Economic Policies
#22Key Findings
With fiscal sustainability a rising concern, the United States receives middling scores overall (rank 22) with regard to economic policies. Its score on this measure has increased by 0.1 point since 2014.
The pandemic led to a swift and extraordinarily severe economic downturn in mid-2020. However, GDP growth bounced rapidly back, returning to robust levels in 2021. Massive emergency spending included payments to individuals and firms, as well as expanded tax credits and unemployment benefits.
The unemployment rate rose to above 14% in mid-2020, but had fallen back to 4.6% by late 2021. The country has one of the least regulated and least unionized labor markets in the OECD, and the government provides little training or placement support. Taxes do not cover government expenses. Most of the tax reforms passed under President Trump have been retained.
Government debt jumped from 106.8% of GDP in 2019 to more than 137% in 2022, driven by pandemic-era spending and the effects of prior tax cuts. Fiscal sustainability is seen as an increasing concern. The Biden administration restored non-defense R&D spending, and pledged to improve financial market oversight weakened by the previous administration.
The pandemic led to a swift and extraordinarily severe economic downturn in mid-2020. However, GDP growth bounced rapidly back, returning to robust levels in 2021. Massive emergency spending included payments to individuals and firms, as well as expanded tax credits and unemployment benefits.
The unemployment rate rose to above 14% in mid-2020, but had fallen back to 4.6% by late 2021. The country has one of the least regulated and least unionized labor markets in the OECD, and the government provides little training or placement support. Taxes do not cover government expenses. Most of the tax reforms passed under President Trump have been retained.
Government debt jumped from 106.8% of GDP in 2019 to more than 137% in 2022, driven by pandemic-era spending and the effects of prior tax cuts. Fiscal sustainability is seen as an increasing concern. The Biden administration restored non-defense R&D spending, and pledged to improve financial market oversight weakened by the previous administration.
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How successful has economic policy been in providing a reliable economic framework and in fostering international competitiveness?
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Economic policy fully succeeds in providing a coherent set-up of different institutional spheres and regimes, thus stabilizing the economic environment. It largely contributes to the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy largely provides a reliable economic environment and supports the objectives of fostering a country’s competitive capabilities and attractiveness as an economic location.
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Economic policy somewhat contributes to providing a reliable economic environment and helps to a certain degree in fostering a country’s competitive capabilities and attractiveness as an economic location.
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1
Economic policy mainly acts in discretionary ways essentially destabilizing the economic environment. There is little coordination in the set-up of economic policy institutions. Economic policy generally fails in fostering a country’s competitive capabilities and attractiveness as an economic location.
The United States has maintained economic policies that have effectively promoted international competitiveness and economic growth. Compared with other developed democracies, the United States has generally featured low tax rates, less regulation, lower levels of unionization and greater openness to foreign trade. The country has enjoyed superior levels of growth, capital formation and competitiveness. The country’s economic situation deteriorated very rapidly in the early spring of 2020, as the COVID-19 pandemic hit the United States. Yet, this dramatic and sudden economic downturn did not last and the economy recovered swiftly to reach a stunning projected GDP grow of nearly 7% in 2022. Simultaneously, starting in spring 2021, high inflation became a major issue in the United States.
During Trump’s first two years in office, Congress passed a major tax reform that included a tax cut for corporations and high-income individuals. Along with increases in defense spending and Trump’s rejection of spending cuts for middle-class social benefits (Medicare and Social Security), the tax cut created a sharp increase in the already unsustainable long-term federal budget deficit. In the aftermath of the pandemic, massive emergency public spending contributed to a further increase in the size of the federal deficit, which reached a record of $1.7 trillion during the first half of 2021.
During 2018, as the Federal Reserve (also known as “the Fed”) began to raise interest rates, Trump repeatedly questioned the Fed’s expertise and accused it of doing harm to the economy. The Fed lowered interest rates during 2019, accounting for signs of slowdown in the world economy. In the aftermath of the COVID-19 pandemic, the Fed furthered lowered its interest rates to virtually zero while moving forward with a bold quantitative easing campaign.
The Biden-Administration implemented the American Rescue Plan Act in 2021 to get the economy going again. The $1.9 trillion package included $1,400 check per adult, an expanded child tax credit, extended unemployment benefits, and expanded eligibility for healthcare benefits. Biden second major economic legislation, the Infrastructure Investment and Jobs Act was signed into law in November 2021. His Build Back Better Act, which would expand major welfare and child support programs passed the House in November but failed to pass the Senate in December 2021. Biden’s economic policy proposal is designed to strengthen the role of the state in the economy.
Citations:
Jeff Stein, Trump’s quest to shatter GOP economics reached its culmination in 2019, Washington Post, Dec. 27, 2019.
During Trump’s first two years in office, Congress passed a major tax reform that included a tax cut for corporations and high-income individuals. Along with increases in defense spending and Trump’s rejection of spending cuts for middle-class social benefits (Medicare and Social Security), the tax cut created a sharp increase in the already unsustainable long-term federal budget deficit. In the aftermath of the pandemic, massive emergency public spending contributed to a further increase in the size of the federal deficit, which reached a record of $1.7 trillion during the first half of 2021.
During 2018, as the Federal Reserve (also known as “the Fed”) began to raise interest rates, Trump repeatedly questioned the Fed’s expertise and accused it of doing harm to the economy. The Fed lowered interest rates during 2019, accounting for signs of slowdown in the world economy. In the aftermath of the COVID-19 pandemic, the Fed furthered lowered its interest rates to virtually zero while moving forward with a bold quantitative easing campaign.
The Biden-Administration implemented the American Rescue Plan Act in 2021 to get the economy going again. The $1.9 trillion package included $1,400 check per adult, an expanded child tax credit, extended unemployment benefits, and expanded eligibility for healthcare benefits. Biden second major economic legislation, the Infrastructure Investment and Jobs Act was signed into law in November 2021. His Build Back Better Act, which would expand major welfare and child support programs passed the House in November but failed to pass the Senate in December 2021. Biden’s economic policy proposal is designed to strengthen the role of the state in the economy.
Citations:
Jeff Stein, Trump’s quest to shatter GOP economics reached its culmination in 2019, Washington Post, Dec. 27, 2019.
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How effectively does labor market policy address unemployment?
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Successful strategies ensure unemployment is not a serious threat.
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Labor market policies have been more or less successful.
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Strategies against unemployment have shown little or no significant success.
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Labor market policies have been unsuccessful and rather effected a rise in unemployment.
The United States has one of the least regulated and least unionized labor markets in the OECD. Some states even have “right-to-work” laws that prevent unions from requiring membership as a condition for employment. The low levels of unionization, which in principle lowers the price of labor, should generally promote employment.
The U.S. government plays a minimal role in promoting labor mobility or providing support for training and placement. With the exception of temporary social policy measures enacted during the COVID-19 pandemic, federal policies regarding labor and employment have not undergone any major change. Trends at the local and state government levels have gone in different directions. Whereas several cities and states with left-leaning governments have sharply increased minimum wages, other states have adopted “right-to-work” laws (e.g., Michigan) or have imposed constraints on public employees’ unions (e.g., Wisconsin).
In 2019, before the pandemic, unemployment continued to decline, reaching 3.7%, which was the lowest officially registered rate since 1969. In addition, the tightening labor market produced gains in average wages. In April 2020, the COVID-19 crisis favored a very sudden increase in the unemployment rate, which rose by about 10 points in one month to move above the 14% mark. Fortunately, starting in May 2020, the unemployment rate began to fall, gradually yet steadily, to 6% in March 2021 and 4.6% in October of the same year. But the labor forces participation rate is still below the rate of pre-pandemic times and more than 2.7 million Americans can be considered as long-term unemployed, a unusally high number for the United States.
Citations:
Patricia Cohen, After a Decade of Hiring, Plenty of Jobs but raises are tiny, New York Times, Jan. 20, 2020
The U.S. government plays a minimal role in promoting labor mobility or providing support for training and placement. With the exception of temporary social policy measures enacted during the COVID-19 pandemic, federal policies regarding labor and employment have not undergone any major change. Trends at the local and state government levels have gone in different directions. Whereas several cities and states with left-leaning governments have sharply increased minimum wages, other states have adopted “right-to-work” laws (e.g., Michigan) or have imposed constraints on public employees’ unions (e.g., Wisconsin).
In 2019, before the pandemic, unemployment continued to decline, reaching 3.7%, which was the lowest officially registered rate since 1969. In addition, the tightening labor market produced gains in average wages. In April 2020, the COVID-19 crisis favored a very sudden increase in the unemployment rate, which rose by about 10 points in one month to move above the 14% mark. Fortunately, starting in May 2020, the unemployment rate began to fall, gradually yet steadily, to 6% in March 2021 and 4.6% in October of the same year. But the labor forces participation rate is still below the rate of pre-pandemic times and more than 2.7 million Americans can be considered as long-term unemployed, a unusally high number for the United States.
Citations:
Patricia Cohen, After a Decade of Hiring, Plenty of Jobs but raises are tiny, New York Times, Jan. 20, 2020
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How effective is a country’s tax policy in realizing goals of revenue generation, equity, growth promotion and ecological sustainability?
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Taxation policy fully achieves the objectives.
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Taxation policy largely achieves the objectives.
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Taxation policy partially achieves the objectives.
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Taxation policy does not achieve the objectives at all.
The U.S. tax system does not produce enough revenue to eliminate the deficit and provide sufficient resources to fulfill major obligations in the long run. Tax policy is highly responsive to special interests and the redistributive effect of the tax system is very low. As a result, the tax system might promote the country’s competitive status internationally but faces serious problems in terms of ensuring horizontal and vertical equity. Many high-income earners pay an effective tax rate that, after deductions, is lower than the rate for middle-class earners. The United States derives a large share of revenue from corporate taxes, a fact that has encouraged some firms to move operations abroad. Despite these shortcomings, the U.S. tax system performs well with respect to competitiveness, since the overall tax burden ranks near the bottom of the OECD rankings.
The Trump administration’s ostensible major objectives were to reduce corporate tax rates, reduce rates paid by high-income taxpayers, eliminate the inheritance tax, reduce taxes for middle income taxpayers, and make up for the losses of revenue by eliminating certain credits and deductions. Although Democrats pledged to repeal Trump’s tax reform law, which “was estimated to cost nearly $2 trillion over a decade,” in early 2021 the new Biden administration made it clear it only sought “a partial rollback of the law, with their focus on provisions that help corporations and the very rich.” (Tankersley, 2021) Months later, in the fall, it became increasingly clear most of the Trump tax reform would remain largely untouched (Zeballos-Roig, 2021).
Citations:
Tankersley, Jim. 2021. “Biden Wants to Raise Taxes, Yet Many Trump Tax Cuts Are Staying,” New York Times, April 5. https://www.nytimes.com/2021/01/22/business/economy/biden-trump-tax-law.html
Zeballos-Roig, Joseph. 2021. “The Trump tax law is poised to be a big winner of Biden’s $1.75 trillion social spending bill,” Business Insider, November 10. https://www.businessinsider.com/trumps-tax-law-sinema-big-winner-bidens-social-spending-bill-2021-11
The Trump administration’s ostensible major objectives were to reduce corporate tax rates, reduce rates paid by high-income taxpayers, eliminate the inheritance tax, reduce taxes for middle income taxpayers, and make up for the losses of revenue by eliminating certain credits and deductions. Although Democrats pledged to repeal Trump’s tax reform law, which “was estimated to cost nearly $2 trillion over a decade,” in early 2021 the new Biden administration made it clear it only sought “a partial rollback of the law, with their focus on provisions that help corporations and the very rich.” (Tankersley, 2021) Months later, in the fall, it became increasingly clear most of the Trump tax reform would remain largely untouched (Zeballos-Roig, 2021).
Citations:
Tankersley, Jim. 2021. “Biden Wants to Raise Taxes, Yet Many Trump Tax Cuts Are Staying,” New York Times, April 5. https://www.nytimes.com/2021/01/22/business/economy/biden-trump-tax-law.html
Zeballos-Roig, Joseph. 2021. “The Trump tax law is poised to be a big winner of Biden’s $1.75 trillion social spending bill,” Business Insider, November 10. https://www.businessinsider.com/trumps-tax-law-sinema-big-winner-bidens-social-spending-bill-2021-11
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To what extent does budgetary policy realize the goal of fiscal sustainability?
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Budgetary policy is fiscally sustainable.
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Budgetary policy achieves most standards of fiscal sustainability.
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Budgetary policy achieves some standards of fiscal sustainability.
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Budgetary policy is fiscally unsustainable.
Budget policy in the United States is a complex issue and raises different concerns regarding short- or long-term deficits respectively. In 2019, the federal budget deficit nearly hit $1 trillion, and economists are raising growing concerns about the sustainability of the country’s fiscal plan. In the aftermath of the COVID-19 pandemic and the emergency spending it triggered, the federal budget deficit increased suddenly, reaching a record $3.1 trillion in 2020, before declining only slightly to $2.8 billion in 2021.
Overall, both the pandemic and the Trump administration’s tax cuts have exacerbated the country’s long-term fiscal challenges. As for President Biden’s administration, for the 2022 fiscal year he has proposed “a $6 trillion budget (…) that would take the United States to its highest sustained levels of federal spending since World War II as he looks to fund a sweeping economic agenda that includes large new investments in education, transportation and fighting climate change.” (Tankersley, 2021) If implemented, his proposal would mean “deficits running above $1.3 trillion throughout the next decade” (Tankersley, 2021).
Citations:
Tankersley, Jim. “Biden to Propose $6 Trillion Budget to Make U.S. More Competitive,” New York Times, June 17. https://www.nytimes.com/2021/05/27/business/economy/biden-plan.html
Overall, both the pandemic and the Trump administration’s tax cuts have exacerbated the country’s long-term fiscal challenges. As for President Biden’s administration, for the 2022 fiscal year he has proposed “a $6 trillion budget (…) that would take the United States to its highest sustained levels of federal spending since World War II as he looks to fund a sweeping economic agenda that includes large new investments in education, transportation and fighting climate change.” (Tankersley, 2021) If implemented, his proposal would mean “deficits running above $1.3 trillion throughout the next decade” (Tankersley, 2021).
Citations:
Tankersley, Jim. “Biden to Propose $6 Trillion Budget to Make U.S. More Competitive,” New York Times, June 17. https://www.nytimes.com/2021/05/27/business/economy/biden-plan.html
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To what extent does research and innovation policy support technological innovations that foster the creation and introduction of new products?
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Research and innovation policy effectively supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy largely supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy partly supports innovations that foster the creation of new products and enhance productivity.
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Research and innovation policy has largely failed to support innovations that foster the creation of new products and enhance productivity.
The United States has traditionally invested heavily in research and development, but the effects of the Great Recession and the country’s problematic budget politics have compromised this support. Certain public institutions stand out, particularly the National Science Foundation, the National Institute of Health, the country’s federal laboratories and various research institutions that are attached to federal agencies. In addition, there is a vast array of federally supported military research, which often has spillover benefits.
The Trump administration afforded research and innovation, apart from defense, a low priority. It cut federal R&D spending, except for Department of Defense R&D, which was projected to increase by 15%. Trump cut scientific and engineering personnel in environmental and resource-related agencies and withdrew support for alternative energy development. In part to compensate for this situation, the Biden administration has proposed major increases in non-defense R&D spending, coupled with small cuts in defense R&D.
Citations:
Joel Achenbach et.al., Trumps budget seeks cuts in science funding, Washington Post, March 11. 2019.
The Trump administration afforded research and innovation, apart from defense, a low priority. It cut federal R&D spending, except for Department of Defense R&D, which was projected to increase by 15%. Trump cut scientific and engineering personnel in environmental and resource-related agencies and withdrew support for alternative energy development. In part to compensate for this situation, the Biden administration has proposed major increases in non-defense R&D spending, coupled with small cuts in defense R&D.
Citations:
Joel Achenbach et.al., Trumps budget seeks cuts in science funding, Washington Post, March 11. 2019.
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To what extent does the government actively contribute to the effective regulation and supervision of the international financial architecture?
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The government (pro-)actively promotes the regulation and supervision of financial markets. It demonstrates initiative and responsibility in such endeavors and often acts as an international agenda-setter.
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The government contributes to improving the regulation and supervision of financial markets. In some cases, it demonstrates initiative and responsibility in such endeavors.
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The government rarely contributes to improving the regulation and supervision of financial markets. It seldom demonstrates initiative or responsibility in such endeavors.
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The government does not contribute to improving the regulation and supervision of financial markets.
Traditionally, the United States had generally promoted prudent financial services regulation at the international level. This includes participation in international reform efforts at the G-20, in the Financial Stability Board (FSB), and in the Basel Committee on Banking Supervision (BCSC). U.S. negotiators played a major role in developing the Basel III capital rules adopted in June 2011, as well as the liquidity rules adopted in January 2013. The global nature of the 2008 financial crisis necessitated a multilateral approach and the promotion of a robust financial-policy architecture.
With respect to the national regulatory framework, U.S. regulatory bodies had been developing rules required by the 2010 Dodd-Frank Act. U.S. regulators generally preferred stronger rules than international standards required (e.g., on the regulation of derivatives). However, lobbying by the powerful financial services industry had weakened U.S. standards. In a major change of direction, the Trump administration and Republican Congress partially repealed the Dodd-Frank Act; the repeal gutted the Volcker rule (prohibiting banks from making certain investments for their own accounts). The administration abandoned support for the development or implementation of international standards. On the domestic side, it largely abandoned enforcement activity of the Consumer Financial Protection Board. The result was a resumption of some of the risky, potentially destabilizing banking practices. President Biden has pledged to improve financial regulation in part through a revitalization of the Consumer Financial Protection Bureau (CFPB), a federal agency created under President Obama but seriously weakened by the Trump administration
Citations:
https://www.wsj.com/articles/curtains-for-global-financial-regulation-1492037557
With respect to the national regulatory framework, U.S. regulatory bodies had been developing rules required by the 2010 Dodd-Frank Act. U.S. regulators generally preferred stronger rules than international standards required (e.g., on the regulation of derivatives). However, lobbying by the powerful financial services industry had weakened U.S. standards. In a major change of direction, the Trump administration and Republican Congress partially repealed the Dodd-Frank Act; the repeal gutted the Volcker rule (prohibiting banks from making certain investments for their own accounts). The administration abandoned support for the development or implementation of international standards. On the domestic side, it largely abandoned enforcement activity of the Consumer Financial Protection Board. The result was a resumption of some of the risky, potentially destabilizing banking practices. President Biden has pledged to improve financial regulation in part through a revitalization of the Consumer Financial Protection Bureau (CFPB), a federal agency created under President Obama but seriously weakened by the Trump administration
Citations:
https://www.wsj.com/articles/curtains-for-global-financial-regulation-1492037557