Wednesday, May 30, 2007

OECD Grades U.S. Economy

The Organization for Economic Cooperation and Development recently released their report on the U.S. economy. A summary of this report, which includes several chapters, can be found here:,2340,en_2649_34569_38626675_1_1_1_1,00.html

Overall, the U.S. Economy gets a favorable assessment, in that it has maintained growth despite the shock of high energy costs, and it has maintained this growth without significant inflationary pressures. However, the OECD clearly lines up with free-market forces in assessing the need for freer trade (with a particular recommendation of reduced subsidies to agriculture) and tax reforms designed to improve capital formation. For example, the OECD suggests broadening the base, rather than raising rates. Moreover, it also criticizes the tax expenditures in the current system, which it claims are not so efficient in achieving their desired outcomes.

On the expenditure side, it is critical of free-flowing spending growth. While tax revenues have risen faster than expected, thus reducing the deficit, there is a temptation to use those revenues for additional spending. The OECD suggests: resist the Devil and he will flee from you. (OK, I paraphrase. See generally chapter 3 of their report.)

The report also takes a swipe or two at the issue of growing income inequality, which is a favorite topic of some politicians these days. Consider the following comments, from chapter 1:

“[T]he very factors that have contributed to economic success and rising overall standards of living -- market liberalisation and globalisation -- have had some side effects that risk undermining the support for such policies. Workers and households experience variability in their earnings and income from year to year and, over the past 25 years or so, income inequality has increased considerably. To a large extent, the rise in inequality reflects an increase in returns to investing in skills. This, in turn, is associated with technological advances, such as improvements in information technologies, which tend to raise the productivity and hence the wages of high skilled workers relative to those of low skilled workers. In addition to technological change, globalisation has been a factor behind rising inequality, though probably a less important one. There is some evidence to suggest that immigration has depressed somewhat the wages of domestic low skilled workers, and outsourcing appears to have had a similar effect.”

Higher wages are needed to incentivize investment in education, thus bringing about new skills that the marketplace will reward. For those low-skilled workers, a more generous immigration policy (at least on the books -- one might argue that it is pretty generous now given the open flouting of immigration rules in many parts of the country) may help to nail their boats to the bottom. While a rising tide for other workers might otherwise bring them up with them, expanding the supply of unskilled labor flowing into the country is not a prescription for prosperity for these workers. (Keep that in mind when there is advocacy for one side or the other based on concern for the poor. It does depend on which group of poor you are trying to help; these groups may be at odds with one another.)

The report is also critical of the recent effort to raise the minimum wage, which was tacked on to the latest spending bill for the war in Iraq. It states in part: “Raising the minimum wage is a poor means to address inequality and poverty. Even though the effects of recent legislation are likely to be limited, such a measure helps many workers who are not poor, fails to help many who are poor, and risks job losses. The Earned Income Tax Credit should be raised, because it reduces poverty more effectively than the minimum wage and delivers more favourable employment outcomes.” Again, as noted here, job losses will result from this policy. This attempt to help lower-income workers by raising the minimum wage will not necessarily produce the results the politicians intended.

The report has much to offer in terms of policy prescriptions. Query whether the political candidates in the upcoming presidential race will take any of these to heart. I can guess that those from one party will not, but I am always open to pleasant surprises.


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