Where would the US be today without the shale stimulus?
When one thinks about why the US has outperformed, a lot of the analysis is destined to focus on fiscal and monetary policy. And while I think that’s an important thought process to go through, I believe that bank recapitalization and shale oil were the differential stimuli that helped the US recover better than Europe. Let me explain below.
What precipitated this post was one by market monetarist Lars Christensen in which he says “Krugman finally acknowledges that it is all about monetary policy”. Lars’ point is that when you look at the fiscal and monetary policy approaches in the US and in the eurozone, the main difference was monetary policy, not fiscal policy. To be honest, Lars has a good point there. And I am someone who has complained about the dominance and limits of monetary policy. But some of my criticism there has to do with sustainability and resource allocation, not with the short-term impact of policy.
However, when I think about the US economy over the last seven years, I tend to think more about the credit cycle than the real economy, because a very few credit sectors have dominated the credit upturn in the US: energy, autos, non-residential property, and student loans.
A lot of what we have seen in the difference between the US and the eurozone, therefore, owes to the quick recapitalization of US banks and the boom in those credit sectors, especially energy. Take shale oil, for example. The EIA says that investments in shale plays in the US totaled $133.7 billion during 2008-12. And that’s just the direct investment in shale. This doesn’t include the investment in traditional energy exploration and production. Nor does this sum include the large multiplier that these investments had due as people connected to these sectors spent income on cars, houses, restaurants, and other goods and services.
What if US banks were as poorly capitalized as European banks? What if those energy investments had never been made? How much growth would these factors have chopped off of GDP. You are talking about a loss of $100 billion a year after multipliers perhaps. That’s a little more than half a percent of GDP.
Of course you have the sovereign debt crisis in Europe, which emanated from a lack of sovereign fiscal space due to a faulty eurozone construction. And that also is a big part of why Europe has performed so poorly.
So yes, there are differences in fiscal and monetary policy. However, other differences matter even more. And going forward, this will be important to remember because right now US monetary policy is more restrictive than European policy. And even so, in a global growth slowdown, my bet would be with the US over Europe, despite the differences in monetary policy.