Structural Changes of the U.S. Economy: Implications for the U.S. Mid- to Long-Term Growth Path and the Korean Economy
3 Pages Posted: 23 Jun 2017
Date Written: June 22, 2017
As shown in various data, during the 2008-2009 financial crisis period, the real GDP of each country recovered slowly after a sharp decline, but is recovering differently in each country. In the case of the United States, it shows a rapid recovery compared to Japan and Europe.
Despite the rapid recovery compared to other developed countries, there are still many people who harbor doubts regarding the mid- to long-term growth path of the U.S. economy. In the mid- to long-term, the growth potential of the U.S. is limited to the mid-1% range, and renowned economists such as Larry Summers and Paul Krugman are questioning the U.S.'s long-term growth by insisting on its secular stagnation.
The U.S. mid- to long-term growth path will have a crucial impact on the future growth of the global economy in light of the U.S. weighting in the global economy. Especially, in the case of Korea, export is still a large part of the economy and the mid- to long-term growth of the global economy accounts for a large portion of Korea's mid- to long-term growth. In this situation, it is important to find a way to accelerate economic recovery through benchmarking of U.S. growth policies.
We use the growth accounting method to diagnose whether the U.S. will grow in the medium-to-long-term. Growth accounting is a method for analyzing the effects of supply side factors such as labor supply, total factor productivity, and labor quality on mid- and long-term growth, and is particularly appropriate for analyzing the impact of trend growth decline. The results of the analysis are as follows. According to labor supply factors, such as the degree of population aging, the quality of education and productivity, the U.S. economic potential growth rate is found to range from 1.4% to 2.9% on average by 2060 unless the effects of the aging of its population are reduced or there is a rapid increase in productivity due to the recent 4th industrial revolution.
In spite of the not-so-great mid- to long-term growth path of the U.S., why is the U.S. recovering faster than other developed countries after the financial crisis? One important reason is active monetary and fiscal policy. During the financial crisis, the U.S. Fed cut its policy rate to zero and conducted quantitative easing. Furthermore, the American Recovery and Reinvestment Act (ARRA) was enacted by the Obama administration to carry out a huge-scale fiscal stimulus package to boost the economy. In addition to these monetary and fiscal policies, supply side policies such as R&D investment played an important role to support the fast recovery. Based on the macroeconomic model that we build, we examined the impact of the decline in trend growth on the economic recovery and searched for the reasons of the rapid recovery of the U.S. Productivity is recovering faster in the U.S. than other countries after the financial crisis. The results of the model analysis show that the recovery of productivity reduces the decline of trend growth, and this better trend growth is positive for current consumption and investment as it improves expectations for future income increase. This rapid U.S. productivity recovery can be attributed to the large-scale national R&D initiated during and after the financial crisis.
The policy implications suggested in this paper can be divided into two major categories. First, the implications for the mid- to long-term foreign policy are as follows. The U.S. is Korea's second largest export market and has a large impact on the global economy. The Korean economy is still highly dependent on exports. Considering this point, we need to diversify our export markets, increase export unit price through development of high value-added products, and develop core goods that are less affected by economic fluctuations. In addition, Korea's mid- to long-term growth strategy suggestions are as follows. As a result of supply side analyzing of the growth rate of Korea, the recent decline in growth rate is caused by productivity decline, decrease of capital accumulation, and low contribution of labor supply. Therefore, it is necessary to implement investment promotion policies similar to productivity improvement and innovation-related policies actively promoted by the Obama administration. Finally, the implications for national R&D policy for mid- to long-term growth are as follows. Korea's R&D spending is quantitatively the top among OECD countries. However, the uncertainty of its R&D spending is much higher than in the U.S. Uncertainty as a result of increased volatility in R&D expenditure may result in lower efficiency of R&D spending by hindering stable research. In Korea, it will be important to benchmark such a system to ensure the sustainability of R&D investment and raise efficiency.
Keywords: U.S. Economy, Structural Change, Long-term Growth
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