United States

   

Economic Policies

#26
Key Findings
Showing increasing problems of fiscal unsustainability, the United States receives middling scores overall (rank 26) with regard to economic policies. Its score on this measure has increased by 0.4 points since 2014.

Economic growth has remained robust. However, the tax cut for corporations and high-income individuals passed in late 2017 has sharply increased the already unsustainable long-term deficit. The annual deficit reached above $1 trillion in late 2019. President Trump threatened to fire the central bank chairman, though he lacked the legal authority to do so.

The new North American trade deal passed the House, and Trump announced a new trade deal with China. Nevertheless, the trade war with China, and lesser conflicts with European Union and Japan, continued. The unemployment rate declined to a record low of 3.7%, with median household incomes climbing by 12%. Incomes have grown faster at the top, exacerbating inequality.

Under current policy, deficits are projected to be above $1 trillion (4.7% of GDP) every year from 2020 to 2029, with government debt totaling close to $30 trillion by the end of the decade. Federal R&D funding has been cut. 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 generally featured low tax rates, less regulation, lower levels of unionization and greater openness to foreign trade. The country has enjoyed superior levels of growth, capital formation and competitiveness. The strong economic growth established during the Obama administration continued through Trump’s first three years.

During Trump’s first two years in office, 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 created a sharp increase in the already unsustainable long-term budget deficit. As of late 2019, the tax cuts were responsible for a roughly $500 billion increase in the annual federal budget deficit, which totaled more than $1 trillion.

During 2018, as the Federal Reserve (also known as “the Fed”) began to raise interest rates, Trump repeatedly questioned the Fed’s expertise and accused it of doing harm to the economy – which he felt undermined his political interests. And though he lacked the legal authority to do so, he threatened in 2019 to fire the Fed’s chairman. Both Congress and financial markets ignored the apparent threat to the Fed’s independence. The Fed lowered interest rates during 2019, accounting for signs of slowdown in the world economy.

Holding firm to his campaign claims that the United States has been treated unfairly in most of its trading relationships, Trump repeatedly attacked various foreign trade agreements throughout his first two years in office. This included the United States pulling out of the Trans-Pacific Partnership trade agreement. Trump also 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 has 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. In 2019, a new North American trade deal passed the House, and Trump announced a new trade deal with China. The Trump administration initiated massive subsidies to assist agricultural businesses severely hurt by the loss of exports to China.

Citations:
Jeff Stein, Trump’s quest to shatter GOP economics reached its culmination in 2019, Washington Post, Dec. 27, 2019.

Labor Markets

#11

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. Some states even have “right-to-work” laws that prevent unions from requiring membership as a condition for employment. The low levels of unionization, which in principle lowers the price of labor, should generally promote employment.

The U.S. government 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 undergone any major change. Trends at the local and state government levels have gone in different directions. Whereas 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 2019 continued to decline, reaching 3.7%, which is the lowest officially registered rate since 1969. In addition, the tightening labor market produced gains in average wages. At the time of this writing (before the Covid crisis of 2020), median household incomes had increased by 12% since Trump had taken office. At the same time, because income grows even faster at the top, income inequality has been exacerbated. The unemployment rates for groups that have tended to receive a smaller share of the expansion’s rewards – high school dropouts, African Americans and Latinos – also dipped in the period from December 2018 to December 2019.

The Trump administration has cut some Obama-era training programs and sharply reduced the enforcement of labor regulations; it has also rejected an increase in the federal minimum wage. Trump’s policies may increase somewhat the supply of low-wage labor and reduce compensation for some working people.

Citations:
Patricia Cohen, After a Decade of Hiring, Plenty of Jobs but raises are tiny, New York Times, Jan. 20, 2020

Taxes

#37

How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?

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 and provide sufficient resources to fulfill major obligations in the long run. Tax policy is highly responsive to special interests and the redistributive effect of the tax system is very low. As a result, the tax system might promote the country’s competitive status internationally but faces serious problems in terms of ensuring horizontal and vertical equity. 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.

According to recent numbers issued by the government, tax reform will lead to a loss of $600 billion more in tax revenues, bringing the cut’s total costs to $1.6 trillion. Although most people actually paid less in taxes as a result of the cuts, the wealthy benefited much more from much larger cuts. In fact, as reported by Max de Haldevang in Quartz, in 2020, the wealthiest 20% of “taxpayers will save more than double the amount of taxes than the remaining 80% of earners combined.”

Citations:
https://qz.com/1769421/trumps-tax-cuts-and-jobs-act-shows-poor-results-after-two-years/

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
Budget policy in the United States is a complex issue and raises different concerns
regarding short- or long-term deficits respectively. 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, by all accounts, the country’s long-term deficit seriously exceeds acceptable levels. As the Congressional Budget Office has testified, “federal debt appears to be on an unsustainable path.” The primary driver 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 (healthcare for the elderly) and Social Security (retirement) programs.

In 2019, the federal budget deficit nearly hit $1 trillion (4.7% of GDP), and economists are raising growing concerns about the sustainability of the country’s fiscal plan. A Congressional Budget Office (CBO) report projected deficits above $1 trillion every year from 2020 to 2029, with government debt totaling close to $30 trillion by the end of the decade.

Overall, the Trump administration’s policy changes have exacerbated the country’s long-term fiscal challenges. Furthermore, Congress has proved increasingly less able to deliver a budget on time. In 2019, it managed to enact the required appropriations bills and avoid a repeat of the January 2018 shutdown. A Bipartisan Budget Act loosened the (largely ineffective) discipline on new spending measures. It also removed the debt limitations that had allowed for highly disruptive partisan brinkmanship, such as that witnessed in 2011 with Republican threats to force default on government bonds.

Research, Innovation and Infrastructure

#8

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
8
The United States has traditionally invested heavily in research and development, but the effects of the Great Recession and the country’s problematic budget politics have compromised this support. Certain public institutions stand out, particularly the National Science Foundation, the National Institute of Health, the country’s federal laboratories and various research institutions that are attached to federal agencies. In addition, there is a vast array of federally supported military research, which often has spillover benefits.

In its first three years, the Trump administration has afforded 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 was projected to increase by 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. Trump’s 2020 budget continued these trends, which included a 13% cut in funding for the National Science Foundation and a 12% cut in funding for the National Institute of Health. Furthermore, the Trump administration’s budget proposes to eliminate several environmental programs at the National Oceanic and Atmospheric Administration agency.

Citations:
Joel Achenbach et.al., Trumps budget seeks cuts in science funding, Washington Post, March 11. 2019.

Global Financial System

#33

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
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