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Many people are still puzzled about the fact that America’s economy has recovered while Europe remains stuck near recession. It is indeed largely a factor of two forces: Europe by and large chose the path of fiscal austerity while America chose stimulus, and America also has control over its own currency, while member states under the euro currency do not. Most economic analyses of the last four years begin and end there, concluding that the dual force of fiscal contraction and monetary skittishness has unreasonably slowed Europe’s recovery and cost its economy dearly. In another aspect, demographics can also help explain the real economic chasm between Europe and the United States in recent years. A quick scan of the US Census Bureau’s list of spending by age group shows that consumers in their thirties and forties lead in several other categories as well. Per person, they spend the most on food, housing services, furniture, apparel, footwear, and entertainment. They are an entrepreneurial bunch as well. According to the Kauffman Foundation, the median age of a company founder when beginning his or her current business is forty. They are, quite literally, the most vital cohort in modern economies.
But something important, and different, has happened to this prime-age group in the US and Europe in recent years. According to IMF, since the global economy began to slow in 2007, the number of European citizens between the ages of thirty and forty-four has declined by 2.6 million, or nearly two percent. In America, the cohort has increased by a quarter million, not a large gain, but hardly the gaping decline seen across the Atlantic. This divergence in prime-age consumers alone explains a meaningful share of the difference between European and American consumer spending trends over the last several years.
To understand how this demographic quirk occurred, it is imperative once again to go back to the end of the Second World War. According to Spike Peterson, an Associate Professor in the Department of Political Science at the University of Arizona, both America and Europe enjoyed a baby boom after the war ended. America went from having 2.6 million babies in 1940 to 4.3 million by 1960. But the boom peaked and then fizzled. By 1975, America was back down to 3.1 million births per year. Europe’s live-birth rate fell from nearly eight million in 1961 to six million by 1980.
But America’s “baby bust” was temporary. Its birth rate soon swelled to back above four million, nearly as many American babies were born in 2005 as were during the peak of the baby boom in the 1960s. Europe can’t say the same. In 2011, the number of live births in Europe was just above five million, one-third below 1960s levels, according to Eurostat.
America’s rising birth rate that began in the 1970s, a second “baby boom” means its ranks of citizens aged thirty to forty-four will continue to grow. Indeed, the US Census Bureau projects the number of Americans in this cohort will rise by nearly five million from 2013 to 2020. Europe’s falling birth rate over the last four decades delivers the opposite fate. The number of Europeans of the same age is projected to decline by 1.3 million by 2020. If “demographics are destiny,” the verdict is clear: America has a light tailwind, Europe a stiff headwind.
Part policy, part culture, and part demographic fate, the economic divergence between American and Europe is striking. One side of the Atlantic has managed a fairly smooth recovery; the other remains stuck in neutral. All policymakers, but particularly those in Europe, must act with a greater sense of urgency. The longer a recovery takes to complete, the deeper the scars. Till von Wachter of Columbia University has shown that losing a job during the worst economic downturns can reduce life expectancy by a year and a half.
According to Yale economist Lisa Kahn, Americans entering the labor market during poor economic times earned seven percent less than those graduating into a strong economy. A full seventeen years after graduation, Lisa Kahn found those who began their careers during a weak economy still earned measurably less than those who began their careers in a strong economy, adjusting for age and inflation. This is the dangerous legacy global economies leave their youth: Those who step into a world of high unemployment may never be able to shake off the anchor of stagnation. America has to worry about the Great Recession leaving a mark for years. Europe must consider the possibility of scars that last for a generation.
Economic history makes clear that economies adapt, and often the seeds of booms are planted in busts. Five years ago, when dire predictions were arising from the “dependence on foreign oil,” no one foresaw America’s current energy boom. Even fewer were confident that its consumers could shed debt as quickly and effectively as they have. Many of the world’s great tragedies, from major wars to devastating natural disasters, were followed by booms of prosperity. Economists spend so much effort analyzing recessions that they often underestimate the odds of something good happening.
But for now, the Great Recession lingers. There are several questions to ponder: Are European voters sufficiently frustrated to demand a new direction of economic policy, away from austerity and toward growth? Will Europe’s central bankers attempt to stimulate the region, risking future inflation for the prospect of short-term economic gain? Will families in both America and Europe begin a new baby boom, as they did after the Second World War? Will a new recession strike, kicking global economies while they’re still weak? These questions will determine where people head next, yet nobody can answer them with any accuracy. Economics is a field strewn with unknowable unknowns.
But the lessons we have learned watching countries respond to the Great Recession are important. Two economies on opposite sides of the Atlantic reacted to the crisis with different approaches, and both are now on different trajectories: America toward growth, Europe toward stagnation. There will be more recessions in the future. These lessons should not be forgotten.