June 22, 2016
Welcome to all of you for this briefing on the 2016 United States Article IV Consultation. By now, you will have seen our concluding statement which covers the range of fiscal policies, monetary policy, and the financial sector.
At the outset, I would like to emphasize we think that the U.S. economy is in good shape, despite some setbacks in very recent months. Unemployment is well below 5 percent, in the past year an average of 200,000 new jobs were created every month, and household incomes are rising at a healthy clip.
Having said this, today we will look beyond the important recent achievements and look forward to what will be needed to ensure strong, sustained and balanced growth in the years ahead. I would highlight in particular “four forces” that pose a challenge to future growth.
What are those four forces? Declining labor force participation, falling productivity growth, polarization in the distribution of income and wealth, and high levels of poverty in the U.S. Let me elaborate.
First, labor force participation is declining.
- The U.S. population is aging and, as a result, a smaller share of the population will be active in the labor force in the coming years.
- The workforce makes up the backbone of the U.S. economy. Mitigating the effects of population aging on labor supply and demand should therefore be a priority – both here in the U.S. but also in many of the advanced economies.
Second, productivity growth has also declined.
- It has fallen from 1.7 percent in the decade prior to 2007 to 0.4 percent in the past five years.
- Much of the gains in average per capita incomes in the 20 years before the financial crisis were from gains in productivity, innovation, and efficiency.
- The fall in productivity growth seems, at least in part, to be linked to falling dynamism both in the U.S. labor markets and in the formation of new and productive enterprises.
Third, the distribution of income and wealth has steadily become more and more polarized. This is a double edged sword.
- On the one hand, since 2000 around one quarter of a percent of the population has moved from earning close to the median income to earning 1.5 or more times the median. This is a good thing and has raised living standards for those families.
- On the other hand, though, more than 3 percent of the population has moved into the group that earns less than half of the median income. For that group, economic insecurity and flat real incomes have resulted in either a stagnation or decline in living standards.
- Our calculations suggest that since 1999, this polarization of the income distribution has knocked around 3½ percent off of badly needed consumer demand. That is around one year’s consumption over a period of 15 years.
Fourth, the share of the population living in poverty is at very high levels.
- The latest data shows almost 15 percent of Americans—or 46.7 million people—living in poverty.1 Poverty is even higher for certain minority groups; for single parent (and particularly female-headed) households; for children; and for those with disabilities.
- With such a large share of the population living below the poverty line, this undoubtedly is an important macroeconomic issue.
- Not only does poverty create significant social strains, it also eats into labor force participation, and undermines the ability to invest in education and improve health outcomes. By holding back economic and social mobility, it creates an inter-generational persistence of poverty.
All in all, our assessment is that, if left unchecked, these four forces—participation, productivity, polarization, and poverty—will corrode the underpinnings of growth (both potential and actual) and hold back gains in U.S. living standards.
What are the policies needed to counter these “forces”? We have outlined a range of possible options. Let me highlight a few:
- Policies need to help lower income households – including through a higher federal minimum wage, more generous earned income tax credit, and upgraded social programs for the nonworking poor.
- There is a need to deepen and improve the provision of reasonable benefits to households to give incentives for work, raise the labor supply, and to support families. This should include paid family leave to care for a child or a parent, childcare assistance, and a better disability insurance program. I would just note that the U.S. is the only country among advanced economies without paid maternity leave at the national level and U.S. female labor force participation is 12 percent lower than that for men. Sensible skills-based immigration reform could also raise the labor supply and boost productivity.
- Boosting productivity growth is another policy imperative. Productivity gains must inherently be based in the private sector. But public policies can help. A better tax system, efforts toward more trade integration, better infrastructure, a stronger and more vocationally oriented education system would all support higher productivity growth.
None of this is easy. However, there are many good ideas out there as to how best to address these issues. And that provides a strong foundation for progress.
In conclusion, I would like to reiterate that the near-term U.S. growth prospects are good despite the recent temporary setbacks. We think that growth should be 2.2 percent this year and higher still in 2017. And by countering the “four forces” I have just described, I am confident that the U.S. can remain on the frontier of innovation and opportunity.
So with that, I am happy to take your questions. Thank you.
1 The poverty rate is measured via income thresholds adjusted for household size and composition. Thresholds vary from $15.379 for a 2-person household to $24.230 for a 4-person household. Source: Income and Poverty in the United States: 2014, U.S. Census, September 2015.