EUR 441.86 For Business Accounts Only

Is U.S. Growth Sustainable? Can It Be Boosted to 3%?

​We attach the shorter version of a paper we published on June 26 that examines and attempts to quantify some key supply-side relationships for the U.S. economy. The paper builds on our work on profitability, productivity, demographics and capital spending and look at the sustainability of the economy over time. We examine why potential growth has been stuck below 2% in recent years and try and answer the question: how much capital spending might be needed to return the economy to its long-run growth path of 3%? We estimate that companies will have to boost investment by more than one-fifth given the fast pace of depreciation in the existing capital stock. We find some evidence consistent with the view that higher government spending depresses private investment and thus leads to a permanent reduction in the potential growth rate of the economy. Our results argue for the need to cut corporate tax rates but also to carry out tax reform (broaden the base) as tax rates are cut. One shorter-run concern, and it is a serious one, is highlighted by the outlook for productivity growth and that the labor cost picture is squeezing profit margins. As slow as growth has been it has been running above potential and aggregate profit margins continue to be squeezed. The magnitude of the decline in whole economy profit margins risks the sustainability of the economic expansion and the gains in equity prices this year have swum against the tide of retreating profits. Again a corporate tax rate cut could alleviate these concerns but the fate of tax policy is unclear and the stakes seem to be high.