A stern warning to the global superpower from Christine Lagarde in her annual report on the economy in the U.S. After pope Francis and Bernie Sanders, now the IMF warns for a revolution on inequality.
Ttoday we will look beyond the important recent achievements and look forward to what will be needed to ensure strong, sustained and balanced growth in the years ahead. I would highlight in particular “four forces” that pose a challenge to future growth.
What are those four forces? Declining labor force participation, falling productivity growth, polarization in the distribution of income and wealth, and high levels of poverty in the U.S. Let me elaborate.
First, labor force participation is declining …
Second, productivity growth has also declined …
Third, the distribution of income and wealth has steadily become more and more polarized. This is a double edged sword …
Fourth, the share of the population living in poverty is at very high levels.
- The latest data shows almost 15 percent of Americans–or 46.7 million people–living in poverty.1 Poverty is even higher for certain minority groups; for single parent (and particularly female-headed) households; for children; and for those with disabilities.
- With such a large share of the population living below the poverty line, this undoubtedly is an important macroeconomic issue.
- Not only does poverty create significant social strains, it also eats into labor force participation, and undermines the ability to invest in education and improve health outcomes. By holding back economic and social mobility, it creates an inter-generational persistence of poverty.
All in all, our assessment is that, if left unchecked, these four forces–participation, productivity, polarization, and poverty–will corrode the underpinnings of growth (both potential and actual) and hold back gains in U.S. living standards.
What are the policies needed to counter these “forces”? We have outlined a range of possible options. Let me highlight a few:
- Policies need to help lower income households – including through a higher federal minimum wage, more generous earned income tax credit, and upgraded social programs for the nonworking poor.
- There is a need to deepen and improve the provision of reasonable benefits to households to give incentives for work, raise the labor supply, and to support families. This should include paid family leave to care for a child or a parent, childcare assistance, and a better disability insurance program. I would just note that the U.S. is the only country among advanced economies without paid maternity leave at the national level and U.S. female labor force participation is 12 percent lower than that for men. Sensible skills-based immigration reform could also raise the labor supply and boost productivity.
- Boosting productivity growth is another policy imperative. Productivity gains must inherently be based in the private sector. But public policies can help. A better tax system, efforts toward more trade integration, better infrastructure, a stronger and more vocationally oriented education system would all support higher productivity growth.
None of this is easy. However, there are many good ideas out there as to how best to address these issues. And that provides a strong foundation for progress.
