Transcript

Transcript of IMF Press Briefing on the Concluding Statement of the 2017 Article IV Mission to the United States

June 27, 2017

Participants:

Alejandro Werner, Director, Western Hemisphere Department

Nigel Chalk, U.S. Mission Chief

Stephan Danninger, Division Chief, Western Hemisphere Department

Gerry Rice, Director, Communications Department

MR. RICE: Good morning everyone and a warm welcome to the IMF for our press conference this morning. This is a press conference on the staff concluding statement of the U.S. Article IV mission. As you know, this is a mission that we do every year in the United States and so this is a regular feature of our surveillance mandate.

I’m very pleased to introduce the director of our Western Hemisphere Department, Mr. Alejandra Werner. We also have with us the Mission Chief for the United States Mr. Nigel Chalk and the Division Chief for the U.S. Division in the Western Hemisphere Department Mr. Stephan Danninger.

You have the documents and we are on the record this morning. I’m going to ask Mr. Werner to make some opening remarks and then we will turn to your questions.

MR. WERNER: Let me first make some brief opening remarks before taking your questions.

The backdrop for the consultation this year was one of a U.S. economy that has achieved much since the Global Financial Crisis. This is the third-longest expansion since 1850, job growth has been persistently strong, and the economy looks like it is effectively back at full employment.

As you may know, in January we updated our growth outlook to incorporate an assumed fiscal stimulus that would roll out over the next few years. However, after discussions with the U.S. authorities, and given the still-evolving policy plans, we have decided to remove that assumed stimulus from our forecast and base our projections on unchanged policies. This in large part reflects the uncertainty about the nature of the macroeconomic policies that will be put in place in the coming months. As a result of the change in assumptions, we have lowered our near-term growth projection relative to that which was published in the April World Economic Outlook.

Despite this relatively good near-term picture, the U.S. economy continues to face considerable challenges. Technological change is reshaping product and labor markets but, unlike in the past, we are not seeing a resulting increase in productivity growth. Demographics are increasingly creating headwinds. And there are important distributional consequences of the secular changes that are underway. These are feeding back into economic prospects on both the demand and supply side. All in all, in our judgement, the U.S. economic model is not working as well as it could in generating broadly shared income growth.

There was agreement with the U.S. authorities on the objectives that need to be achieved to ensure stronger and more inclusive growth going forward. As we have emphasized in past consultations, these include: generating faster economic and productivity growth, stimulating job creation, incentivizing business investment, balancing the budget and bringing down the public debt, and creating the fiscal space that is needed to finance priorities such as infrastructure and investments in human capital.

In our judgement, achieving these objectives will require action on many fronts. To raise living standards for the majority of Americans the key priorities are: a tax reform that simplifies the system and generates an increase in the revenue-GDP ratio, more investment in infrastructure; more trade integration; and an array of policies to enhance labor supply and skills. In this latter point, we have in mind a more effective education system; skills-based immigration reform; and policies to help low- and middle-income households maintain gainful employment—such as better social assistance programs, childcare support, and paid family leave.

These policies will need to be embedded into a sustained, gradual and balanced reduction in the fiscal deficit over the medium-term. Given where we are in the cycle, we support a gradual increase in policy rates and a normalization of the Federal Reserve’s balance sheet.

Many of the policy details are laid out in the concluding statement that you have before you. We believe this set of policies will be both good for the U.S. and good for the global economy.

With those introductory remarks, my colleagues and I will now take your question.

MR. RICE: Thank you, Alejandro. I know there are a large number watching online, feel free to send your questions and we will try to take them as time allows. I’m already seeing some popping up. Let’s begin in the room.

QUESTIONER: Thanks. Sam Fleming from the Financial Times. The administration thinks they can see a tax legislation on the floor of Congress in September; the republican Speaker thinks this year of tax changes. You clearly disagree. You don’t think there is any prospect of tax changes in the near future? Could you explain why you think they’re being too optimistic and why therefore you have lowered your growth forecast?

MR. WERNER: I think we are not saying that there won’t be any legislation approved in the next few months regarding taxes and a budget approval. What we are saying is that in our previous forecast we had an assumption of an important fiscal stimulus that was going to be rolled out in the next years. We are removing that fiscal stimulus because now we have in front of a Congress a budget that assumes an important fiscal consolidation in the next few years.

So, we had two different scenarios there and as a result of negotiations in Congress we can end up as we detail in the concluding statement either with the scenario which we have a strong fiscal consolidation in the next few years, based on what is laid out in the budget, in which there is an important and a tough – let’s say – control in reduction of government expenditures in some areas and a fiscal reform that is mostly revenue neutral I think. Or we can then have a situation in which maybe we have a path of government expenditures that is a little bit linear and on the other hand we have a tax reform that is either revenue neutral or generates some reductions in tax and in that sense the whole fiscal package ends up being stimulating.

Given this broad range of uncertainty, we decided to base our growth assumptions on current policies and therefore we remove the fiscal stimulus that was embedded in the previous forecast and we end up lowering growth from 2.3 for 2017 to 2.1 and from 2.5 in 2018 to 2.1 as well. That’s the effect of this change in assumptions.

MR. CHALK: I don’t think we took a view on the timing of the tax reform and I don’t think we have any reason not to expect the proposal to come out later this year. The tax reform that the administration has stated in the budget and in public communications would be one that’s revenue neutral so that’s the tax reform that we’ve built into our forecast. And that’s the difference from where we were forecasting in January, when we were forecasting that there would be a reduction in revenues from both personal and cooperate income tax, which would lead to a short-term stimulus of the economy and would boost growth in the near term. We’ve basically taken that tax stimulus out on the basis of the presentations and discussion we had during the Article IV. But I think we fully expect there to be some proposal before the end of the year on tax reform.

QUESTIONER: Andrew Mayeda with Bloomberg News. Just so we are absolutely clear, can you run through again what was in the original fiscal stimulus that was included and that is now removed?

MR. CHALK: In the January WEO forecast and the April WEO forecast we had built in a 2 percent of GDP revenue stimulus over the next three years from 2017 to 2019, which added cumulatively over the three years 1 percent to the level of GDP.

QUESTIONER: And my second question is wondering if you can talk a little bit about this discussion about a potential trilemma that the administration is facing. Is it possible for the U.S. to simultaneously reduce its trade deficit, increase investment on the scale that it is describing or is being proposed and to balance its budget?

MR. WERNER: In the concluding statement we are very clear in terms of outlining the set of policies that can generate important impact on potential GDP growth for the U.S. economy. Many of these polices are aligned with proposals that have been put on the table and some of them have been contemplated by the administration. However, looking at the international experience in the last 40 years and looking at the U.S., it is unlikely that this set of polices can generate an acceleration in growth of the magnitude of approximately 1 percentage point.

When you look at the international experience since 1980, we can only find few examples of advanced economies that have had such an acceleration, and in many cases this acceleration came after important recessions – therefore a significant part of those accelerations was supported by important acceleration of employment. But that, for an economy that it’s starting close to full employment, will be hard to achieve. Demographics will also be weighing down on growth in the U.S. Therefore, to achieve such an important acceleration you will have to rely on significant accelerations on investment and total factor productivity growth that have not been seen in the data with such a high frequency. That’s the data on which we base our comments that it’s unlikely to see such a significant growth acceleration – it would need to be supported by important increases in productivity and important increases in investment.

Secondly, if you have an important acceleration of investment, especially in the short run, before the important supply-side effects kick in you, will have some expansion of the current account deficit. Therefore, in the short run, the hypothesis that you laid out would present itself as a possibility. Obviously in the long run, when important supply-side effects manifest themselves, you can end up having a situation in which these three things will be showing up in the data.

MR. CHALK: Yes, it’s not a trilemma we are used to. The idea of reducing the trade deficit, increasing investment and balancing the budget we certainly think is feasible. In fact, the policy that we laid out in the concluding statement, we think would actually do that: it would reduce external imbalance, raise investment and lead to a gradual fiscal consolidation.

I think key are two things. One is to do enough on the supply side to drive productivity and growth improvements, increasing labor force participation, rising savings. And the second thing is that balancing the budget should be a process which uses both revenue and expenditure. It seems quite difficult to achieve the same outcome, if you are going to rely entirely on the spending side of the budget in order to do the medium-term fiscal consolidation.

MR. RICE: We have got quite a bit of activity online. I’m going to take a few questions and then come back in the room for one more round. CNN, Patrick Gillespie is asking: is the renegotiation of NAFTA a reason why you have reduced your economic forecast? How would you describe the level of certainty or uncertainty regarding U.S. trade policy? And there is another one coming from Heater Scott of AFP, and Heather is asking: “The Article IV is unusually critical of specific U.S. policy proposals. How did U.S. officials respond to the IMF’s comments, for example on the disproportionate burden on the lower and middle classes?” There is one more from Reuters, from Lindsay Dunsmuir: “Given you’ve cut the U.S. growth forecast, does that mean you also envisage cutting the global growth forecast as well.” On that one, I’ll just say to Lindsay that we are going to be giving our updated global growth numbers in a few weeks’ time, with the WEO Update. I believe it’s the third week of July, so I think we’ll hold that one until then. But I’ll ask Alejandro, Nigel and Stephan to pick up on those other two questions, please.

MR. WERNER: The change in the growth forecast was mainly due to the revision of the assumptions on the fiscal stance, so there is nothing in there associated with NAFTA renegotiations or other trade issues.

With respect to how the U.S. authorities reacted to some of the comments that are included in the concluding statement regarding income polarization, income distribution, poverty rates in the U.S.: I think the U.S. administration shares the view that the U.S. economy has been facing important challenges in its growth processes, that growth has been too slow, too uneven, and generating important social problems in the U.S. economy. And therefore, I think there was a very clear, shared diagnosis, and shared objective in trying to reverse these trends in the U.S. economy and assigning a set of policies that are conducive to faster growth; and more importantly, even more distribution of the gains from economic prosperity.

MR. DANNINGER: On the low- and middle-income groups, the reason why we focused on those is that we think that in order to raise growth, you need to put all your efforts into utilizing labor force, and emphasize that groups that have had a tendency to drop out of the labor force more aggressively, that they have an environment in place that they can put their supply forward.

Here, we had emphasized issues that we’ve done for a couple of years. On the tax reform side, for example, we think of measures that incentivize work. On the lower-income side, for example, there are income tax elements worth looking at during the tax reform. We have been stressing an education reform that allows people to retool their skills as they transition from one sector to another sector. There’s been a lot of talk, for example, of enhancing systems such as an apprentice system that has been proving successful in other countries to possibly give some of the lessons that are relevant for the U.S.

And finally, we think that policies that would help families to continue to sustain employment, like through family leave, are important – these measures are also proposed by the administration, and we support them. So, it was a discussion on what are the right tools to achieve these goals, which I think both sides share.

MR. RICE: I’m coming back in the room, if there’s a second question. EFE?

QUESTIONER: Pedro Fernandez from Spanish News Wire EFE: Given this downgrade of the forecast, should the Fed in effect take a break in the process of gradual adjustment?

MR. CHALK: For several years now we’ve argued for gradual process of interest rate increases. The Fed has been pursuing a gradual process. We think that the recent softness in the inflation almost looks transitory. But the fact that we’ve seen it for three months now, in inflation data, gives us a concern that there are some downside risks to inflation, while at the same time the economy is at full employment. So, given where the Fed is relative to its mandate, I don’t think our advice has particularly changed: we see that there is a good reason why balance sheet normalization, a slow, gradual pace of rate increases should continue, and that’s what we support.

MR. RICE: Is there another question in the room?

QUESTIONER: I was just curious to what degree you think inequality is a curb on potential U.S. growth? Is inequality just something that is undesirable, and it creates social unrest? Or is it actually something that holds back the U.S. economy’s potential?

MR. CHALK: In the last few years we’ve looked quite carefully at this issue of income polarization, and relatively high levels of poverty in the U.S. We think both of those feed through to the macro economy, and are macro relevant, and they feed through both on the supply and the demand side.

We did some work last year when we looked at the income polarization over the past decade, which has significantly suppressed consumption demand. So, on the demand side – it’s reducing demand. You see the effect it has on formations, say changing the way the U.S. real estate market works, and the demand for housing. There are various angles on the demand side where we see the income polarization and poverty being important.

And then, also on the supply side, we see important avenues. Certainly, it’s much more difficult for low-income households to invest in education and then in health care, which curtails their ability to raise human capital and it’s eating into productivity. We think that the fact that childcare is expensive, that there are cliffs in the social benefit programs that discourage work, that’s eating into labor force participation for low-income groups.

We can certainly see that households at the lower-end of the income distribution, with children, have a significantly lower labor force participation rates. All of those things tell us that both on productivity and on labor force participation there are constraints that are being put on the economy by income polarization and the level of poverty.

And that’s why in our analytical work we’ve emphasized measures like subsidized childcare, like paid family leave, earned income tax credit with an increase in the minimum wage. These are long-standing Fund advices that we’ve had for several consultations, which we think will help both on the supply and the demand side to alleviate some of these constraints on growth.

MR. RICE: Thanks very much to those in the room. Thanks to colleagues online. And thank you to my colleagues at the table. We’ll see you next time.