SAN FRANCISCO () -- The U.S. economy is headed toward a fiscal trap. In the next two years, 51% of the voting public will not be paying federal income taxes. In fact, a large percentage of that group will actually be receiving money from the government, leaving tax-paying Americans with little say in tax reformations.
In the keynote speech "Global Economic Views and Market Outlook" at the , Dr. Matthew J. Slaughter analyzed recent economic and market trends to project where the U.S. economy is headed. The outlook may not be as bad as we think, according to Slaughter, but some big fiscal policy decisions are ahead for the United States - and as the voting power of tax-paying Americans diminishes, it is increasingly important to be informed.
"As a lot of us know, there's a lot of concern about where the economy is headed," said Slaughter, who is a professor of international economics at Dartmouth College's Tuck School of Business. Despite recessionary fears and subprime housing concerns, however, some economic indicators are actually remaining positive.
"If you ask economists how to measure economic performance in a county, they will say productivity," he said. In the past decade, "the U.S. has had very good growth in productivity," according to Slaughter. Growth has averaged 2.7% between 1996 and 2006, although the economy saw some deceleration in the later years, dropping from 4.1% in 2002 to 1% in 2006. But this year has seen a bit of an uptick to 1.2% - a positive indicator for the U.S. economy.
Increases in the standard of living and corporate profits only come through strong productivity rates - though the growth rate and results are not always spread evenly across industries, Slaughter noted.
Knowing the productivity growth is an important indicator of the economic outlook because it affects fiscal policy decisions in the U.S, he added. "If we're less certain about the speed limit (of growth), it's more of a challenge to conduct monetary policy."
In addition to productivity, Slaughter pointed out that other economic signals are pointing away from a recession, including an acceleration in business investments in 2007.
"Recessions oftentimes arise after drops in business investments," he said.
The trade deficit is also shrinking this year - a positive indicator for the United States, according to Slaughter. "Real exports growing is a big plus for the U.S. economy."
The housing slump cannot be ignored, however. "Residential investment is down about 4.4% of total GDP activity in the third quarter versus its peak," he said.
Another indicator showed that U.S. construction employment is down to 7.6 million this year from 7.7 million last year. This is important to take into account because higher interest rates, labour market demand and home prices all affect consumption, and the U.S. economy is driven by consumption demand.
"Seventy percent of demand in the United States is accounted by consumption in households," Slaughter said.
Thinking Globally
In the global context, economic policies in the United States are becoming more closed off. "If we look at economic policies in the U.S., there is this policy called 'protectionist drift,'" Slaughter said.
"Despite how important globalization is...our policy in the U.S. is moving away from more open borders to more closed borders."
According to polls, the average American opposes freer trade, he said, because of labour market pressure fears. Between 2000 and 2005, workers with every education level below doctorates, law degrees and MBAs saw a drop in earnings growth.
"This is what the market forces of globalization and technology are delivering," he said.
As the U.S. Population Ages...
"For many decades, the U.S. has maintained a rather stable political economy of fiscal policy at the federal level," according to Slaughter. "This has been true despite ongoing fiscal recessions" and other market trends.
But a new era is upon the United States as the baby boomer generation continues to grow older. Entitlement spending, including social security, Medicare and Medicaid, is likely to double from 8% of the total GDP to 16% by 2045. If these projections turn out to be correct, Slaughter said, Americans are going to have some big choices to make about taxes and fiscal policy.
In the near term, however, economic indicators remain a bit rosier than some economists may say. "The U.S. economy has been quite strong in recent years thanks largely to its underlying productivity growth," Slaughter concluded.
But as the U.S. working population ages, productivity rates may not continue to be so positive.
