The United States After the Great Recession: The Challenge of Sustainable GrowthJoshua Meltzer Fellow, Global Economy and Development Brookings

David StevenCenter on International Cooperation, New York University Managing Global Order, Brookings

Claire LangleyResearch Analyst, Global Economy and DevelopmentBrookings

April, 2013NAFCAM

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Contents• Introduction & assumptions

• Defining the United States growth model – positive outcomes and key future challenges

• Drivers of U.S. options

• Future scenarios & reforming the policy space

• Policy recommendations

» Increasing employment

» Investing in the future

» Maximizing an increased energy endowment

» Fiscal rebalancing

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Key Assumptions

• The United States economic model has many strengths, but its resilience has been weakened. Acute economic, social and environmental challenges need to be addressed.

• The response of the United States to this era of crisis will play an important role in influencing how other countries react.

• The United States is unlikely to adopt policies that run counter to its’ interests and values, so it is necessary to gain an understanding of the drivers of and obstacles to change in American society before addressing the challenges.

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The United States growth model: economic outcomes

• Since the end of WWII the economy has achieved steady growth, low unemployment and inflation, with rapid advances in technology.

• The United States is a leader in international governance, trade, investment, technological development and diffusion, and the spread of scientific, economic, and legal models.

• Economic growth is market driven, and the private sector is the main driver of innovation and productivity while the government has a limited role.

• The economy ranks 5th in terms of global competitiveness and is highly entrepreneurial.

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Emerging Economic Challenges

• The 2007/08 recession highlighted vulnerabilities in the U.S. economy and recovery has been slower than expected.

• The economy faces several long term challenges:

» Declining international competitiveness

» Difficulty in creating jobs and increases in long term unemployment

» Declining incomes & reduced economic mobility

» Lack of investment in infrastructure

» High levels of indebtedness

» Growing fiscal pressures

» Vulnerability to global imbalances

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Social outcomes

• Historic growth has resulted in substantial benefits in terms of health, wealth, and education.

• Life expectancy, literacy and education enrollment have all increased.

• Incomes have increased to nearly 8.5 times higher than post-war levels.

• Americans rate their quality of life more highly than the average for the OECD.

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Downward trends in social indicators

• Inequality has risen, and is larger in the U.S. than any other OECD country excluding Mexico.

• Economic mobility is declining.

• But 68 percent of Americans believe they have achieved, or will achieve, the American Dream.

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Changes in Wealth Over Time

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Environmental outcomes• Environmental regulation in the United States aims to

protect the environment for future generations, while interfering as little as possible with economic growth.

• Resulted in better domestic environmental outcomes:

» Air quality has improved significantly

» Household water quality has improved and polluted urban waterways have recovered

» Resource efficiency has become a priority

• The U.S. has cooperated in international environmental treaties (i.e. Montreal Protocol on Substances that Deplete the Ozone Layer etc.)

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Challenges to Further Environmental Progress

• Environment has become an increasingly contentious political issue and a source of partisan divide.

• Key environmental challenges:

» Securing access to resources

» Tackling climate change

» Responding to extreme weather events

» Coping with water stress

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Where next for the U.S.?

• Key drivers of U.S. options:

» Demographics.

» Polarized political system.

» Declining trust in elites and institutions.

» But, enduring geopolitical strength.

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U.S. population is projected to grow over the next 40 years

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Possible U.S. policy going forward

• A limited role for government

• Wealth and job generation for all

• Increased resilience to crises and future shocks

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Scenarios for the future• Scenario 1: Muddle through: continuation of business as usual through

rebalancing growth slightly to the middle class, maximizing energy advantages, and delaying action on climate change.

• Scenario 2: Going for growth: aggressive focus on economic growth in order to meet the aspirations of a growing population, with limited regard for environmental consequences.

• Scenario 3: Intelligent design: many of the same developments as scenario 1, but with a greater role for policy to create jobs, while using the country’s growing energy endowment to tackle its deficit, and restrain carbon emissions.

• Scenario 4: Emergency response: further shocks drive change, with extreme weather events providing some potential for increasing sustainability.

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Intelligent Design: pathway toward sustainable

development • Policy makers focus on employment through renewed public

investment in education and training, additional support for sectors with high export potential, and innovative approaches to regulation in the financial sector.

• Federal Reserve emphasizes maximizing employment, alongside its’ current focus on interest rates and price stability.

• Energy resource opportunities are maximized with policies focused on the potential of gas to:

» reduce emissions

» Build competitive manufacturing

» Contribute to fiscal consolidation

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Policy reform in key sectors• Employment: the most urgent priority to accelerate American

recovery, while addressing underlying structural issues.

• Investment in the future: make farsighted decisions to improve education, build new infrastructure, and increase innovation.

• Energy: make strategic use of an increased energy endowment, while reducing resource demand and enhancing sustainability.

• Fiscal rebalancing: insulate economic recovery from the process of fiscal reform while also reducing and stabilizing the debt.

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Tackling the jobs crisis

• Target long-term unemployment: implement an emergency package to bring the rate of unemployment back down to about 5%. Options include re-training schemes and wage subsidies for employers.

• Support manufacturing in high-end industries: support for innovation in high-end manufacturing can create middle-class jobs and support robust local economies.

• Focus on metropolitan areas: capitalize on opportunities for growth in highly populated urban areas.

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Investing for tomorrow• Education: invest in future generations by making higher

education more affordable and accessible; improving educational outcomes by strengthening assessment systems; addressing the skills gap.

• Infrastructure: national infrastructure strategy that focuses on low-carbon mass transport, innovative new financial mechanisms for sustainable infrastructure, and resilience to extreme weather events.

• Innovation: increase federal funding for R&D in industries with high growth potential and benefits for environmental sustainability by supporting an enabling environment for investment, supporting entrepreneurship through reformed immigration policies.

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Fueling the future• Regulation of the shale gas industry to reduce leakage

issues.

• Investment in gas infrastructure and standards for transportation.

• Clean energy standard in the power sector to reduce emissions.

• Building sustainability in cities through promotion of higher-density urbanization, energy efficient buildings, and public transportation links.

• Regulations promoting energy efficiency.

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Fiscal rebalancing

• Reform the tax code so that income inequality is addressed.

• Cut inefficient subsidies, such as those for fossil fuels.

• Make permanent the R&D tax credit and other tax incentives to encourage innovation

• Shift taxation from labor/capital to carbon, through the implementation of a carbon tax and the lowering of income and corporate tax rates.

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Toward renewed U.S. global leadership

• Combination of policy reform measures could result in increased sustainability and international leadership, and a more cooperative geopolitical environment with innovations in global governance.

Opportunities for international cooperation:

» Building the knowledge base needed to underpin international action.

» Pivoting to the global jobs crisis.

» Strengthening the global trade system.

» Demonstrating leadership on energy, food and other resources.

» Reframing action on climate change.

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International Trade• Complete the WTO Doha Round

» International Services Agreement

» Trade facilitation etc

• Pursue high standard comprehensive FTAs with key economies

» Trans-Pacific Partnership

» EU-US Trade and Investment Partnership