Remarks by Angel Gurría, OECD Secretary-General
20 September 2010, New York, United States
Ladies and Gentlemen:
It is a pleasure to be in New York. I am grateful to Terry McGraw, Chair of the U.S. Council for International Business, and Charlie Heeter, Chair of the Business and Industry Advisory Committee (BIAC), for having provided us with this platform to launch the OECD Economic Survey of the United States.
The Survey comes at a critical juncture of the economic cycle. The recovery from the worst economic crisis in our lifetimes remains sluggish. Unemployment is high, the financial sector in many parts of the world is still not functioning properly and governments have less and less room to manoeuvre, especially on the fiscal side.
The purpose of the OECD Survey is to contribute useful ideas on how to boost job creation and support a sustainable and balanced recovery in the United States.
Providing immediate support to the recovery
Let me start with a few words about the short-term outlook.
The stimulus packages helped stabilise the economy. A turnaround began about a year ago, and employment started to rise again, albeit at a slow pace. Most recent projections suggest that the recovery will continue. In our short-term outlook, released on September 9th, we project that U.S. GDP growth will be 2.6% higher in 2010. This is not stellar, but it is a great improvement from what we saw a year ago.
There are also increasing signs that the economy has entered a soft patch, but this is not inconsistent with previous recoveries. We do not see a risk of a double-dip recession, but we do not see either a recovery that is strong enough to bring unemployment back to pre-crisis level in the next couple of years.
We therefore believe that macroeconomic support ought to be maintained in the short-term. Monetary policy continues to play a crucial role. In this regard, we welcome the announcement of Chairman Bernanke that the Federal Reserve would be prepared, if necessary, to provide additional stimulus.
Fiscal support also remains important. The decision to channel further support to the states last summer was very timely. It was especially important, because it helped fund education, keeping thousands of teachers employed. The extension of unemployment benefits, job training and tax or hiring credits are also welcome, as they will help cushion the lingering effects of the recession.
While support for the recovery is undoubtedly the main priority, it is also important to signal that the budget deficit will move back to a more sustainable path. We believe that the Administration’s target of reducing the deficit to 3% of GDP by 2015 is an essential step to boost confidence.
But it will be important to spell out which measures will be taken to achieve this goal, even if they are put in place only later. In this context, we look forward to the recommendations of the bipartisan National Commission on Fiscal Responsibility and Reform, established by President Obama.
In fact, in the next couple of years, there will need to be a difficult balancing act. Keeping the momentum of the recovery, while improving public finances. This is a daunting task and this Survey highlights priorities for action. This includes labor markets, enhancing the efficiency of government programs and reaping the potential of the green growth economy.
Jobs for the future
A key strength of the U.S. economy is the adaptability of its labour market. Over the years, it has delivered strong job creation and low unemployment. But this recession has been so severe that long-term unemployment has risen to record levels. More than 4 per cent of the labor force has been unemployed for more than six months. This raises the spectre of a large pool of unemployed persons with skills that no longer match the needs of employers.
Many workers will need retraining as they move from declining to expanding activities. Support for job training and post-secondary education provided under the stimulus programme has been valuable. Such training and education programmes should be prolonged to help workers adapt to the post-recession economy.
And further efforts are needed to tackle youth unemployment, which is above 18%, 7 percentage points above pre-crisis levels and almost double the overall rate. This is clear signal of mismatches between education and demand for skills.
The fiscal stimulus has supported employment. However, during 2007-2009, unemployment rose for two-and-a-half years before peaking in the fourth quarter of 2009 at 10% of the labor force. It could be early 2013, at best, before the unemployment rate returns to its pre-recession level.
There are other more direct ways to enhance job creation. In many OECD countries, tax cuts reducing labour costs have supported private-sector hiring. In this regard, we welcome the Administration’s initiative to cut employer payroll taxes. Such policies should remain in place until the labour market has improved more markedly.
Efficient government programs
Looking forward, the needed fiscal consolidation will require a large effort to ensure efficient delivery of public services. In other words, to get value for money.
The largest potential for efficiency gains can probably be found in health-care programmes, if only because they are so large. U.S. health care spending approaches 16 percent of GDP. This is almost double the OECD average. Nearly half of this spending occurs through government programs, such as Medicare, Medicaid and the Veterans’ Administration. These programs provide essential health care services to senior citizens, low-income families and military veterans. However, if past spending trends continue, they will absorb an increasing chunk of tax revenues.
The recent U.S. health care reform is an important landmark. It significantly broadens health-insurance coverage, which is consistent with reforms advocated by the OECD. It also provides some responses to the unsustainable growth in health-care spending, although to fully take advantage of this, future governments will have to exercise some discipline and refrain from overriding the cost-saving provisions of the legislation.
Beyond health care reform, the Survey also recommends some additional reforms in this policy area, including ways to stabilize the ratio of work life to active retirement by linking the age of social security eligibility to active life expectancy.
Greener technologies to reduce climate-change risks
Last but not least, the United States needs to explore new sources of growth to support a robust, sustainable and smart recovery. In doing this, it needs to seize the new opportunities presented by the green economy.
Global warming is a global problem that requires a global solution. U.S. leadership is vital in this regard because the United States has the world’s largest economy and is therefore a large emitter of greenhouse gases.
A major plank to conserve energy and reduce emissions of greenhouse gases is government support for green technologies. This is essential because private investment in emission reduction and alternative energies is otherwise likely to be insufficient. Support for the development and diffusion of emission-reducing technologies, is very welcome in this regard, as is the Administration’s reinforcement of international cooperation in this field.
However, government support for innovation will not do the job if the right incentives are not in place. And the best incentive is putting a price on carbon, either through a carbon tax or through cap-and-trade. This would encourage producers and consumers to exploit emission-reduction opportunities and would boost research on alternative energy sources.
The government has proposed a comprehensive package of policies to substantially reduce emissions. But, it is not certain whether a carbon tax or a cap-and-trade system will be effectively created in the U.S. in the near future.
We strongly call on the U.S. Congress to pass climate change legislation. If this is not done, most likely the EPA will progressively extend regulation to reduce emissions from motor vehicles to all other sectors. This would not be as cost-effective an approach to abatement and would be unlikely to be sufficient to enable the United States to achieve the emission reduction targets communicated at Copenhagen.
According to OECD projections, barring new policy action, U.S. emissions will increase by 28% until 2050.
At the international level, U.S. leadership also provided the much needed impulse behind the G20 pledge to limit global greenhouse gas emissions by phasing out inefficient and wasteful fossil fuel subsidies. The OECD, together with other international organisations, is supporting the G20 process in this effort. We estimate that the elimination of these subsidies alone could lead to a 10 % cut in emissions worldwide.
Ladies and Gentlemen:
The United States is facing a challenging agenda on the road to recovery. It will take time for the economy to return to the pre-crisis level and even longer to achieve job-rich, sustainable and balanced growth. The Obama Administration is taking important actions and staying the course of reform, but the effort should continue.
Let me close my remarks by stressing one very important point: growth and prosperity require continued leadership and inclusive international co-operation. The United States has played a crucial role in multilateral efforts to boost the recovery. Take the example of the unprecedented coordinated response to the economic and financial crisis. Its success is a tribute to the active co-operation of G20 members and U.S. leadership on matters that affect the lives of billions of people.
We hope that the U.S. will be able to continue to show this leadership in other important international discussions going forward, including the conclusion of the Doha Development Round, COP16 and initiatives to fight corruption and promote a coherent approach to lift millions of people out of poverty in developing countries.
But we also understand that for the U.S. to be able to lead, it needs to find a way back to a path of increased growth and prosperity. I hope that the analysis and recommendations of our Survey will provide food for thought on how to strengthen your domestic economy.
We stand ready to support you and work with you every step of the way. You can rely on the OECD’s policy experience, emanating from 50 years of multilateral learning and partnership. The OECD is at your service.