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What is the short term outlook for the United States?
The US economy has performed very well since the early 1980s. Since then, real GDP growth has been the highest among G7 countries and well above the OECD average. In per capita terms real incomes remain much higher than in nearly all Member countries. Productivity gains picked up markedly in the second half of the 1990s, and there has been a further acceleration of late. Following a period of sluggish growth and massive policy stimulus, the economy has now enjoyed nearly a year of strong expansion, growing by about 5 per cent (annualised) over the past three quarters. Since mid 2003, the recovery has broadened - spreading from spending by households and government to business capital formation - and has gained considerable cyclical momentum. This should ensure continued growth at above potential rates in the near term - even though macroeconomic policies are likely to become less stimulatory - so that the output gap that opened in 2001 may close around the middle of next year. To be sure, significant downside risks to this positive outlook remain. While the current account balance is not a policy target, the persistence of a large external deficit could put upward pressure on long term interest rates. And the unusually slow improvement in the labour market might crimp confidence and spending. On the other hand, the further pick up in productivity and hence potential output in recent years and the high level of profitability bode well for a continued robust economic expansion, increasingly led by business investment.
How can good economic performance be sustained?
The US Administration has emphasised strong economic growth as a top priority; assuring such an outcome will be a challenging task. Indeed, although the economy has been quite resilient, manifesting a solid capability to adjust to adverse shocks, policymakers face a number of hurdles, which need to be cleared in order to ensure a sustained recovery and continued strong growth over the medium and long run. Major policy challenges in this regard are to:
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Reduce public dissaving by strengthening budgetary discipline and placing the public retirement and health insurance systems on sound financial footings.
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Ensure policy settings are consistent with an orderly unwinding of the external deficit, based on a strengthening of national saving and exports, rather than weaker investment and growth.
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Lock in price stability and adapt the central bank’s communications policy to the new low inflation environment.
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Continue to re build financial market confidence by vigorously implementing and enforcing corporate governance and accounting reforms.
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Further enhance product market competition to maintain higher productivity growth.
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Avoid protectionism and continue to build support for free trade.
This does not mean that there are not other areas that need attention and where reform efforts or policy changes should be considered, especially to address environmental problems and tackle a broad range of social issues. These social and environmental challenges, in particular, were extensively covered in the last Survey and are hence not revisited in depth.
What are the factors underlying the large external deficit and how can it be reduced?
The current account has been in almost uninterrupted deficit since the early 1980s. With the usual cyclical improvement hardly visible during the recent recession, it has reached record levels and is currently running at around 5 per cent of GDP. As a result, net external claims on US residents have grown to some 25 per cent of GDP, still less than the net liabilities of many other countries but rising of late by an average of several percentage points of GDP per year. An adjustment in the current account balance could involve a number of domestic and foreign factors that affect the global demand for dollar assets. At some stage, those assets may come to occupy too large a share of foreign portfolios, even though their relative returns remain favourable. The flow of private capital into the United States has slowed somewhat in the last two years. Although governments - especially in Asia - have stepped up their purchases of US assets, this slowdown may have contributed to the decline in the dollar on foreign exchange markets since early 2002. This should help arrest the rise in the external deficit but, in the interest of global growth prospects, stabilisation of the foreign debt ratio cannot rely exclusively on dollar depreciation. Faster domestic demand growth abroad will be required, as will an increase in US national savings and some long lasting competitiveness gains independent of exchange rate changes.
Dollar and the current account
Source: Bureau of Economic Analysis.
Underlying the current account deficit is a rising gap between domestic saving and investment, which is covered by foreign saving. If that deficit is to be reduced in relation to GDP, either domestic saving will have to increase or investment to fall, again relative to GDP. Increasing saving can be achieved by raising net exports relative to domestic demand, decreasing consumption relative to income or reducing public spending relative to taxation. The fiscal stimulus of the past few years has been helpful in promoting recovery; but if current prospects of future budget deficits are realised, interest rates will be higher, barring a considerable rise in private savings. This would imply slower growth in the capital stock, productivity and economic potential. There are a number of factors that would allow the current account adjustment to occur gradually, including the dollar’s role as a reserve currency and the scarcity of equally attractive investment alternatives, owing to the favourable features of the US economy (deep capital markets, a flexible labour market, a healthy investment climate and robust productivity trends). Nonetheless, ensuring a smooth adjustment process that avoids endangering both domestic and international growth prospects will require policies that bolster investor confidence by strengthening corporate governance and curbing emerging protectionism and, more fundamentally, effective measures to shrink the budget deficit over time.
Has there been progress in environmental policies?
While some progress has been made in the environmental field, there remain several areas of concern, including ozone protection, air pollution reduction and mercury targets. In its Clear Skies initiative, the Administration set a new target for reducing major pollutants through cap-and-trade policies, but it opposes targets for greenhouse gas (GHG) emissions. A credible alternative to the Kyoto protocol commitments on global warming is still lacking, although GHG emissions are heavy and hence in need of market based restraint. Proposed energy legislation focuses almost entirely on supply increases through costly hand outs to producing sectors, while measures to restrain demand by price or other means are notably absent. One result of this reticence is that the fuel efficiency of the automotive fleet has being stagnant over the past decade at some 6 per cent below earlier peak levels as the fleet has grown heavier and its typical engine more powerful. The government persists in setting separate (“CAFE”) standards for cars and light trucks - although it has announced tighter standards for the latter for the coming three model years, narrowing the gap somewhat - thereby accommodating the increase in the light truck share of new vehicle sales from one tenth when the programme began in 1979 to around one half most recently.
Are trade and agricultural policies moving in the right direction?
The United States is committed to further trade liberalisation in global, regional and bilateral contexts. However, its repeated resort to import restricting measures - even though often consistent with WTO rules - has somewhat eroded its leadership role in the world trade arena. Anti dumping and countervailing duty sanctions against Canadian softwood lumber and safeguard actions regarding steel and Chinese textiles are the most prominent examples. The United States has yet to implement certain rulings issued by the WTO’s Dispute Settlement Body, notably those concerning the so called Foreign Sales Corporation provisions in the US tax code. The recent discontinuation of the steel tariffs and a provisional agreement in the long standing dispute on softwood lumber are welcome steps, although the former has been accompanied by the imposition of a licensing and monitoring programme and the latter would still severely limit market access by a quota system, adding permanently to the cost of homebuilding. Hence:
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Actions to restrict access to domestic markets or to impede firms’ and governments’ ability to source globally should be avoided, both because they imply higher prices and lower real incomes for consumers and tend to impede structural adjustment and flexibility and because they encourage protectionist tendencies worldwide.
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US leadership to successfully conclude the Doha round is essential. In this context, the authorities might need to consider how bilateral and regional trade agreements can best support and complement progress in multilateral trade liberalisation. The limited coverage of key protected sectors such as agriculture in bilateral agreements underlines the need to press for comprehensive trade liberalisation multilaterally.
Agriculture is both the source of many trade disputes as well as a sticking point in the present global trade negotiations. While agricultural support relative to farm revenues is below that in some other OECD regions, it is likely to increase as a result of recent policy changes. The gains from these support measures go overwhelmingly to large scale farmers and entail losses to consumers, taxpayers and foreign producers, especially those in developing countries. Recent policy changes risk accentuating both production distortions and trade tensions and are not in line with the long term OECD policy reform objectives. It would be desirable to roll back the extra support given to farmers in the past few years and reverse the move away from market based outcomes implied by recent legislation. This would strengthen the United States’ leadership role in the world trade arena where it has tabled ambitious proposals for agricultural liberalisation in the context of the Doha Round.
Do social policies need attention?
There are also ongoing challenges on the social policy front. Health insurance coverage has begun falling again, following a temporary improvement in the late 1990s. This represents a significant economic cost to the extent that a lack of insurance leads to poorer health outcomes and earlier death. In contrast to health coverage, fears that the cyclical downturn would reverse the sharp drop in welfare caseloads following the reforms in the mid 1990s have proved unfounded. On the other hand, poverty rates have edged up again, and, although they are still below their previous peak in the 1990s, they are very high for some population groups. Continued efforts are necessary to ensure that improvements in social conditions in the 1990s, highlighted in the 2002 Survey, are not reversed.
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Une Synthèse (en format pdf) peut également être téléchargée. La Synthèse contient les évaluations et recommandations de l'OCDE.
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