Ten Ways to Expand U.S. Growth

IMF News, July 27, 2017

Source details

Author: Yasser Abdih, IMF Western Hemisphere Department
Date: July 27, 2017
Key message: With the economy at full employment, the United States should gradually remove both fiscal and monetary support while intensifying efforts to address multiple constraints on its medium-term growth prospects.

Weak productivity growth.
An aging population.
Falling labor force participation.
Increasingly polarized income distribution.
High levels of poverty.
A share of income paid to workers that is nearly 4 percentage points lower than that in the early 2000s.
A middle class that has shrunk to its smallest size over the past 30 years.
A potential growth rate that is virtually the lowest since the 1940s.

Fiscal policy:
- Aim for a gradual and sustained reduction in the general government deficit—brought about by both higher revenues and lower spending—to put public debt on a downward path.
Monetary policy:
- The Fed should continue to gradually raise interest rates in light of incoming data.
- The Fed should reduce its holdings of securities in a predictable and well-communicated manner to avoid undue market volatility.

Simplify the system—with lower tax rates and fewer exemptions.
Redesign to create incentives for people to enter the labor force, decrease income polarization, and support low- and middle-income households.
Potential revenue sources mentioned:
- A broad-based federal consumption tax.
- A carbon tax.
- A higher federal gas tax.

Underinvestment in infrastructure has held back private sector productivity, long-term growth, and job creation.
Case for a sizable increase in public spending on maintenance, repairs, and new infrastructure projects, within the constraint of deficit and debt reduction.

Promote a level playing field in trade as favorable for the United States and elsewhere.
Scope to modernize trade agreements, including the North American Free Trade Agreement, in a way that is mutually beneficial for all participants.
The United States would gain by keeping its markets open as it pursues new or amended trade agreements.

Improve educational opportunities and outcomes.
Offer childcare support for low- and middle-income families.
Introduce paid family leave to encourage labor supply, raise human capital, and help reduce income polarization.
Expand the Earned Income Tax Credit.
Increase the federal minimum wage.
Improve the design of social assistance programs to increase work incentives and support the most vulnerable.

Preserve the current approach to regulation, supervision, and resolution.
Fine-tune some aspects of the system, notably to reduce the compliance burden for smaller banks.

Simplification, together with harmonizing rules across states, could stimulate job creation and growth.
Care should be taken to avoid negative consequences for the environment, workplace safety, or protections for lower-income workers.

Aim to protect gains in coverage achieved since the financial crisis, particularly for those at the lower end of the income distribution.
Doing so will have positive implications for productivity, well-being, and labor force participation.
The system will also need to contain healthcare costs.

IMF study findings:
- The decline in the U.S. share of income paid to workers is broad-based across states and industries, but the extent of the fall varies greatly.
- In addition to changes in labor institutions, technological change and different forms of trade integration have lowered the labor share.
- The fall was largest, on average, in industries that saw:
- A high initial intensity of “routinizable” occupations.
- Steep declines in unionization.
- A high level of import penetration (competition from abroad to what domestic firms sell plus how much imported inputs these firms use).
- Quantitatively, the study finds that the bulk of the effect comes from changes in technology that are linked to the automation of routine tasks, followed by import penetration.
Policy implication:
- Policies that help labor adjust—such as programs that upgrade workers’ skills—will be needed.

Ten Ways to Expand U.S. Growth — IMF News, July 27, 2017.