IMF Survey: Concerted Efforts Needed to Boost U.S. Long-term Growth and Reduce Poverty

Residents of Cartersville, Georgia line up for free groceries. Reducing poverty will require improved job prospects and economic growth, says IMF (photo: Robin Nelson/ZUMApress)

Economic Health Check

Concerted Efforts Needed to Boost U.S. Long-term Growth and Reduce Poverty

By Ravi Balakrishnan IMF Western Hemisphere Department

July 23, 2014

The U.S. recovery is gathering steam but managing the exit from zero interest rates and boosting potential growth remain top priorities, the IMF said in its most recent report on the world’s largest economy.

Economic activity in the United States accelerated in the second half of 2013, but an unusually harsh winter conspired with other factors—including a still-struggling housing market, an inventory correction, and slower external demand—causing momentum to fade. Output tumbled to -2.9 percent in the first quarter of 2014—the first quarterly contraction since early 2011.

The IMF expects growth to accelerate in the remainder of this year (in the 3–3½ percent range), as employment improves, firms boost production, sales and orders of durable goods pick up, and confidence returns. The large drag from the first quarter contraction will be tough to offset, however, and growth for the year as a whole will be a disappointing 1.7 percent. Still, the IMF team expects growth to accelerate in 2015 to the fastest annual pace seen since 2005.

Tackling poverty

Despite improving growth and rising employment, almost 50 million Americans still live in poverty, unable to earn enough to meet their basic needs, and this includes almost one-in-four American children. Improved employment prospects and economic growth will be essential to bringing this number down, but the IMF report argues for an expansion of the Earned Income Tax Credit and an increase in the minimum wage as part of the solution.

Boosting long-term growth

Without further policy interventions, the IMF expects potential growth to level off at around 2 percent in the coming years given the drag from population aging on labor force expansion and slower productivity growth. This is well below the average potential growth rate of over 3 percent seen in the decade before the financial crisis.

The IMF recommends policies to counter this decline in longer-term growth including greater investment in U.S. infrastructure, improving educational outcomes, a better tax system, and building a skilled labor force (including through immigration reform, job training, and providing childcare assistance for working families).

Reducing debt

The IMF team continues to argue for a credible medium-term fiscal consolidation plan to tackle longer-term debt dynamics but also to provide the flexibility for some near-term fiscal support to the economy that can be designed to both reduce poverty and encourage longer-term growth. The IMF recommends that the fiscal plan should include steps to lower the growth of health care costs, reform social security, and increase tax revenues.

Lifting off from zero interest rates

The goal for monetary policy is to manage the exit from zero interest rates in a manner that allows the economy to converge to full employment with stable prices while avoiding financial instability and negative spillovers to the global economy. This is obviously a complex and challenging undertaking.

To facilitate this process, the IMF recommends steps to expand the Fed’s communications toolkit, including giving consideration to scheduling press conferences by the Fed Chair after each Federal Open Market Committee meeting and publishing a quarterly monetary policy report that is endorsed by the committee.

Securing a safer financial system

Much has been done to reduce financial system risks: banks are stronger, corporate balance sheets are healthy, leverage has been contained, and the regulatory framework has been greatly improved. Nevertheless, the prolonged period of very low interest rates continues to raise financial stability concerns, particularly related to activities outside of the traditional banking system.

The IMF recommends countering these excesses through tighter underwriting standards and higher risk weights for certain assets while monitoring carefully emerging risks in the asset management industry. The report highlights the supervision and regulation of the insurance industry as an area that deserves particular attention.