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The Future of USA Economic Growth

The Future of USA Economic Growth

Real GDP (real gross domestic product) growth stalls early in 2023 due to last year’s sharp rise in interest rates; it then gradually returns albeit at a reduced pace.

The Federal Reserve proves unwilling or unable to reduce labor market excess, leading to inflation decreasing gradually and leading to a subsequent slowdown in demand.

USA Economic Growth
USA Economic Growth

Economic Growth

As the world’s largest economy, the US is particularly susceptible to slowing economic growth. A slowing economy means reduced demand, reduced employment opportunities and less income for consumers – though usually these conditions do not lead to recession. Still, one must not ignore their risk and thereby risk falling into irrelevancy.

Tighter monetary policy, slowing growth in Europe and China, rising energy prices and an expensive dollar are weighing heavily on the economy. Consumer spending remains strong on pent-up demand while investments in business fixed equipment and housing remain weak.

Asset price inflation created an estimated “paper wealth” of approximately $160 trillion by 2021, as real estate and equity valuations increased more rapidly than GDP and global financial balance sheets quadrupled to include $1.6 quintillion worth of assets (real estate, debt, equity and currency and deposits). While not identical with actual investment capital being deployed into productive enterprises, such paper wealth still represents potential future demand for funds that could require funding solutions.

Policy makers face an uphill climb. In order to boost productivity, they must find ways to do it while being mindful not to increase inequality further and decrease labor’s share of national income, or too tightening could put inflationary pressures beyond control.

Achieve long-term economic recovery requires stimulating domestic demand in tandem with economic output, increasing investment and productivity. A global system of rules would benefit this approach by guaranteeing open legal trade while protecting against external shocks.

Reducing government borrowing and investment is another effective means of strengthening the economic outlook, as this will lessen the effects of higher interest rates on consumption. Economic growth can also be enhanced by freeing up capital for more productive investments – infrastructure spending has seen significant improvements recently after decades of underinvestment. Focusing on higher-speed Internet, clean drinking water and electric vehicle charging infrastructure can accelerate productivity growth and promote long-term economic prosperity, yet all require cooperation from other governments and companies in order to be effective. A successful partnership can create a better global economic environment.

Employment

The US economy is expanding, though its pace of expansion is decreasing. This is likely due to limited labor supply for producing goods and services; consequently, this limit affects real GDP and thus future job growth and economic prosperity.

America’s cities and counties have seen their economies diverge since the Great Recession. Megacities, high-growth hubs, and their urban peripheries were responsible for two thirds of job growth from 2007-2017 while trailing cities and distressed Americana counties struggle to reinvent themselves.

These communities must make efforts to revitalize their economies and attract investment. Education needs to be improved while skilled workers developed. Infrastructure investments like broadband Internet service, clean drinking water and electric vehicle charging stations will increase productivity while stimulating economic growth.

However, these investments may not be enough to counteract the effects of automation and globalization. Already these trends have caused occupations to decline significantly and more may go away in years ahead – impacting food service, office support and production work as well as customer service and retail sales workers whose work tends to be manual and repetitive – leaving these occupations vulnerable to automation.

New technologies hold promise of creating additional jobs across other occupational categories. According to forecasts by McKinsey Global Institute (MGI), such as healthcare, STEM occupations and creative industries will see substantial job creation over time. Other sectors with potential for job creation include transportation utilities as well as professional technical services.

However, America’s economic future relies on more than technological progress alone; policymakers must also address inequality and stagnant wages as well as revisit how GDP measures wealth in America.

For these issues to be successfully addressed, the United States must create high-wage jobs that offer security and dignity to Americans. The government must support efforts to revive manufacturing, secure supply chains, invest in R&D research, as well as assist young people in attaining skills necessary for future success.

Inflation

Since the COVID-19 pandemic began, inflation has declined sharply but still falls short of reaching 2 percent as set forth by the Federal Reserve. The main driver behind this decline has been that big price increases occurring more than 12 months ago are no longer included when making year-over-year comparisons, yet monthly price pressures remain firm; hence why long-term inflation remains a serious threat even as headline inflation decreases and the economy expands at a healthy clip.

Short term, the economy’s potential output remains constrained by supply-chain disruptions and disruptions to financial markets, slower labor force participation rates, and slower productivity growth. Such short-term issues could have a greater or smaller effect than anticipated by CBO; their resolution will determine its longer term trajectory of economic development.

CBO developed four quantitative scenarios of future GDP and inflation for consideration (the “return to past era”, “higher for longer”, balance sheet reset and productivity acceleration), each representing different shocks and stresses that would shape economic progress over time. Each scenario would have an individual effect on economic progress.

Key characteristics of each scenario are its substantial wealth gains (with the exception of returning to previous era, which does not). But such growth comes at the cost of real economic output and inequality escalation, raising risk and potential corrections down the line.

These scenarios vary in terms of how quickly and to what extent the government deficit shrinks, as well as in interest rate changes over time. Since interest rates depend on economic growth and savings and investments, those scenarios that assume stronger growth could see larger increases in national debt and faster inflation rates for personal consumption expenditures (PCE), which includes everything other than housing purchases by consumers. Furthermore, CBO projects lower unemployment rates and an increase in labor force participation rates that push nominal GDP and PCE inflation higher over time.

Taxes

President Trump has applauded Ronald Reagan’s 1986 tax act, but it remains to be seen if he has internalized its lessons. For starters, it required months of hearings and markups before reaching Congress; moreover, bipartisan cooperation and compromise to close loopholes proved essential to its success – this may prove difficult in today’s polarized political environment where Republican leaders seem more focused on tax cuts rather than expanding economic growth as this may increase tax revenue enough to reduce deficits – something which has never been proven!

In its 2009 Trustees Report, the Office of Administrative State Debt & Investment Trustee Report showed a present value shortfall or unfunded liability of the OASDI closed group totalling $16.3 trillion; representing 3.7 percent of payroll tax liability and 1.2 percent of GDP over an infinite future. In addition, trustees included low-cost and high-cost projections which illustrate uncertainty inherent in long-range forecasting; those from CBO tending towards being more optimistic due to faster real earnings and productivity growth assumptions.

If these trends continue, OASDI’s unfunded liabilities will increase significantly as a proportion of both payroll taxes and GDP, signaling an alarming shift for a country which traditionally enjoyed relatively low levels of debt. An increasing ratio of beneficiaries to workers has caused benefits costs to rise more rapidly than scheduled tax revenues for over three decades – creating an ever widening fiscal gap and mounting economic risks. Read More

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