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Top Five Policy Priorities to Brighten America’s Economic Future

(version in Español)

There was a time in the not-so-distant past when science fiction could make us look forward to a better world. We had uplifting visions of the future in shows like Star Trek and Back to the Future. Today, the menu of options only offers a dystopian world ruined by poverty and violence (think The Hunger Games, Divergent, or Elysium).

It sure is easy to get pessimistic these days. Six years after the financial crisis, the recovery in the United States has been fragile and weaker than anything we have seen in the post-WWII period. Growth figures, in large part, have been serial disappointments, disrupted by government shutdowns, debt ceiling showdowns, or meteorologically-triggered slowdowns.

Is this a “new mediocre”?

In our last annual check-up of the U.S. economy, we project future potential growth at only 2 percent in the coming years—a significant step down from the average potential growth rate of over 3 percent that we have seen over the past one or two decades.

So what’s going on? Two main sources for this weaker outlook: a slower expansion of the labor force and a slowdown in productivity.

Over the past three decades, the labor force expanded at an annual rate of 1¼ percent. The growth rate now is projected to level off at below ½ percent. A large part of the drop is accounted for by aging: roughly 10,000 baby-boomers will turn 65 today, and about 10,000 more will cross that threshold every day for the next 19 years.

But the shrinking pool of workers is exacerbated also by weaker productivity growth. After soaring in the late 1990s—largely as a product of the information technology revolution—labor productivity growth has irrefutably slowed. At this stage, it is difficult to say whether this is a temporary phenomenon or is here to stay. One could certainly argue that there will be a new round of technology advances in the coming years or perhaps productivity gains linked to a new “energy revolution.” However, even if we take a middle ground—assuming labor productivity will rebound from the 2013 low of ½ percent but remain below the average growth rate of 2¾ percent observed between 1998 and 2007—we are still left with a markedly weaker outlook for potential growth.

Roadmap for a “new momentum”

Containing the decline in potential growth depends crucially on the will of the U.S. administration and Congress to adopt a policy agenda that encourages productive investment and innovation, reverses the downswing in productivity growth, and boosts the labor supply.

Our “Top Five” list to achieve that goal includes:

  • Infrastructure investment to reverse the downward trend in both the quantity and quality of the public capital stock in the United States.
  • Tax reform to simplify the code, broaden the base, and lower marginal rates—particularly for the corporate income tax.
  • Encourage innovation and improve education outcomes by reinstating the research and development tax credit, promoting and funding early childhood education, and providing greater support to science, technology, engineering, and math programs.
  • A comprehensive, skills-based immigration reform to ensure that the U.S. maintains a work force that meets employers’ needs for highly-skilled, educated, and innovative workers.
  • Active labor market policies that improve training programs, provide more effective job search assistance, improve family benefits (including childcare assistance), expand the Earned Income Tax Credit to younger workers so as to encourage work, modify the disability insurance program to ensure that those working part time do not lose their benefits, and provide incentives to those that hire the long-term unemployed.

Many of these policies come with a price tag—with the notable exception of immigration reform, which would likely reduce fiscal deficits modestly. However, the overall costs are not that large—we estimate around ⅓ percent of GDP per year for the next 2–3 years. However, part of this fiscal cost would be offset by the faster growth that results from these policies. Ideally, these measures should be taken in conjunction with a broader and much-needed medium-term fiscal consolidation plan. 

No lack of good ideas

Some may not agree with the priorities we have articulated. That is fine. But there certainly should be a public debate on which programs could generate the maximum bang for the buck. There are a lot of great ideas out there that would improve the prospects of the U.S. economy and address the sustainability of public finances.

The challenge will be to forge a political agreement on a set of ideas that both sides of the aisle can get behind. Recent progress—such as the Bipartisan Budget Act—indicate that a bipartisan agreement is possible, particularly given the intersection of proposals from both the Administration and Congress in areas such as business tax reform, infrastructure and work training programs, and immigration reform. Long-term growth in the United States will depend critically on acting on such common ground.