The US economy grew briskly in the 3rd quarter of this year, even with the record high fuel prices and the effects of Hurricane Katrina. According to the Washington Post:
"The nation's gross domestic product, a broad measure of the value of all goods and services produced, rose at a 3.8 percent annual rate in the third quarter, up from a 3.3 percent pace in the second quarter, the Commerce Department said. That first estimate of GDP growth could be revised in coming months.
The gain in economic momentum largely reflected faster growth in consumer spending, which accounts for about two thirds of economic activity, the Commerce Department said.
The department said it could not quantify the hurricane's economic effects. The Labor Department said Thursday that 502,000 people have filed new claims for unemployment insurance benefits because of the storms."
The underlying data, though, is maybe not quite as optimistic as the 3.8% number suggests. Much of the growth is being driven from consumer spending, which is being accomplished now by borrowing, for Americans are spending greater than 100% of their disposable income. This is not a trend that can continue indefinitely.
However, US growth rates are far better than Europe and Japan and have been so for over a decade. The Economist writes concerning a new theory on why American growth has outpaced Europe that is an interesting argument.
"In the past ten years, the economies of what is now the euro area have grown by around 2% a year. America has managed a full percentage point more....
Technological advance, though, is at the core of their own approach. In essence, a given industry in a given country can use either the best technology available or an older, less efficient version. In countries already at the cutting edge, innovation is the source of growth. Those not at the frontier advance by implementing existing, but still better, methods of production.
From this, two observations follow. The first is that the institutions and policies best suited to countries at the leading edge need not be the right ones in less advanced places. Education, say Messrs Aghion and Howitt, is a case in point. The closer a country is to the technological frontier, the more growth depends on having a highly educated workforce. Further back from the frontier, education still matters; but university degrees matter relatively less and good primary and secondary education count for relatively more. Evidence from different countries and from American states appears to bear this out. And what does this imply for the transatlantic growth gap? America spends around 3% of its GDP on tertiary education; the European Union only 1.4%. More than a third of Americans have degrees; fewer than a quarter of Europeans do. Against that, many EU countries are considered to have stronger secondary education than America does. Europe may therefore have been well equipped for its post-war decades of chasing the United States, but did not adopt the policies needed to push back the technological limits.
The second observation is that, whereas most theories of growth laud the accumulation of capital, it is sometimes good to see it destroyed. Growth is likely to be higher if markets are open to new entrants, which either drive less efficient incumbents out of business or scare others into investing, updating their technology and seeing off the raiders. Again, this is likely to matter more the closer countries are to the limits of technology. And again, the destructive process appears to have a freer rein in America than in Europe. For example, say the authors, half of all America's new pharmaceutical products are introduced by firms less than ten years old; the proportion in the EU is only 10%."
Time will tell if the economic theory above is correct, but it does present a fascinating reason for the US advancing beyond Europe after 30 years of post-war European impressive growth.