United States

   

Economic Policies

#24
Key Findings
Showing increasing problems of fiscal unsustainability, the United States receives middling scores overall (rank 24) with regard to economic policies. Its score on this measure has increased by 0.3 points since 2014.

A moderately expansionary fiscal policy and steady low interest rates helped sustain economic growth. However, a tax cut policy focused on cuts for corporations and high-income individuals was passed in late 2017, sharply increasing the already unsustainable long-term deficit.

President Trump’s sustained attack on foreign trade led to revisions in the North American Free Trade Agreement, after the imposition of tariffs on Mexico and Canada. Similarly, he provoked a trade war with China, imposing major tariffs that produced a retaliatory response. Lesser conflicts targeted the European Union and Japan.

Unemployment continued to decline to about 4%, with rates much higher among minorities and in inner cities. Under current policy, the deficit is projected to continue increasing over the next 10 years, reaching 5.7% of GDP by 2028. Total U.S. R&D spending is at a record high, with the federal share at a historic low. Banking oversight has been relaxed, allowing risky banking practices to resume.

Economy

#7

How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?

10
 9

Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 8
 7
 6


Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
 5
 4
 3


Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
 2
 1

Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
Economic Policy
8
The United States has maintained economic policies that have effectively promoted international competitiveness and economic growth. Compared with other developed democracies, the United States has had generally low taxes, less regulation, lower levels of unionization and greater openness to foreign trade. Although its pro-business policies have had some social costs, the country has enjoyed superior levels of growth, capital formation and competitiveness.

Although the Trump presidency began in January 2017, President Obama’s economic policies remained without major alteration for most of that year. The United States thus continued a moderately expansionary fiscal policy with the Federal Reserve Board (the Fed) maintaining steady, comparatively low interest rates. The moderately strong economic growth established during the Obama administration continued through Trump’s first two years.

But in late 2017, the Republican Congress passed a major “tax reform” which included a tax cut for corporations and high-income individuals. Along with increases in defense spending and Trump’s rejection of spending cuts for middle-class social benefits (Medicare and Social Security), the tax cut produced a sharp increase in the already unsustainable long-term budget deficit. During 2018, as the Federal Reserve began to raise interest rates, Trump repeatedly accused it of harming the economy and questioned its expertise.

Throughout 2017 and 2018, Trump carried on a sustained attack on foreign trade, holding firm to his campaign claims that the United States has been treated unfairly in most of its trading relationships. The United States pulled out of the Trans-Pacific Partnership trade agreement. Trump demanded that revisions be made to the North American Free-Trade Agreement with Canada and Mexico, after imposing major increases in tariffs affecting both countries. He provoked a trade war with China, imposing major tariffs that China met with firm retaliatory measures, along with lesser conflicts with the European Union and Japan.

Labor Markets

#13

How effectively does labor market policy address unemployment?

10
 9

Successful strategies ensure unemployment is not a serious threat.
 8
 7
 6


Labor market policies have been more or less successful.
 5
 4
 3


Strategies against unemployment have shown little or no significant success.
 2
 1

Labor market policies have been unsuccessful and rather effected a rise in unemployment.
Labor Market Policy
8
The United States has one of the least regulated and least unionized labor markets in the OECD, with less than 7% of private sector workers and only 36% of public-sector workers holding union membership. Some states have “right-to-work” laws that prevent unions from requiring membership as a condition for employment and federal labor policy has not responded to evolving management strategies for avoiding union organizing. The low levels of unionization should generally promote employment, by lowering the price of labor. The U.S. government otherwise plays a minimal role in promoting labor mobility or providing support for training and placement. In recent years, federal policies regarding labor and employment have not changed. Trends in local and state government have gone in different directions. Several cities and states with left-leaning governments have sharply increased minimum wages. Other states have adopted “right-to-work” laws (e.g., Michigan) or have imposed constraints on public employees’ unions (e.g., Wisconsin).

Unemployment in 2018 continued its long slow decline since the 2008 and 2009 recession, with the official unemployment rate of 4% In addition, the tightening labor market led to the first gains in average wages in two decades. However, unemployment rates remain far higher among racial minorities and in inner cities.

The Trump administration has cut some Obama-era training programs and funding for enforcement of labor regulations. Trump’s policies may somewhat increase the supply of low-wage labor, while reducing the compensation of some working people.

Citations:
Center for American Progress, The State of the U.S. Labor market: Pre-August 2015 Jobs Release, https://www.americanprogress.org/issues/economy/news/2015/08/06/118877/the-state-of-the-u-s-labor-market-pre-august-2015-jobs-release/ CUT OR UPDATE.

Taxes

#40

To what extent does taxation policy realize goals of equity, competitiveness and the generation of sufficient public revenues?

10
 9

Taxation policy fully achieves the objectives.
 8
 7
 6


Taxation policy largely achieves the objectives.
 5
 4
 3


Taxation policy partially achieves the objectives.
 2
 1

Taxation policy does not achieve the objectives at all.
Tax Policy
5
The U.S. tax system does not produce enough revenue to eliminate the deficit, tax policy is highly responsive to special interests (resulting in extreme complexity and differing treatment of different categories of income) and the redistributive effect of the tax system is very low. The tax system has performed poorly with respect to equity, both horizontally and vertically. Many high-income earners pay an effective tax rate that, after deductions, is lower than the rate for middle-class earners. The United States derives a large share of revenue from corporate taxes, a fact that has encouraged some firms to move operations abroad. Despite these shortcomings, the U.S. tax system performs well with respect to competitiveness, since the overall tax burden ranks near the bottom of the OECD rankings.

Congress enacted a sweeping “tax reform” measure in late 2017, which went into effect in January 2018. The Trump administration’s ostensible major objectives were to reduce corporate tax rates, reduce rates paid by high-income taxpayers, eliminate the inheritance tax, reduce taxes for middle income taxpayers, and make up for the losses of revenue by eliminating certain credits and deductions. Official estimates from the nonpartisan Congressional Budget Office and the Joint Economic Committee’s bipartisan staff indicate that the law will produce a $1.5 trillion increase in budget deficits over 10 years. The Republican Congress, with Trump’s support, made spending cuts in some social safety-net programs, such as food stamps, but has not touched the major middle-class social programs, Social Security and Medicare. Overall, the effect of the December 2017 tax reform will be a significant loss of long-term fiscal sustainability.

Budgets

#40

To what extent does budgetary policy realize the goal of fiscal sustainability?

10
 9

Budgetary policy is fiscally sustainable.
 8
 7
 6


Budgetary policy achieves most standards of fiscal sustainability.
 5
 4
 3


Budgetary policy achieves some standards of fiscal sustainability.
 2
 1

Budgetary policy is fiscally unsustainable.
Budgetary Policy
4
The condition of budget policy in the United States is complex and raises different concerns depending on the time perspective of the assessment. In the depths of the 2008 – 2009 recession, the budget deficit, enlarged by the fiscal stimulus, reached $1.4 trillion, or 9.9% of GDP. While the deficit shrunk to a manageable 2.5% of GDP by 2015, recovery was too slow to stimulate vigorous economic growth. At the same time, long-term deficits are by all accounts seriously beyond acceptable levels. As the Congressional Budget Office has testified, “federal debt appears to be on an unsustainable path.” The primary cause of long-term deficits, in addition to the severe limits on revenues, is the growth of the elderly population and the generous terms of the Medicare (health care for the elderly) and Social Security (retirement) programs.

In 2018, the annual deficit jumped by about 17% over the previous year. Under current policy, the deficit is projected to increase over the next ten years and reach 5.7% of GDP by 2028 – with spending on Social Security, Medicare and Medicaid now accounting for about half of the federal budget. Overall, Trump administration policy changes have exacerbated the country’s long-term fiscal challenges. Furthermore, Congress is increasingly less able to deliver a budget on time. A massive disagreement between Congress and the president over immigration and the Deferred Action for Childhood Arrivals (DACA) policy led in January 2018 to a failure to pass the budget for government operations. As a result, the government was shut down for four days.

Research, Innovation and Infrastructure

#10

To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?

10
 9

Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
 8
 7
 6


Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
 5
 4
 3


Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
 2
 1

Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
R&I Policy
7
The United States has traditionally invested heavily in research and development, but the recession and the country’s problematic budget politics have compromised this support. Certain public institutions stand out, particularly the National Science Foundation, the several federal laboratories, the National Institute of Health, and research institutions attached to federal agencies. In addition, there is a vast array of federally supported military research, which often has spillover benefits.

Recent demands for spending cuts and the across-the-board sequester cuts have resulted in stagnating federal R&D spending, including in the area of basic science. U.S. government R&D spending has declined as a share of GDP and in comparison both to spending by other countries and by the private sector. In 2016-2017, total U.S. R&D spending was at a record level of $513 billion, while the federal government share of R&D spending was at a historic low, below 25%. Critics have particularly noted the modesty of government funding for energy research, which is critical to the goal of reducing carbon emissions.

In its first two years, the Trump administration has made research and innovation, apart from defense, a low priority. It cut federal R&D spending by about 4.5%, except for Department of Defense R&D, which is projected to increase 15% and includes $2 billion for a new program on artificial intelligence. Trump has cut scientific and engineering personnel in environmental and resource related agencies and withdrawn support for alternative energy development.

Citations:
Congressional Research Service (2017), Federal Research and Development Funding: FY 2018, https://fas.org/sgp/crs/misc/R44888.pdf

Global Financial System

#23

To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?

10
 9

The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
 8
 7
 6


The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
 5
 4
 3


The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
 2
 1

The government does not contribute to improving the regulation and supervision of financial markets.
Stabilizing Global Financial System
6
Prior to the Trump presidency, the United States had generally promoted prudent financial services regulation at the international level. This includes participation in international reform efforts at the G-20, in the Financial Stability Board (FSB), and in the Basel Committee on Banking Supervision (BCSC). U.S. negotiators played a major role in developing the Basel III capital rules adopted in June 2011, as well as the liquidity rules adopted in January 2013. The global nature of the 2008 financial crisis necessitated a multilateral approach and the promotion of a robust financial-policy architecture. The Obama administration took the initiative in transforming the G-20 into a new enlarged “steering group” for global financial policy.
With respect to the national regulatory framework, U.S. regulatory bodies had been developing rules required by the 2010 Dodd-Frank Act. U.S. regulators generally preferred stronger rules than international standards required (e.g., on the regulation of derivatives). However, lobbying by the powerful financial services industry had weakened U.S. standards. In a major change of direction, the Trump administration and Republican Congress partially repealed the Dodd-Frank Act; the repeal gutted the Volcker rule (prohibiting banks from making certain investments for their own accounts). The administration has abandoned support for the development or implementation of international standards. On the domestic side, it has largely abandoned enforcement activity of the Consumer Financial Protection Board. The result has been a resumption of some of the risky, potentially destabilizing banking practices that led to the financial crisis.

Citations:
https://www.wsj.com/articles/curtains-for-global-financial-regulation-1492037557
Back to Top