Top Five Policy Priorities to Brighten America’s Economic Future

IMF Blog, November 5, 2014

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Recent U.S. recovery has been "fragile and weaker than anything we have seen in the post-WWII period."
IMF projects future potential growth at only 2 percent in the coming years—a decline from the average potential growth rate of over 3 percent observed over the past one or two decades.
Two main sources of the weaker outlook:
- Slower expansion of the labor force.
- 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.
- Aging accounts for a large part of the drop: 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.
- Slowdown in productivity.
- Labor productivity growth soared in the late 1990s (information technology revolution) but has "irrefutably slowed."
- 2013 low for labor productivity was ½ percent.
- Average growth rate between 1998 and 2007 was 2¾ percent.
- Uncertainty remains whether the slowdown is temporary or persistent; even a rebound from the 2013 low that stays below the 1998–2007 average implies a markedly weaker potential growth outlook.

Core objective: encourage productive investment and innovation, reverse the downswing in productivity growth, and boost the labor supply.
The "Top Five" policy agenda:
- 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,
- 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 to encourage work,
- modify the disability insurance program so those working part time do not lose benefits,
- provide incentives to those that hire the long-term unemployed.

Many recommended policies come with a price tag; immigration reform is an exception and would likely reduce fiscal deficits modestly.
Estimated overall cost: around ⅓ percent of GDP per year for the next 2–3 years.
Part of the fiscal cost would be offset by faster growth resulting from these policies.
Ideal implementation: pursue these measures in conjunction with a broader and much-needed medium-term fiscal consolidation plan.

A public debate is necessary to identify programs that generate the maximum "bang for the buck."
Challenge: forge political agreement on a set of ideas acceptable to both sides of the aisle.
Recent progress (for example, the Bipartisan Budget Act) suggests bipartisan agreement is possible, especially where proposals intersect (business tax reform, infrastructure, work training programs, immigration reform).
Long-term U.S. growth will depend critically on acting on common ground.

IMF Blog post by Deniz Igan, November 5, 2014.