Transcript of a Press Conference on the Conclusion of the 2016 Article IV Consultation Mission with the United States

June 22, 2016


Christine Lagarde, Managing Director

Alejandro Werner, Director, Western Hemisphere Department

Nigel Chalk, U.S. Mission Chief

Stephan Danninger, Division Chief, Western Hemisphere Department

Gerry Rice, Director, Communications Department

MR. RICE: Good morning, everyone. And welcome to this press conference on behalf of the International Monetary Fund. Today is the concluding statement of our Annual Article IV Consultation with the United States.

We have with us this morning, the Managing Director of the IMF, Madam Christine Lagarde. Immediately to Madam Lagarde's right is our Director for the Western Hemisphere Department, Alejandro Werner; and to Alejandro's right is Stephan Danninger, who is the Division Chief for North America. Immediately to my right is the Mission Chief for the U.S., Nigel Chalk.

We are on the record this morning. Look forward to your questions; please keep them as short as you can. Identify yourself by name and affiliation. And with that, I would ask Madam Lagarde to make some opening remarks.

MS LAGARDE: Thank you, Gerry. Good morning to all of you. Over 2, under 5, and 4 - that’s for you to remember. Over 2, guess what, is the growth that we forecast for the United States; under 5 is the current unemployment rate; 4 are the four forces that need to be addressed in order to actually improve growth and have it sustainable, solid and balanced.

So, the current situation is positive and despite some recent setbacks, we believe that the U.S. economy is in good shape. I want to focus on this, and this is what the Article IV Report will be focused on -- the four forces that will actually impact growth in the United States going forward, and which need to be addressed in order to improve the situation for the mediumterm.

Those forces are not PPP, they are PPPP. What do I mean by that? Labor force participation declining, productivity growth falling, polarization in the distribution of income and wealth, and finally, high levels of poverty. So you have the four Ps: participation, productivity, polarization and poverty.

So, let me take each of those four in turn. On the issue of labor participation in the U.S. economy, not unlike other advanced and emerging market economies, is aging. As a result, a smaller share of the population will be active in the labor forces in the coming years. And that is critically important because the workforce is actually the backbone of the U.S. economy, and mitigating the impact of population aging, both in terms of supply of labor and demand in general, must be a priority.

Second, productivity growth has declined. In the 10 years before the financial crisis, productivity was at around 1.7 percent. Since the financial crisis, in the last few years, productivity has declined to 0.4 percent, and this matters because the gains in average per capita income in the past two decades has generally been fed by improved productivity, by innovation, by efficiency.

So, what is causing this declining growth of productivity is a matter that we will be, at the IMF, investigating a lot further and deeper to really understand it. But there are indications already that it could be linked to falling dynamism, both in the U.S. labor markets and in the formation of new and productive enterprises. Why is that so, is what we are going further research.

Third P, is the polarization that we see in the distribution of income. And while about 0.25 percent of the population has moved from earning close to the median income, which is north of $45,000, to more than 1.5 of the median income, which is good. More than 3 percent of the population has moved into the group that earns less than half of the median income, and for that group economic insecurity, flat real incomes have resulted in either stagnation or decline of living standards.

Our calculations suggest that since 1999, this polarization of the income distribution has knocked around 3.5 percent of badly needed consumer demand. This is around one year's consumption over a period of 15 years.

Final P, the share of population living in poverty is at a very high level. The latest data shows almost 15 percent of the American population of 46.7 million people living in poverty, and those numbers are even higher, if you concentrate on certain groups, particularly minority, single parents, especially female-headed families, and it is heavier for young people and those with disability.

So, with such large share of the population living below the poverty line, this has important macroeconomic issues, let alone the concern that is of a more political nature, which we will not address. But if we look at the macroeconomic impact, not only does poverty create significant social strains, it also eats into labor force participation, and undermines the ability to invest in education, to invest in health, to invest in training, and by holding back economic and social mobility it creates not only a poverty impact on this generation, but it certainly can make it more sustainable inter-generationally.

So, all in all, our assessment, despite the good news about the U.S. economy that I mentioned earlier on, is that if left unchecked, those four forces, participation, productivity, polarization and poverty will corrode the underpinnings of growth, both potential growth and actual growth, and will hold back gains in U.S. living standards.

But there is a fifth P, I would like to mention, which is policies; because policies can actually counter those forces. We have outlined in our work, a range of options that can be used either in combination or in isolation, and I would like to highlight a few for you. Policies need to help lower income households, and that includes a higher Federal minimum wage, more generous-earned income tax credit, upgraded social programs for non-working poor.

There is also a need to deepen and improve the provision of reasonable benefits to households to give incentives to work, to raise the labor supply, and to support families. That would include paid family leaves to care for children or parents; childcare assistance, and a better disability insurance program.

I would just note that the United States, of all the so-called rich countries, is the only one which does not have, at the national level, maternity leave provisions. So sensible skills-based immigration reform could also raise the labor supply and boost productivity.

And I come to my final P, productivity. Productivity growth is another imperative, as were discussed, and those gains must inherently be based in the private sector, but public policies can actually help productivity gains in the private sector, by having a more sensible tax system, one that is simpler and functions better; more trade integration; better infrastructure, or stronger and more vocationally-oriented education system, all of that would support higher productivity growth.

Now none of it is easy, and some of the proposals are debated, sometimes controversial, but we believe that they provide a solid foundation for progress. So, as I said, over 2, under 5, and 4 forces. Our forecast for this year is 2.2 percent. We believe that unemployment will remain below 5, but those 4 forces have to be contended with.

With that, we are all very happy to take your questions.

MR. RICE: Thank you very much, Madam Lagarde.

QUESTIONER: Hi. One of the things that jumped out at me in this report was the notion that the dollar looks overvalued by 10 to 20 percent based on current exchange rates. I'm just wondering if you can tell us, against which currencies that comes? What are the sources of it? Is it just a rush to safety, amid uncertainty in the world right now? Thanks.

MS LAGARDE: Well, what you see in the report as well is that the U.S. dollar has appreciated in real terms by about 10 percent in the course of 2015, which, based on our model, which includes all currencies pretty much. I mean, not the smallest countries in the world, but all currencies. It leads us to believe that there is an over-appreciation ranging between 10 and 20 percent, pretty much, at the median between these two.

And that is a factor of probably that’s, you know, flight to safety - the safe-haven factor that always applies to the U.S. dollar in times of uncertainty, and certainly the variation in the price of oil is always often correlated with an appreciation of the dollar when the price of the barrel goes down. So, it's really those two factors that we see as a possible explanation for this appreciation.

MR. RICE: Thank you. In the front row, the Financial Times.

QUESTIONER: There is perhaps a fifth or sixth force that you don't mention in the report, and that is politics, which is very much an active one here in the U.S. economy, but also across the Atlantic, in the U.K. I wonder -- two questions; one, what would be the impact of a Brexit vote on the U.S. economy in particular? And what would the channels be in which the U.S. economy would be affected?

And secondly, you do have a couple of mentions of protectionism and the need for the U.S. economy, or U.S. policymakers, to reject all forms of protectionism. There is a number of protectionist policies that are being advanced by Donald Trump, the Republican Presidential Candidate. What would be the impact on the U.S. economy of such policies?

MS LAGARDE: We believe that a vote by the U.K. people to leave the European Union would have some effect on the U.S. economy. How large those effects could be is debatable, and we don’t conclude to a particular level of impact. However, we certainly agree with, I think, Chairman Yellen yesterday, that it would not entail -- it most likely not entail a recession in the United States.

Having said that, the channels would be of two different kinds; the first one which is probably the most innocuous is the trade channel, simply because the trade relationship between the U.K. and the U.S. are not of such magnitude that it would impact, significantly, the U.S. economy.

The other channel is the financial channel, and if there was, you know, significant flight for this safe haven that we were talking about, which would probably and inevitably increase and appreciation of the U.S. dollar, for instance. Or if there was significant volatility and uncertainty prolonged over time, it would have an impact through that financial channel, which would be more real than the one through trade.

On the issue of protectionism, what we are seeing in various corners of the world, as can be demonstrated by the number of complaints and filing, and identification of protectionist measures by the WTO, is a certain rise of protectionism, which we believe is not conducive to growth, because we believe that actual trade and open trade to the extent that it is conducted in a fair and even-handed manner is in itself conducive to growth overall.

So, protectionist measures, in our view, are counterproductive from a growth perspective. In other words, if you have a growth agenda, you should not be advocating trade protectionism.

MR. RICE: Let me swing over here, the lady in the second row; The Washington Post. Thank you.

QUESTIONER: Hi. In the policy prescription that you all put forth --

MS LAGARDE: In the what?

QUESTIONER: In the policy prescription --

MS LAGARDE: Thank you.

QUESTIONER: -- that you guys put forth. One of them was encouraging the Federal Reserve to allow inflation to run above its 2 percent target, and saying that they should actually hit that target from above. Some economists believe that in order to do that, they would have to not hike rates again, or perhaps even cut the Federal Funds rate, in order to ensure that inflation does reach its target or even goes above. Do you think the Fed should be actively considering either not hiking rates again, or cutting interest rates?

MS LAGARDE: Well, first of all, the inflation targeting is focused on two, and can be addressed in a symmetric way. Second, we agree with Chairman Yellen that there has to be clarity of communication, and no confusion about the messaging. Third, we also support the view that any such decision to increase rates should be data dependent, should be gradual, and should really be focused on the objective of stability, and not abrupt decisions one way or the other.

So, I think that summarizes our view, and both the numbers in terms of prices, and in terms of labor market, looked at from all the possible angles that are available for the analysis, should be the first and foremost priority before any decision is made.

MR. RICE: Thank you very much. Let's just stay with your neighbor here.

QUESTIONER: Ms. Lagarde, I'd like to ask about the dollar as well. If you look at the G20 Finance in Shanghai, and the Sendai G7 Finance, their concern was that the -- and you were there at both those meetings -- that the dollar was going to rise against a possibly declining RMB, and the yen. So what's going on here? If the dollar is overvalued, does that suggest that the world economy is even more fragile than the fragility that you’ve identified?

MS LAGARDE: You know, it's quite complicated to actually elicit some ultimate and universal wisdom from variation of currencies. But we try to look very carefully at where it moves, how much it moves, and how fast it moves, and certainly what was agreed in both Shanghai and Sendai, repeated by the leaders, was that any such move should not be intended for competitive devaluation purposes, and to increase a share of global markets.

And what we are seeing at the moment on -- you know, in those variations is not an export-growth-determined policy by any of the policymakers. But as I said earlier on, the appreciation of the dollar in the last 12 months is probably attributable to the level of uncertainty that there is around, as well as to variation of community prices that often, more often than not have a direct impact on the evaluation of the dollar relative to other currencies. So that’s what we’re seeing.

I’m not -- we’re not suggesting that it’s a reflection of additional fragility. We see a degree of recovery, could be better. But it’s certainly sufficiency anchored around three percent, probably a little north of that. And, certainly, as far as the US economy is concerned, we see, you know, a solid US economy, which has to address those four forces that I referred to earlier.

MR. RICE: Yes, sir.

QUESTIONER: Two questions. One, if your four Ps are not met, what is your forecast for potential growth? How much further will it fall, and, if you could get some numbers on that?

And two, you seem to be having your cake and wanting to eat it too on the Fed. It seems you clearly say there’s a clear reason for a very gradual path for rates, and yet, at the same time, you say that potential -- the capacity constraints could see a major surge in inflation, which would warrant the Fed raising rates quickly. So I wonder if you could elaborate more on that dynamic, please?
MS. LAGARDE: You know, I’ll leave the impact on potential growth to Nigel, so he has a little bit of time to also express his views given that he was the mission chief on that. But it’s a bit of a difficult kind of factual to have because we are -- you’re asking us to anticipate what would happen if those policies that we are recommending were not adopted. I’ll let Nigel address that point.

On the issue of the Fed monetary policy, I think we are very much aligned with Chairman Yellen and in that we very strongly support that any move be data dependent, communicated with clarity, which requires a degree of consistencies and repetition, and be as gradual as possible. What we have consistently said, over time, is that it should not be a monetary policy that requires to sort of reverse the moves that have been taken. And that’s, really, in our view, the key point. That it be gradual, that it be supportive of the economy, but that it not be such that a reversal be required. Equally, when we see that there is a recognition that is a symmetric approach, we’re also on that page.

Nigel, do you want to address the potential growth, please?

MR. CHALK: So when we do our forecasts in general, we take, as a baseline, the existing policies of the government. So under existing policies, so that’s not including the policies we’ve suggested in the concluding statement, our potential growth forecast over the medium term is a varying 1.9 percent. And that’s quite a lot below where we were pre-crisis, where US potential growth was closer to three. I think that reflects what the managing director says, that the shifts -- the secular decline in labor force participation, the low productivity, and to some sense, the feedback from poverty and polarization back into potential growth.

MR. RICE: Thank you. Okay, let me swing down to the front here, sir.

QUESTIONER: I would like to ask you, in regards with Brexit, do you have any concerns that maybe it can encourage some other countries to do the same thing and maybe to push the beginning of the end of the European Union? And also, do you believe these will have an impact in economies like Mexico and some other countries?

MS. LAGARDE: You know, we have been on record and have been public twice in the last few weeks about our basic conclusion that a decision by the UK people to leave the European Union would be negative from an economic point of view and would reduce the income. We’ve gone into details. There are numbers. We have a baseline. We have the various scenarios that are applicable. We’ve identified trade and financial stability as the two pillars of negative effects. And I don’t really want to go back into debating those reports. They are there. They’ve been commented upon significantly.

I personally believe that the European Union is an extraordinary construction, from inception to the work in progress that it has never ceased to be. And certainly, for having lived through the last few years, first, as finance minister then as managing director of the IMF, I have seen for myself the progress that has been made and which I regard as encouraging, while obviously not perfect. So I would hope that this is a conclusion that encourages member states to continue that work in progress and to continue to improve it.

You know, as far as the impact of the UK people’s decision to either stay or remain, I think the same channels that we have identified for the US economy would equally apply to Mexico and would be a factor of how much trade there is between the UK and Mexico and how the financial markets, variations, and potential volatility would affect the Mexican economies. I think we can probably all conclude that there would be some effect, but probably not of a significant magnitude.

MR. RICE: Thank you. In the back, please.

QUESTIONER: Hi, Madam Lagarde. You’ve received a lot of monetary policy questions, so I’ll ask a fiscal policy question. A lot of the prescriptions that you give in your report would require approval, certainly, by the administration and, definitely, by Congress. However, as you know, there’s considerable gridlock in Congress. A lot of the solutions that you’re suggesting; infrastructure spending, tax reform, raising the Federal minimum wage, would require approval by Congress.

I’m wondering, at what point do you think the debate on boosting US growth should shift to rather than just exclusively a focus on monetary policy, a discussion on fiscal policy?

MS. LAGARDE: Well, we believe at the IMF that a three-pronged approach is absolutely necessary for most economies, and that applies to the United States as well. That three-pronged approach is based on structural reforms, fiscal growth, friendly fiscal policies, and use of fiscal space where there is fiscal space and monetary policy. And for the moment, we have clearly seen a lot of monetary policy actions and impact around the world, including in the United States and not enough of the other two.

So that debate needs to take place. We are encouraged by some of the measures that were adopted on a bipartisan basis in the last few months. Whether it’s the budget with appropriation and debt ceiling provision. Whether it’s the agreement to fund highway development. Whether it’s the agreement around the Earned Income Tax Credit going forward. Those are positive signs that there is a willingness to address the hardcore economic issues and how the US economy can bounce back and reach and hopefully, exceed potential going forward.

I see the, you know, when I look at the political debate, I see, for instance, the Earned Income Tax Credit as one where they could be bipartisan (inaudible).

MR. RICE: Okay. Gentleman in the front here. Thank you.

QUESTIONER: Thank you. Thank you, Madam Lagarde, for doing this. And I keep asking you President Putin’s questions. He was speaking --

MS. LAGARDE: So you’re the spokesperson?

QUESTIONER: No. No. Never. I’m a journalist. I have nothing to do with the government. Thanks, but, they have their economic forum in St. Petersburg, he was talking there, and he said that we need the strong America -- the strong American economy. But obviously, he was talking about Russia then. So my question to you about that is this interdependence that you also seem to stress -- in all of your appearances. In this particular case, I’m not seeing any reference to that in the documents. Why is that? Is it really present? Do we really -- does the world need this strong American economy? Does a strong American economy need the world, including Russia?

And since I’m on this Russian subject, Putin said that we were expecting a decline this year. We are seeing growth. His economy minister says the same. He says that probably to be a growth year. Do you agree? Thank you.

MS. LAGARDE: Well, thank you very much. You know, when we look at say two categories of numbers, the number of people unemployed and looking for a job, over 200 million. When we look at poverty levels and the increasing excessive inequalities in many economies, we believe that stronger growth and therefore stronger economies are needed. Then you move in to the policy area, which I have just described with the participation, productivity, polarization, and poverty as far as the US is concerned. The exercise that we conduct with the Article IVs, as you know, are country specific, and we focus on the fundamentals, the focus, the downside, the improvement in the policies specific to a particular country. This is the Article IV nature. And obviously, it doesn’t stop us from looking at the interconnections, at the high degree of interconnectivity between the various economies of the world. If you look at the research we do, we work on cluster of economies that work together, whether it’s on a supply-chain basis, or whether it’s on a geographical proximity. But you know, when you look at our global economic outlook, we certainly focus on the interconnections and the value of those interconnections, if they are conducted in a fair and evenhanded way, which we believe some of the multilateral trade treaties include.

On the Russian economy, it’s not Article IV time, but I don’t, you know, if it’s positive news for the Russian economy, the better. We don’t have that positive focus for 2016. We still believe that the Russian economy is going to continue to contract, less so than in 2015 but still a contraction.

MR. RICE: Thank you very much. That brings to close today. Thank you for coming. Thanks to Madam Lagarde and the team.


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