American exceptionalism — through Bidenomics

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When COVID-19 struck, the initial economic impact was devastating. Large parts of major economies shut down, both because of official lockdowns and because people feared that in-person interaction would expose them to infection. In the United States, 20 million jobs suddenly disappeared.

At the time, there was widespread concern that the pandemic would leave lasting economic scars. After all, the 2008 financial crisis was followed by a weak recovery that left real gross domestic product in many countries far below the pre-crisis trend even a decade later. Indeed, as we approach COVID's four-year mark, many of the world's economies remain well short of full recovery.

But not the United States. Not only have we had the strongest recovery in the advanced world, but the International Monetary Fund's latest World Economic Outlook also points out that American growth since 2019 has actually exceeded pre-COVID projections.

There's a lot of terrible noneconomic news out there right now. But let's take a moment to celebrate this good economic news — and try to figure out what went right with the U.S. economy.

It's true that a recent poll found that a majority of Americans and 60% of Republicans say that unemployment is near a 50-year high. But it's actually near its lowest level since the 1960s.

What about inflation? When you use comparable measures, America also has the lowest inflation rate among major economies.

Can we trust government data here? I've been having some fun with a project called Truflation, which supposedly uses the blockchain and was backed in part by crypto types and which I suspect was intended to show that official inflation was greatly understated. What its numbers actually show is a steep decline in inflation over the past year.

U.S. economic success, then, is real, and remarkable. How did we pull it off?

Part of the answer, to be fair, is luck. Russia's invasion of Ukraine caused a major energy shock in Europe, which had come to rely on imports of Russian natural gas. America, which exports gas, was much less affected.

A second, probably more important factor was that the United States pursued aggressively expansionary fiscal policy. In early 2021, the Biden administration enacted a very large spending bill. Many economists were extremely critical, warning that this spending would fuel inflation, which it probably did for a while. But inflation has subsided, while "Big Fiscal" helped the economy get to full employment — arguably the first time we've had truly full employment in decades.

One last thing: When COVID struck, all advanced countries took strong measures to limit economic hardship, but they took different approaches. European governments generally paid employers to keep workers on their payrolls, even if they were temporarily idle. America, for the most part, let layoffs happen but protected workers with expanded unemployment benefits.

There was a case for each approach. Europe's approach helped keep workers connected to their old jobs; the U.S. approach created more flexibility, making it easier for workers to move to different jobs if the post-COVID economy turned out to look quite different from the economy before the pandemic.

My conjecture — and that's all it is — is that the U.S. approach turned out to be the right one. COVID appears to have had lasting effects on what we buy and how we work — most obviously, working from home appears to be here to stay — while high labor force participation belies fears that laid-off workers would never come back. So, America's COVID response, even though it temporarily led to high measured unemployment, may have set the stage for a strong recovery.