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The following is the Executive Summary of the OECD assessment and recommendations, taken from the Economic Survey of the United States 2005 published on 27 October 2005.
Despite higher energy prices, the expansion has continued at a solid pace, driven by private domestic demand. With the output gap closing, stimulus is appropriately being withdrawn. However, monetary tightening since mid 2004 has not yet translated into higher long-term interest rates, and the incipient decline in the federal budget deficit owes much to the recent buoyancy of revenues. Over the next 18 months, the economy is projected to grow at an annual rate of 3¼ per cent, roughly in line with estimated potential output. Although such a soft landing is the most likely outcome, there are some risks. With little economic slack left, inflation could continue to pick up, in particular if oil prices keep rising. Insufficient public spending restraint or renewed dollar weakness associated with concerns about the external deficit might also add to inflationary pressures. On the other hand, an end to the house price boom, let alone a sharp correction, could entail a retrenchment of household expenditure that has been underpinned by rising household wealth.
The longer-term outlook also appears to be favourable. But addressing a number of issues would improve the chances of sustaining the recovery and good economic performance. They are mainly related to the lack of national saving and the associated large fiscal and external imbalances, but also concern some structural policy areas where progress in implementing reforms has been slow.
Ensuring fiscal sustainability and budget discipline
Further reducing the federal budget deficit requires spending discipline and a reform of major entitlement programmes. Efforts to eliminate the actuarial imbalance in Social Security should aim at strengthening work incentives for the elderly. Most likely, it will also be necessary to bolster revenues by broadening tax bases and relying more on indirect taxation.
Improving fiscal relations between levels of government
The significant degree of fiscal autonomy of the states appears to have had beneficial effects. But states’ tax systems need to be improved and budgetary priorities reassessed, given impending age- and health related pressures. Overly onerous conditions on federal grants to states for welfare and education should be avoided.
Coping with external adjustment
While a gradual adjustment of the external position is the most likely scenario, a credible macroeconomic policy reduces the risk of an abrupt shift in investor preferences. Policies that might increase national savings and ease inter sectoral resource transfers would also be helpful in their own right, even though the economy’s adjustment capacity is already impressive. Finally, global imbalances also need to be addressed by appropriate actions in other countries.
Addressing problems in the labour market
Expenditure on active labour-market measures (such as training) has been modest by international comparison, and the limited assistance available to job losers may be a factor contributing to rising protectionist sentiment. Trade adjustment assistance programmes (including wage insurance) could be expanded to cover displaced workers more generally. Moreover, to boost labour force participation, programmes for the disabled should be reviewed so as to reduce work disincentives.
Dealing with energy and environmental issues
The electricity grid and its supervision need to be strengthened. Energy policies should not only focus on supply but also on curtailing demand through greater use of economic instruments that take account of externalities. Taxation of all carbon-based energy products would have a strong impact on greenhouse gas emissions, which are high by international comparison.
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Return to the Economic Survey of the United States 2005
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For further information please contact the United States Desk at the OECD Economics Department at webmaster@oecd.org. The OECD Secretariat's report was prepared by Hannes Suppanz and Thomas Laubach under the supervision of Peter Jarrett.
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