Economic Survey of the United States 2005



Press Release: prospects for the US economy presented in Washington DC by OECD Chief Economist Jean-Philippe Cotis.

Executive summary

An Economic Survey is published every 1½-2 years for each OECD country. Read more about how Surveys are prepared

The OECD assessment and recommendations on the main economic challenges faced by the United States are available by clicking on each chapter heading below. Chapter 1 identifies the challenges for which the subsequent chapters provide in-depth analysis and policy recommendations.



Published on 27 October 2005

Chapter 1:   Chapter 1: Challenges facing the US economy
This chapter discusses challenges facing the US economy over the short and medium term against the backdrop of the current economic situation, which is quite favourable by international comparison. With the gradual withdrawal of monetary and fiscal stimulus and much higher oil prices, growth has slowed slightly as output has approached capacity limits and inflation pressures have begun to build.  Although the impact of Hurricane Katrina is still subject to substantial uncertainty, prospects for a soft landing are good. Nonetheless, policy action in some areas would be helpful in unwinding imbalances that have emerged and sustaining favourable economic performance. While spending restraint will be an essential part of any federal budget deficit reduction, reform of the major entitlement programmes and the tax system is important as well. States’ tax systems are also in need of attention, especially in view of increasing age  and health related pressures, which strain their limited ability to raise taxes. Bringing down the large external deficit requires policies that support a rise in national saving and the eventual sectoral adjustment. In the labour market area, there is a role for public policy to facilitate re employment of and provide income support to displaced workers as well as to encourage labour force participation. Finally, especially at a time of rising dependence on costly foreign oil and gas, the introduction of a tax on all carbon based products should be given much fuller consideration.

Chapter 2:   Chapter 2: Ensuring fiscal sustainability and budgetary discipline
This chapter discusses several major challenges facing fiscal policymakers in the United States. Despite recent improvements in revenues, a return to surpluses in the federal unified budget is still unlikely to materialise before age related spending pressures gather strength in the next decade. The chapter starts by presenting the budget outlook over the next ten years under alternative scenarios and assesses the need for reviving budget rules in some form. It then examines the current debate about Social Security reform and improvements to the retirement system more broadly. Finally, it considers how the efficiency of the tax system could be strengthened.

Chapter 3:   Chapter 3: Fiscal relations across levels of government
This chapter discusses the current state of fiscal relations between the federal, state and local governments in the United States and suggests directions for improvement. The significant degree of fiscal autonomy of the states and, to a lesser extent, of local governments has had several beneficial effects, including the responsiveness of public expenditure to local preferences and the comparatively high degree of accountability through the close link between revenue-raising powers and expenditure assignments. This link reflects traditionally weak support for redistribution across jurisdictions. Grants from the federal to sub national governments are focused on achieving aims of an efficiency or paternalistic nature and are therefore all earmarked. Programme devolution to the states, notably in the welfare area, has been remarkably successful in fostering innovation in programme design, but the cost pressures in health care for the indigent are such that greater federal involvement might become necessary. The efficiency with which states raise revenues has been compromised by the erosion of their tax bases, notably for corporate income and sales taxes. Replacing these taxes with a less distorting form of indirect taxation could reverse this trend. Finally, state balanced budget requirements appear to have had salutary effects, but more extreme forms of fiscal rules have reduced state and local governments' ability to provide the desired level of public goods.

Read also ECO Working Paper 462  Fiscal relations across

Chapter 4:   Chapter 4: Coping with the inevitable adjustment in the current account
In recent years the US current account deficit has grown to the point that most observers consider its level to be already unsustainable. Yet it seems set to continue to increase in the foreseeable future, with net foreign debt likely to surge. This chapter describes the present deficit from three points of view: imbalances of imports over exports of goods, services and income; of inflows over outflows of capital; and of investment and spending over savings and income in the domestic economy. It then examines the possible causal factors for these disequilibria and goes on to describe the arguments for both optimistic and pessimistic views as to their unwinding over time. Last, it suggests a number of policy conclusions as to how the US authorities should factor the presence of the deficit into their decision making, even though they rightly do not view it as a target outcome. The bottom line is that the importance of avoiding disincentives to save and of maintaining as much flexibility as possible in the economy is reinforced by the risks posed by the deficit.

Read also ECO Working Paper 467 Coping with the inevitable adjustment in the US current account

Chapter 5:   Chapter 5: Labour market issues
This chapter discusses developments in the labour market, which have been quite unusual in the current business cycle. While movements in unemployment have not been out of line with traditional patterns, this has resulted from a combination of both abnormally weak job creation and labour force participation. Possible explanations for these trends are considered. These include higher trend productivity growth and offshore outsourcing on the one hand and demographic factors and rising school enrolment on the other. The issue of job quality – both in terms of earnings and working conditions – is also addressed. Finally, after a brief review of labour market policies, some areas are identified where reforms or initiatives would be desirable.

Chapter 6:   Chapter 6: Energy and environmental issues
This chapter discusses developments in the energy and environmental areas, which are closely linked, as well as related policies. After a decade of relative calm, energy markets have been subject to considerable strain. The associated sharp rise in prices has focused attention again on reforms long needed in this sector. Although energy intensity in the United States has been declining, it is significantly higher than in the OECD as a whole, partly reflecting internationally low energy taxes. The latter are also a factor behind high, albeit declining, per capita emission levels. Supply incentives are still biased against renewable forms of energy whose share is very low. And major blackouts have highlighted the need for improving the reliability of the country’s electricity grid, an issue addressed in the recently passed energy bill.


A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.

To access the full version of the OECD Economic Survey of the United States:

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For further information please contact the United States Desk at the OECD Economics Department at  The OECD Secretariat's report was prepared by Hannes Suppanz and Thomas Laubach under the supervision of Peter Jarrett.





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