The U.S. Economy in Crisis: Steps for the Next Administration

Summary
The next administration will confront numerous domestic economic policy challenges, including persistently high unemployment, a surging national debt, tax and social spending reform, and the energy and climate nexus.
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The next administration will confront numerous domestic economic policy challenges, including persistently high unemployment, a surging national debt, tax and social spending reform, and the energy and climate nexus. In addition, issues critical to the global economy, such as the euro crisis and the moribund multilateral trade agenda, will require attention.

To address these challenges, Carnegie assembled a distinguished panel with Larry Kotlikoff, professor of economics at Boston University and presidential candidate for the Americans Elect party; Ron Blackwell, former chief economist for the AFL-CIO; and Robert Shapiro, co-founder and chairman of Sonecon, LLC. Uri Dadush moderated.

Major Challenges

  • Debt: Kotlikoff noted that the government’s long-term fiscal problem is even worse than it appears on paper because unfunded liabilities are not considered alongside the country’s official debt. Examining the government’s balance sheet like a company’s balance sheet—subtracting the present value of all future liabilities and transfer payments from the present value of all future assets and revenue—shows that the government’s fiscal gap is a staggering $211 trillion.

  • Unemployment: Almost three years after the end of the Great Recession, 27 million Americans are still unemployed or underemployed. Working-age men have been particularly hard hit. Blackwell pointed out that one out of every five working-age men today is not employed—in a normal economy, this figure is closer to one out of 20. Blackwell added that he does not expect this number to drop significantly even when the economy fully recovers.

  • Income Inequality: The panelists agreed that some amount of income inequality in an economy is desirable because it motivates worker performance, but the level of inequality in the United States today is almost certainly too high. Inequality has increased significantly over the last 30 years, driven primarily by enormous gains for the top one percent of households. Blackwell pointed out that while inequality has increased in most nations over this period of time, it is higher in the United States than in any other Organisation for Economic Co-operation and Development (OECD) country.

Causes of the Challenges

  • Structural Changes: The panelists agreed that the U.S. debt problem is being driven by the cost of healthcare spending, which in turn is a function of an aging population and, Shapiro added, the cost of pioneering advanced medical technology. Similarly, disappointing job gains, stagnating wages, and rising inequality long preceded the recession. Kotlikoff noted that skill-biased technological change and low-wage competition from emerging economies have hurt wage growth among low-skilled workers.
  • The 2008-2009 Financial Crisis: The crisis did not cause the U.S. fiscal problem or the phenomenon of stagnating wages and fewer employment opportunities for the middle class, but it did aggravate them, the panelists said. Deficit spending needed to counter the Great Recession added to the U.S. debt. The financial crisis also worsened inequality by destroying home equity values, the only asset broadly held in the economy.
  • Politics and Money:
      1. Polarization. Shapiro argued that the fiscal challenges faced by the United States are due more to politics than economics. The United States successfully confronted large deficits in the ’80s and ’90s through political compromises involving cuts in entitlement and defense spending and tax hikes, he said. But increased political polarization, media outlets that thrive on conflict, and a politically divided public makes compromise very difficult to achieve today.

      2. Money and Politics. Blackwell insisted that money plays an outsized role in the American political process and stymies meaningful reform, as parties with an interest in maintaining the existing system throw their financial weight around. Shapiro objected that money may not mean so much in presidential elections, when both sides are capable of marshaling tremendous resources. But they could be decisive in congressional races, he conceded.

Policy Options

  • Borrow Now, Save Later: The United States should take advantage of record low borrowing costs to borrow and invest in infrastructure, education and training, research and development, and other projects and initiatives that will boost long-run economic output and growth, Blackwell argued. Sustainable growth would, in turn, increase tax revenue and help address the U.S. long-term fiscal problem.

  • Healthcare is Key: Kotlikoff noted that 60 percent of the fiscal gap would be erased if government spending on health care could be kept at 10 percent instead of rising to 23 percent as the Congressional Budget Office has projected. He proposed replacing Medicare, Medicaid, employer-based healthcare, and the new health exchanges with individually risk-adjusted vouchers provided by the government. A panel of doctors would cap the cost of the vouchers at 10 percent of GDP. Blackwell objected that this would not address the problem of doctors, hospitals, and insurance companies being allowed to charge whatever they want.

  • Cutting the Political Gordian Knot: Shapiro noted that the Republicans and Democrats are not against raising taxes and cutting entitlement spending, respectively, so much as concerned that they would have no control over how this is done. He suggested that one way to address this would be to have both parties agree to headline numbers (for example, raising $1 trillion in taxes and cutting spending by $2 trillion over the next ten years), then allow the party that is politically vulnerable to a part of the compromise determine how provisions for that part are written.

About the International Economics Program

The Carnegie International Economics Program monitors and analyzes short- and long-term trends in the global economy, including macroeconomic developments, trade, commodities, and capital flows, drawing out their policy implications. The current focus of the program is the global financial crisis and its related policy issues. The program also examines the ramifications of the rising weight of developing countries in the global economy among other areas of research.

 
Source carnegieendowment.org/2012/03/21/u.s.-economy-in-crisis-steps-for-next-administration/a2dx

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