Poverty and slow productivity threaten US growth, says IMF

23 Jun 16

The International Monetary Fund has cut its growth forecasts for the US economy, warning of threats from high rates of poverty and inequality and sluggish productivity.


Christine Lagarde. Credit: IMF Staff Photo/Stephen Jaffe

Christine Lagarde. Credit: IMF Staff Photo/Stephen Jaffe


The fund now estimates America’s economy will grow at 2.2% over 2016, down from the 2.4% it predicted in April.

IMF managing director Christine Lagarde said overall the US is in good shape but “four forces” – the high poverty rate, polarised incomes, declining productivity and a weak labour market – threaten to “corrode growth”.

She highlighted latest data, which shows 15% of Americans, or 46.7 million people, are living in poverty, creating “significant social strains”, eating in to labour force participation and undermining the “ability to invest in education and improve health outcomes”.

“With such a large share of the population living below the poverty line, this undoubtedly is an important macroeconomic issue,” she stressed.

The increasingly polarised distribution of income and wealth is also a “double-edged sword”, she continued, representing a rise in living standards for some but economic insecurity, flat real incomes, and stagnating or declining living standards for others.

“Our calculations suggest that since 1999, this polarisation of the income distribution has knocked around 3.5% off badly needed consumer demand. That is around one year’s consumption over a period of 15 years,” she said.

She warned that participation in the workforce – the “backbone of the US economy” – is declining as the population ages, and productivity has fallen from 1.7% before the financial crisis to 0.4% in the past five years.

“Our assessment is that, if left unchecked, these four forces will corrode the underpinnings of growth (both potential and actual) and hold back gains in US living standards,” she stressed.

The fund warned that an ageing population, combined with rising interest rates, will mean growing fiscal imbalances. Government debt will begin rising in 2019 and exceed 80% of GDP by 2020, it warned, noting that “regrettably” the US lacks a detailed plan for the medium term.

It recommended a number of steps to work towards healthier future public finances, including “comprehensive reform” of the tax system, “fundamental reform” of the pension system, containing the cost from healthcare and measures “to avoid self-inflicted wounds” caused by future disagreements on fiscal policy between parties.

Lagarde also urged the US to tackle the “four forces”. Policies to help lower income households – in particular a higher federal minimum wage, more generous income tax credit and upgraded welfare programmes for the non-working poor – are needed, she said.

She noted that the US is the only advanced economy without paid maternity leave and that American women are still not active enough in the labour market. Paid family leave to care for a child or parent, childcare assistance and better disability insurance would also encourage participation.

“Sensible skills-based immigration reform could also raise labour supply and boost productivity,” she added.

The latter is “another policy imperative”, she continued, stating that a “better tax system, efforts towards more trade integration, better infrastructure, a stronger and more vocationally orientated education system” would all support productivity growth.

“By countering the ‘four forces’ I have described, I am confident the US can remain on the frontier of innovation and opportunity.”

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