America’s Economy
Sunny outlook, but the weather may turn
THE primary job of any pundit is to forecast all the ways in which things could go wrong. So far, however, the American economy has stubbornly defied the dire prognostications of those expecting bad weather. Economic growth has swayed and faltered. Revised figures announced on Thursday May 31st showed that the economy grew at an annual rate of 0.6% in the first quarter of 2007, less than half the initial estimate. But no matter how close recession seems, somehow the storm clouds never quite break. This may explain why Americans are gaining in confidence, despite a negative household-savings rate, a collapsing housing market, increasing global competition, and a currency that looks decidedly anaemic.
The Conference Board's consumer-confidence index has risen, admittedly from a five-month low. And house prices are still increasing, though at the slowest quarterly rate for ten years, according to the Office of Federal Housing Enterprise Oversight. And even if the American economy is doing all right now, what of the future? This is the question asked in a new survey by the Organisation for Economic Co-operation and Development. The report is surprisingly upbeat on current trends, saying that the economy seems to be weathering the sharp correction in the housing market surprisingly well. Though the Federal Reserve must restrain lingering inflationary pressures without unduly straining growth, the outlook for the short term seems reasonably sunny.
Over the long term, however, America faces gloom: a shrinking labour force. In essence economic growth depends on two things: how fast the number of workers rises and how much more they can produce. For most of the past two decades, both have grown briskly. And the American economy has enjoyed the fastest pace of growth in the developed world.
Since the 2001 recession, however, the labour force has not grown as robustly as after previous downturns. More importantly, labour-force participation is still more than a full percentage point below what it reached in 2000. If the size of the labour force does not track population gains, the remaining workers will have to work harder, or more efficiently, if living standards are to keep rising.
There are reasons to think that the slowdown in labour-force growth is permanent. The great transition of women into the working world, which has boosted participation rates for decades, seems to be over. The proportion of women working is expected to remain roughly stable, or grow only slowly, barring big social or institutional change. Meanwhile, another enormous demographic shift is on the way: the retirement of the baby boomers. That will place an extra burden on tomorrow's workers unless productivity growth is strong enough to plug the gap.
On this point, the OECD is sceptical. American productivity growth has been well above the OECD average for more than a decade and should remain strong. But expected gains will come more slowly than in the past ten years. Unless America undertakes structural reform to make its economy even more competitive, the nation will struggle to support its ever-increasing number of dependants.
The proposed reforms are mostly tricky: trade liberalisation and an end to the distortions caused by farm subsidies; tax reform to broaden the base and remove economically inefficient tax breaks; changes to social security in order to encourage saving and delay retirement; and deep changes to the education system at all levels. Most of these will be politically unpopular. Even improving education, by itself an uncontroversial proposition, generally ends up becoming highly contentious when the details of reform start undercutting powerful interest groups such as the teachers’ unions.
THE primary job of any pundit is to forecast all the ways in which things could go wrong. So far, however, the American economy has stubbornly defied the dire prognostications of those expecting bad weather. Economic growth has swayed and faltered. Revised figures announced on Thursday May 31st showed that the economy grew at an annual rate of 0.6% in the first quarter of 2007, less than half the initial estimate. But no matter how close recession seems, somehow the storm clouds never quite break. This may explain why Americans are gaining in confidence, despite a negative household-savings rate, a collapsing housing market, increasing global competition, and a currency that looks decidedly anaemic.
The Conference Board's consumer-confidence index has risen, admittedly from a five-month low. And house prices are still increasing, though at the slowest quarterly rate for ten years, according to the Office of Federal Housing Enterprise Oversight. And even if the American economy is doing all right now, what of the future? This is the question asked in a new survey by the Organisation for Economic Co-operation and Development. The report is surprisingly upbeat on current trends, saying that the economy seems to be weathering the sharp correction in the housing market surprisingly well. Though the Federal Reserve must restrain lingering inflationary pressures without unduly straining growth, the outlook for the short term seems reasonably sunny.
Over the long term, however, America faces gloom: a shrinking labour force. In essence economic growth depends on two things: how fast the number of workers rises and how much more they can produce. For most of the past two decades, both have grown briskly. And the American economy has enjoyed the fastest pace of growth in the developed world.
Since the 2001 recession, however, the labour force has not grown as robustly as after previous downturns. More importantly, labour-force participation is still more than a full percentage point below what it reached in 2000. If the size of the labour force does not track population gains, the remaining workers will have to work harder, or more efficiently, if living standards are to keep rising.
There are reasons to think that the slowdown in labour-force growth is permanent. The great transition of women into the working world, which has boosted participation rates for decades, seems to be over. The proportion of women working is expected to remain roughly stable, or grow only slowly, barring big social or institutional change. Meanwhile, another enormous demographic shift is on the way: the retirement of the baby boomers. That will place an extra burden on tomorrow's workers unless productivity growth is strong enough to plug the gap.
On this point, the OECD is sceptical. American productivity growth has been well above the OECD average for more than a decade and should remain strong. But expected gains will come more slowly than in the past ten years. Unless America undertakes structural reform to make its economy even more competitive, the nation will struggle to support its ever-increasing number of dependants.
The proposed reforms are mostly tricky: trade liberalisation and an end to the distortions caused by farm subsidies; tax reform to broaden the base and remove economically inefficient tax breaks; changes to social security in order to encourage saving and delay retirement; and deep changes to the education system at all levels. Most of these will be politically unpopular. Even improving education, by itself an uncontroversial proposition, generally ends up becoming highly contentious when the details of reform start undercutting powerful interest groups such as the teachers’ unions.
The OECD also wants changes to disability benefits. Some evidence indicates they depress labour-force participation rates. Low-income workers struggling to find jobs may be turning to permanent sick leave when their unemployment benefits run out. But picking on the sick and old to make life easier for young workers will be a hard sell even to the hard-hearted American electorate looking for protection as the clouds begin to gather.
Source : Economist
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