much worse shape than ours, providing much less support to the broader economy. It almost goes without saying that most Republicans voted against TARP. And Ryan’s latest budget would make it even harder for government officials to intervene in future financial crises.
None of this seems to infiltrate media coverage. Republicans don’t like universal health insurance or welfare, so they’re seen as “anti-European.” When Republicans like Senator Orrin Hatch say that “President Obama basically would like us to be Europe,” nobody questions them. But the Europeanization of the GOP continues. The Europeanization of America, on the other hand, hasn’t happened, because the party that always talks about it is still in the minority.