Pundits looking for smart nonpartisan things to say about the U.S. presidential election have hit on the idea that the fate of the American economy, and perhaps therefore Barack Obama’s election, hinges on events in Europe.
This is a very misleading way of looking at things. A country the size of the United States is overwhelmingly the author of its own destiny. The outside world does matter for the United States, but it matters in the sense that external events occur that require a policy response. Events in Europe will sink the American economy if and only if American policymakers react to those events in a substantively disastrous manner. Considering that American policymakers and policymaking institutions have demonstrated a high proclivity for disastrous decision-making over the past four or five years, I think the odds of disaster are reasonably high. But make no mistake—if disaster strikes it’ll be a failure made in the United States.
It’s worth insisting on this because otherwise the “pass the blame” game can become paralyzing. One reason the European policy response has been so bad is that European legislators spent most of 2009 telling everyone that the financial crisis was American in origin. This was in some sense true, but also irrelevant. If you’re driving and the road curves and there’s no guardrail, what you need to do is steer the car properly not complain about road engineering while your car goes off the cliff.
Back to Europe. I feel really bad for the government of Switzerland faced with this crisis. Switzerland has substantially fewer inhabitants than Los Angeles County and is completely surrounded by eurozone members. If the whole rest of the continent falls into a deep funk, Switzerland will still be Europe’s most prosperous enclave but they’ll have a really big problem. The United States is about 40 times larger than Switzerland, is much less integrated with the eurozone, and doesn’t even export that much to Europe. If we get crushed by events across the Atlantic, it’ll be because of panic rather than direct real effects. What kind of panic? Well, specifically, political and economic instability in Europe may sharply increase the demand for safe liquid dollar-denominated financial assets. That might lead to a sharp reduction in the demand for dollar-denominated goods and services. The correct answer to this, however, is not to “blame Europe”; it’s to give the world the assets it needs. Print money, issue bonds, do what it takes. There are always going to be events in the world economy. A car that only works if the road never curves is a terrible car. A car equipped with a steering wheel that nonetheless drives off the road every time the road curves has an incompetent driver.
Steer the car, don’t blame the road.
