Strengthening the global economy: a report on the Bush Administration agenda; a focus on raising productivity growth and increasing economic stability

Business Economics, Jan, 2003 by John B. Taylor

The Bush Administrations international economic agenda emphasizes increased economic growth and improved economic stability throughout the world. However, effective international policy begins at home, and the macroeconomic policies are in place for sustained, non-inflationary U.S. growth. On the international side, the Administration is focused on raising productivity growth in the industrialized countries, emerging markets, and the developing world. Because there is little the U.S. can do to remedy the structural problems that are holding back growth in Japan and Germany, much of the Administration's focus is on developing and emerging economies. For developing economies, much of the emphasis is on increasing assistance to those developing countries that pursue constructive growth policies. Much of this increase is through multilateral agencies as well as direct bilateral assistance. For the emerging market countries, policy focuses on improving conditions for private investment by better preventing financi al crises, reducing contagion when crises do occur, reducing reliance on official finance packages, and increasing predictability in the sovereign debt restructuring process. Free trade is another cornerstone the Administration's international economic policy; and now that the President has trade promotion authority, free trade negotiations will move ahead quickly on several bilateral and multilateral fronts. Removing terrorist access to finances and rebuilding Afghanistan have been unanticipated additions to foreign economic policy, and the Administration is moving forward in these areas, as well.

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It is a pleasure to have the opportunity to discuss the international economic policy agenda of the Bush Administration with fellow economists--to give a brief overview of key goals and to highlight some of the important accomplishments. The Administration's international economic agenda was big when we came into office last year, and it has grown, especially since the September 11 terrorist attacks. But I believe that we have stuck to our overall strategy and have made good progress on implementing the strategy, even as we have added such items as terrorist financing and Afghanistan reconstruction to our agenda, as I discuss below.

Two goals have guided our international economic agenda: (1) increasing economic growth, as measured by improvements in productivity and higher per capita income, and (2) improving economic stability, as measured by a reduction in the severity, length, and frequency of economic downturns and crises. These goals apply to the United States, to other industrialized nations, to emerging market countries, and to the developing world as I will now try to make clear.

Economic Growth and Stability in the United States and Other Industrialized Countries

My economic research on models of the world economy taught me long ago that getting one's own economic policy right is ninety percent of getting international economic policy right. So I should start with a discussion with the U.S. economy.

It should be clear to any economist that fiscal and monetary policy in the United States responded remarkably quickly and decisively to last year's recession. The President's tax cut was well timed, and along with the automatic stabilizers, helped mitigate the recession. The Federal Reserve moved early and aggressively to lower the federal funds rate. Low interest rates are still a factor supporting the economic recovery.

Tonight we are already completing one full year of economic recovery--a recovery that is close to what we forecast last year and about what one should expect following a shallow recession. It is very good news that productivity growth has held up so well during the recession and that inflation remains low as the recovery proceeds. We expect economic growth to return soon to the long run potential of between 3 and 3.5 percent.

With the right policies there is no reason why the current U.S. economic expansion cannot be as long-lasting, or even longer-lasting, than the expansions of the 1990s and of the 1980s, which were the first and second longest peacetime expansions in American history. As the economy recovers, it is essential that we make the tax cuts permanent, control the growth of government spending, reduce the deficit, continue to remove barriers to job creation, and insist on corporate responsibility.

Economic growth for the other G-3 countries still leaves much to be desired, however. Japan has not yet recovered from its long period of slow growth, deflation, and instability. The higher rate of growth of the monetary base by the Bank of Japan since last year should be maintained and accompanied by changes in the banking sector that will allow the growth rate of bank credit and M2 CD to increase as well. Germany is also growing very slowly. I believe that supply-side factors, which are holding down the growth rate of productivity and of potential GDP, must be addressed if real GDP in Germany is to grow more rapidly. Productivity growth should be higher, not lower, in Germany and Japan than in the United States.