US takes better care of the long-term recession - Natixis

In recessions, the United States, the euro zone and France do not all make the same trade-off between the short and the long term, according to Patrick Artus, Research Analyst at Natixis.

Key Quotes

“When we examine the profile of activity during recessions and exits from recession in the United States, the euro zone and France, we see significant differences that reveal a strong preference for the short term in the euro zone and France and a strong preference for the long term in the United States.”

“In the short term during a recession, employment and wages adjust more drastically to the cycle in the United States than in the euro zone or France, but the economic stimulus provided by fiscal policy is also greater in the United States. This leads to similar falls in GDP during recessions in the United States, the euro zone and France. But it reveals a strong preference for the short term in the euro zone and France, where corporate profitability falls due to the slow pace of the adjustment in employment and wages.”

“In the medium term, after recessions, investment, employment and production get going again faster and more vigorously in the United States than in the euro zone or France. The euro zone and France are hampered in the medium term by:

• The fall in corporate profitability due to the weak adjustment in employment;
• An increase in the tax burden resulting from the need to finance the increase in public spending that boosts activity in the short term. In the United States, in contrast, the fiscal deficit is corrected by reducing public spending.”

“The United States therefore takes better care of the long term than the euro zone or France, which may come as a surprise given the common argument that US “financial capitalism” favours the short term. “Macroeconomic short-termism” therefore seems to be found in Europe, where employment and wages are slow to adjust, which hampers the subsequent economic recovery.”