Expand / Collapse Hide / Show all Abstracts Table of Contents

• Mark
• • PDF
  • READ
  Assessment and Recommendations

  The US economy entered recession in the first half of 2001, with employment falling and industrial production continuing the slide it had begun in mid-2000. The downturn was relatively short and mild. Real GDP increased by ¼ per cent in 2001 as a whole. It declined in the first three quarters of the year, as firms cut stocks and capital spending while household spending slowed. Demand recovered surprisingly quickly after the 11 September terrorist attacks, but the contraction in payrolls persisted until early this year, and the labour market has yet to turn around. Nevertheless, the low unemployment rate prior to the slowdown has meant that, so far, it has not exceeded 6 per cent – well below earlier cyclical peaks and close to what would have been considered full employment just a few years ago. Inflation has receded markedly. Meanwhile the current account deficit has resumed its trend increase. The weak economy has been accompanied by a significant profits drop and a series of revelations regarding misleading accounts and deficiencies in corporate governance, weighing heavily on equity markets and, to a lesser extent, on the value of the dollar.

• • PDF
  • READ
  Recent Trends and Prospects

  Economic activity reached its trough in the second half of 2001, as the economic fallout from 11 September accelerated the deterioration that had begun earlier. Real GDP fell in the first half and was steady in the second half of 2001, and year-average over year-average growth measured only ¼ per cent (Figure 1, Panel A). The slowdown in growth was modest, both in comparison to the declines in GDP witnessed in earlier recessions (such as in the early 1990s) and in view of the deterioration in equity prices since early 2000 and the shock of the terrorist attacks. Final domestic demand slowed considerably, and de-stocking subtracted substantially from output, although net exports placed a smaller drag on activity than in recent years (Table 1). Despite the short-lived decline in GDP, resource utilisation dropped notably: the unemployment rate rose a bit in 2001 from the low of 4 per cent in 2000 and moved significantly higher in early 2002, and output fell somewhat below potential last year (Panel B). Inflation decelerated with the fall in energy prices and an easing in core inflation (Panel C). The mild downturn barely dented the economy’s reliance on inflows of foreign capital to finance domestic demand, however, and the current account deficit remained near 4 per cent of GDP.

• • PDF
  • READ
  Macroeconomic Policy

  Skillful policy actions limited the extent and duration of last year’s economic downturn. A rapid monetary easing – both before and after the events of 11 September – combined with a substantial fiscal expansion to underpin household demand and boost activity. Monetary policy has remained very accommodative this year. Yet, core inflation has been moderate and edging lower, while inflation expectations have been well contained. Even though the recovery is still fragile, the focus will eventually turn to the timing and speed of a return to a more neutral monetary stance. On the fiscal side, renewed restraint will be needed, following the plethora of recent measures to cut taxes and boost spending. The large swing to deficits at the federal level and the deterioration in state finances imply that, in the absence of policy changes, a restoration of fiscal surpluses is unlikely over at least the next couple of years. Surpluses would be desirable both to contain longer-term macroeconomic imbalances and to prepare to address the population-ageing problem that will emerge more strongly at the end of the decade. The remainder of this chapter discusses, in turn, recent monetary and fiscal policy developments and the challenges in these areas in the period ahead.

• • PDF
  • READ
  Health System Reform

  The US health care system is unique in the OECD area. It does not have a national insurance programme and 14 per cent of the population has no insurance coverage, although charity and subsidised programmes facilitate access to the medical system for the 40 million uninsured. It spends vastly more than other Member countries (14 per cent of GDP as compared with an OECD average of 8 per cent). It does relatively well in terms of clinical outcomes achieved. It is also responsive, adapting quickly to changes in consumer preferences, and the majority of Americans is highly satisfied with the care they receive. But, the costs of health care are high, and many Americans are at risk of being uninsured at some point in their lives. Also, like in other OECD countries, service use and health outcomes vary widely across the population. Neither public nor private payers have achieved much in the way of curbing expenditure growth over the long term, despite short-lived successes on the public side in containing prices through prospective payment systems and on the private side in controlling volume and costs through managed care. In addition, the system’s performance on various measures of health status, in comparison with those of other OECD countries, calls into question the value of the high level of spending in terms of marginal improvements in population health, although arguably worse societal risk factors also play a role. Still, despite the remaining potential to achieve better value for money, improvements in population health seem to have yielded substantial increases in national income (Nordhaus, 2002b).

• • PDF
  • READ
  Structural Policy Developments

  While the longest expansion ever recorded is now history, the improvements in many areas of economic performance that accompanied it remain intact. The tight labour market together with robust gains in productivity led to markedly better work prospects for less-skilled workers and other groups weakly attached to the labour market, most notably single mothers. The strong economy reinforced economic policies to encourage work – such as the Earned Income Tax Credit and fundamental changes in welfare programmes in the mid-1990s – to generate improvements in work participation and income and falling poverty rates. This contrasts with the worsening in wellbeing experienced by disadvantaged groups in the 1980s expansion. Even social conditions often viewed as separate from macroeconomic performance, especially crime, have improved significantly over the past decade, and the buoyant economy and good policy – economic and noneconomic – have played important roles. Even so, there are aspects of the labour market, education and in areas of international contention where improvements should be sought.

• Add to Marked List