Cline_Ec1_Lctr - Correcting the Imbalances in US Economic...

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Correcting the Imbalances in US Economic Growth 1 William R. Cline Center for Global Development and Institute for International Economics March, 2003 Introduction The US economy has long and appropriately been regarded as a powerhouse, an impressive machine for creating jobs, the locomotive pulling along the rest of the world economy. Although the economy is now in the stage of recovery from a mild recession, and despite the current Iraq- related uncertainties, the perception of a fundamentally strong US economy remains valid. However, a number of important imbalances have accompanied robust growth. Some of these are a matter of social choice and do not necessarily threaten continued growth per se. Others are more integral to growth itself, and constitute potential fissures in the foundation that had better be repaired sooner rather than later if the growth machine is to continue working. I would like to focus on four imbalances and consider how they might be corrected: the imbalances in external accounts; in household saving and fiscal accounts; in the financial asset market; and in the distribution of wages. There are other challenges and imbalances in the American economy that will also have to be addressed sooner or later – particularly the future social security burden with an aging population, the 1 Public lecture presented at Swarthmore College, Swarthmore Pennsylvania, March 3, 2003.
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care, and the conflict between private and social values in environmental issues, especially those involving international cooperation. The powerhouse economy Before turning to what needs to be corrected in the US economy, let me begin by reviewing its impressive accomplishments. As figure 1 shows, output per available worker in the labor force grew at 1.7 percent annually in the 1980s and 2.2 percent in the 1990s, whereas in Europe (except for the UK) there was a decline from 1.5 percent to 1 percent, and in Japan there was a collapse after the bubble economy from 2.8 percent growth in output per worker in the labor force to only 0.6 percent. There was a sharp acceleration in US productivity growth beginning in 1995, as output growth per worker employed rose from 1.4 percent annually in 1973-95 to 3.1 percent in 1995-2000. Much of the improvement in the 1990s can be explained by the success in overcoming the stagflation shocks of the 1970s and early 1980s, when oil shocks in particular prompted both recession and inflation. Prudent fiscal policy in the mid-1990s also helped reduce interest rates and spur investment. Perhaps even more importantly, there was one of those historical waves of innovation that Schumpeter emphasized as the source of dynamic growth, even if one believes that the advent of the internet and microcomputers was not on the same scale as the past waves of technological breakthroughs such as the coming of the railroads. 2
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Cline_Ec1_Lctr - Correcting the Imbalances in US Economic...

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