What Big Economies Got Right, or Wrong, After Crisis; Why the U.S. and U.K. Have Fared Better Than Japan and Europe
The divergent policy paths taken by the world's advanced economies provide lessons for global leaders navigating difficult post-crisis environments.</br></br>The U.S. and U.K. appear to have gotten something right, while the eurozone and Japan have fumbled. Unemployment rates after the crisis peaked at 10% in the U.S. and 8.5% in the U.K., and are down to 5.8% and 6%, respectively. The eurozone rate has climbed in the past few years to 11.5%, while Japan's economy has fallen back into recession.</br></br>The American and British central banks embraced aggressive easy-money policies early on. Japan lurched toward consumption-tax increases to restrain budget deficits, while Europe moved slowly in addressing weaknesses in banks and stuck to a course of fiscal austerity.</br></br>Here are three lessons from this inadvertent experiment in post-crisis policy-making:</br></br>Quantitative easing helps address a long-standing economic riddle. What can central banks do to help the economy after short-term rates hit the "zero lower bound?" When rates are near zero, central banks lose a tool typically employed when the economy is weak: short-term interest-rate cuts. Rate cuts spur borrowing, spending and investment, helping to smooth out the economic cycle by bringing forward activity from a more optimistic future during depressed times.