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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, published on 9 December 2008.
The US economy is going through an exceptionally difficult period after having been hit by converging adverse developments, some in reaction to previous excesses during the upswing, others more exogenous. A sharp downturn in the housing market, a financial crisis and temporarily high commodity prices have caused activity to slow sharply during 2008. This happened at a time when the external position was persistently weak and the fiscal stance had become unsustainable in the long-term – making for a difficult challenge to steer policy between competing objectives. Policymakers have taken actions to support growth and stabilize the financial system, while keeping a careful eye on inflation expectations. It is nonetheless likely that activity will get worse before it gets better. In addition to these short-term severe difficulties, adverse social trends need to be addressed, including incomplete access to health care, the topic of a special chapter in this Survey.
Faced with a confluence of extremely adverse events, macroeconomic policy has moved quickly to provide stimulus. Aggressive cuts in interest rates, large tax rebates and liquidity injection into dislocated financial markets have provided crucial support. Even so, sharp downside risks to growth continue to prevail, reflecting uncertainties on bank solvency and credit supply. Monetary policy stimulus remains necessary in the near term, but interest rates should be raised promptly once the economy revives, so as to avoid igniting price pressures. Resolving the financial crisis will entail accumulating additional fiscal debts, and further fiscal stimulus will be desirable if financial conditions and economic prospects do not quickly improve; nevertheless, strong budget consolidation should be given priority as soon as possible to address the unsustainable long-term fiscal trends.
The most severe housing downturn in decades has triggered large-scale financial disruptions. While the housing market correction needs to run its course, additional measures could be useful to limit further fall-out to the household and financial sectors. The government takeovers of Fannie Mae, Freddie Mac and AIG, as well as the measures taken to recapitalize the financial sector were necessary to support financial market stability but, after the crisis has passed, the system of housing finance should be fundamentally reformed.
Resolving the financial crisis could be a long drawn-out process. A major financial institution failed and several others have been on the brink of bankruptcy, prompting the central bank to extend lender of last resort protection, while the government has introduced a rescue plan to inject capital in distressed financial institutions and to purchase or guarantee troubled assets. If these initiatives are not accompanied by regulatory reforms, they could inadvertently serve to encourage imprudent behaviour on the part of lenders in the future. A major overhaul of regulatory and supervisory policy is necessary to remedy the deficiencies in oversight that the crisis has revealed. The new policy approach should be based on a more unified structure and a strong market stability regulatory body that can make prudential supervision more coherent. The market for housing financing will also need to be overhauled.
Health care reform is needed. Despite health spending being much higher in the United States than in any other OECD country, the US population’s health status does not compare favourably on key indicators, in part because many people do not have adequate financial access to medical care. Starting from the present situation, a plan likely to be successful would replace the health insurance tax exclusion with subsidies for individual purchase of insurance and reform the insurance market as needed. There appears to be wide interest for such reform and numerous packages along these lines have been proposed.
How to obtain this publication
The Policy Brief (pdf format) can be downloaded in English. It contains the OECD assessment and recommendations.The complete edition of the Economic survey of the United States 2008 is available from:
For further information please contact the United States Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by David Carey and Andrea de Michelis under the supervision of Patrick Lenain. Research assistance was provided by Laure Meuro and Roselyn Jamin.