Texas A&M University
The current expansion of the U.S. economy is among the longest on record. There have been 33 recessions since 1854, and, given the length of this expansion, one may think that we are now due for another downturn. The fiscal stimulus arising from the tax cut passed at the end of last year may keep the economy growing for some time, but this effect is expected to eventually wear off. While the Federal Reserve has shown a willingness to raise interest rates to prevent overheating, Federal Reserve Chairman Jerome Powell has recently indicated that interest rates are “just below” broad estimates of a neutral level — a setting designed to neither speed nor slow economic growth. Still, predicting recessions is a notoriously difficult endeavor, as pointed out by Nobel Laureate Robert Shiller. Nevertheless, there are some warning signs, among them the flattening of the yield curve and the decrease in the spread between 10-year and 2-year Treasuries – and these warnings would become stronger were these movements to continue in the same direction.
So-called sin taxes represent an effort to tilt consumption away from items that are harmful, such as tobacco, alcohol and sugary drinks. The revenues generated by these taxes could also benefit health outcomes if they were dedicated for that purpose. Evidence on taxing sugary drinks from the experience in Philadelphia and elsewhere suggests the policies do reduce people’s consumption of these drinks. Additional research would be needed to show concrete beneficial health outcomes from the reduction in the consumption of sugar due to the tax.
A substantial part of the decline in labor force participation can be explained by the the retirement of baby-boomers. But there are concerning trends in participation for those who are in prime working ages. The fact that the return to low-skilled work has been falling, together with poor options for elder care and child care, have contributed to more people leaving the work-force. In contrast to other advanced economies, since 2,000, labor force participation among prime-age women has been declining in the U.S. The good news is that considering this trend isn’t universal, the U.S. can look to other advanced countries and make policy shifts to help reverse the decline in women in the labor force.
The minimum wage is not an effective tool to reduce poverty or income inequality. Many of the beneficiaries do not live in low-income households. Moreover, there is some evidence that workers who earn the minimum wage tend to see relatively rapid gains in hourly wages as they acquire experience. Policies that supplement the incomes of low-wage workers, like the Earned Income Tax Credit, are better targeted to low-income families and encourage work.
Productivity growth is notoriously hard to measure and to predict. But there are a few factors that could be contributing to the slowdown in the U.S. Historically, a large part of productivity growth has come from new, fast growing firms hiring workers away from older, less productive firms. With declining dynamism and fewer start-ups in the economy, this mechanism is much less pronounced today. A slowing rate of capital accumulation – as well as the fact that the education differential between generations is not growing as quickly – could also be contributing factors.