US economy is stepping on the gas Automobile sales are at their highest level since the start of the financial crisis, and there are even signs that the delinquent housing market is finally beginning to turn. Sales to listings, a key measure of the health of the US housing market, are at last moving in the right direction, while in some states, prices have actually started to rise. There are still plenty of reasons to worry about the durability of the American recovery, but set against the still moribund performance of the UK economy, and that of much of the rest of the Europe, the US already looks a model of renewal. Unemployment is falling, and growth, though likely to slow a little after a buoyant fourth quarter, remains robust. Output in the US is back at comfortably above its pre-crisis peak. In the UK, by contrast, the economy has gone nowhere for more than a year now, with output stuck a full four percentage points below the 2007 peak. Unemployment, moreover, is still rising and, with the great bulk of the public spending cuts still to come, looks destined to go much higher before it starts falling. I should be careful not to over-egg the doom and gloom. There have been encouraging signs even in the UK data. Retail sales surged in January, according to figures published yesterday, beating the gloomy consensus by a country mile. Nor is the overall picture quite as bleak as the headline figures suggest. Strip out the oil and gas sectors, where production has declined markedly - possibly because of the Government's attempt to tax the North Sea more - and growth in the rest of the economy, though still subdued, isn't so bad. What is more, net trade is improving by leaps and bounds. Britain recently recorded its best trade balance in nearly 10 years, which given that 40 per cent of our commerce is with the eurozone, is commendable. Even so, few here expect significant overall economic growth this year, while in the US, things are very obviously on the mend. The country from which the financial crisis sprung is emerging from the implosion's economically catastrophic consequences far more rapidly than us. Why is this? Why is the US seemingly back in clover, while the UK is still stuck deep in the mire? For former US treasury secretary Larry Summers, the Labour Party, and most others of a Keynesian persuasion, the reasons are clear. It's largely because of fiscal policy. While Britain and much of the eurozone have been applying austerity, the US has kept the fiscal taps full on for much longer. Seemingly ruinous deficits have been tolerated and public debt has been allowed to rise, countering the adverse consequences for demand from private sector deleveraging. The position adopted by George Osborne, the Chancellor, has been quite different. Not until we get on top of our debts, he has argued, can we expect to see the economy return to significant growth. As long as the deficit goes unaddressed, the economy will struggle. We need deficit reduction to allow growth, he argues. Mr Summers has been scathing in his analysis of this strategy. The idea of "expansionary fiscal contraction," he told an audience in Davos last month, is not just "oxymoronic," but you might think of dropping the prefix too. No country came out of the Great Depression in the 1930s, he argues, except by abandoning the gold standard and ultimately by rearming for the Second World War. To his mind, it's a powerful lesson. Reasonable growth won't return absent of demand. In circumstances where the private sector can't or won't provide it, the state must step into the breach. Austerity cannot be a viable growth strategy, as the eurozone is fast discovering to its cost. It's an argument that I find only partially persuasive. First, because it's not clear that the US has in fact had much of a fiscal stimulus. The headline-grabbing size of President Barack Obama's federal stimulus may have been partially, if not wholly, offset by cuts in state and local government spending. Most states are obliged to run balanced budgets, so expenditure was cut sharply into the recession as revenues declined. The second reason why the fiscal explanation doesn't seem to carry much weight is that it is not clear that Britain had any choice but to cut the deficit. If governments could be sure that to spend more would carry no interest rate penalty, then probably even George Osborne would have swallowed his small-state beliefs and let rip. But, of course, we know that they cannot. Britain's abnormally large banking sector, in combination with exceptionally high levels of household debt, make the UK particularly vulnerable to the sort of sovereign debt and financial market contagion we have seen sweep the eurozone. Given the UK's monstrous overall level of debt, the Chancellor cannot afford to take risks with interest rates. It is this very level of debt that provides the best explanation as to why the UK economy is failing to respond. Britain has barely made a start on paying off its debts. In the US, where the downturn began rather earlier than anywhere else, the process is more advanced, with sharp falls in household and financial sector debt more than offsetting the rise in government debt. There are two other factors worth noting. One is that the US is not nearly as exposed to the eurozone crisis as the UK, whose fate is strongly intertwined with that of Europe both through trade and the banking system. And the other is that America is simply much better at "animal spirits" than Europe. America's private sector is considerably bigger as a proportion of GDP than in Britain and much of the rest of Europe, and it has been quicker and less sentimental about clearing out the detritus of the last boom. Bad debts were written off, workers were shed, and uncompetitive business was allowed to go bankrupt or, as in the case of the big automobile manufacturers, brutally restructured. Unlike Europe and the UK, where employment preservation has led to serious losses of labour productivity, the US has been growing steadily more competitive right through the downturn. Shale gas has been the icing on the cake. Sometimes, it seems, the short, sharp shock is better than the long, drawn-out adjustment.