Latest prospects for the US economy: can redistribution help sustain growth?

Here is a link to the latest Strategic Analysis on the US economy from the Levy Economics Institute. They publish a short report like this every year around this time, and discuss the performance of and prospects for the US, as well as considering how things could be improved with a change in policy.

The Levy Institute is officially non-partisan, but tends to publish in the spirit of post-Keynesian thinking. The late Hyman Minksy and Wynne Godley spent the latter part of their lives working there and Godley helped build their macroeconomic model of the US economy.

This year, the 14-page report is titled Can Redistribution Help Build a More Stable Economy? In short, the authors examine what they see as the four key constraints on the US economy and which account for the historically lengthy but weak recovery: (1) weak net export demand; (2) fiscal conservatism; (3) increasing income inequality; and (4) financial fragility. These four constraints help to explain the weak performance, as well as some of the political developments of recent years.

Generally, richer households save a greater proportion of their income than poorer households, so rising inequality will tend to weaken consumption growth and overall aggregate demand. Such a trend, as has taken place in the US in recent decades, was only overcome in the years leading up to the Great Recession by rising household debt. When the housing bubble burst, households began to deleverage (pay down debt), which weakened consumption growth.

The authors consider the impact of a change in government policy of higher taxes on incomes and wealth at the very top of the distribution and spending the resultant revenues, perhaps on necessary infrastructure, which they find should increase GDP significantly over a number of years.

Of course, this assumes that the sources of growth, particularly investment, is constrained by consumption rather than aggregate savings or company profits. Given the high level of income and wealth inequality, exacerbated by the recent tax reform, this may well be the case.

The report also makes the point that there are limits to redistribution via taxes and government spending. Reforms to labour and product markets could reduce pre-tax income inequality which would be more sustainable than tax changes, at least beyond a certain point.

The report does neglect potential reforms which could address weak net export demand, such as a weaker dollar or policies to increase the competitiveness of industries which export or have the potential to do so.

The persistent US current account deficit means that in the absence of stronger demand from abroad, faster growth in the domestic sources of demand and growth will tend to be accompanied by higher public or private debt, which increases the potential for financial fragility and future economic crises or stagnation. Despite this, the report makes for fruitful reading.

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