The U.S. Is the Sick Man of the Developed World

(Bloomberg View) -- What do the economists at the International Monetary Fund see when they look at the U.S.? An economy in the midst of a long expansion ("its third longest expansion since 1850"), with "persistently strong" job growth, "subdued" inflation and something close to "full employment." But also this:

For some time now there has been a general sense that household incomes are stagnating for a large share of the population, job opportunities are deteriorating, prospects for upward mobility are waning, and economic gains are increasingly accruing to those that are already wealthy. This sense is generally borne out by economic data and when comparing the U.S. with other advanced economies.

The IMF then goes on to compare the U.S. with 23 other advanced economies in the Organization for Economic Cooperation and Development in this chart:

I realize the type is awfully small if you're reading this on anything other than a big computer screen, but the overall point is that the U.S. has been losing ground relative to other OECD members in most measures of living standards. And in the areas where the U.S. hasn't lost ground (poverty rates, high school graduation rates), it was at or near the bottom of the heap to begin with. The clear message is that the U.S. -- the richest nation on Earth, as is frequently proclaimed, although it's actually not the richest per capita -- is increasingly becoming the developed world's poor relation as far as the actual living standards of most of its population go.

This analysis is contained in the staff report of the IMF's annual "consultation" with the U.S., which was published last week. Another IMF report released last week, an update to its World Economic Outlook that downgraded short-term growth forecasts for the U.S. and U.K., got a lot more attention. But the consultation report is more interesting.

It is interesting not because the IMF economists have turned up shocking new information or have especially amazing ideas for improving the relative position of the U.S. It's just that as outsiders looking in (yes, outsiders who work in Washington, but still ...), they at least offer a different perspective than one hears every day on Capitol Hill. For example:

Income polarization is suppressing consumption (see Alichi et al., 2016), weighing on labor supply and reducing the ability of households to adapt to shocks. High levels of poverty are creating disparities in the education system, hampering human capital formation and eating into future productivity.

What is to be done? Well, the IMF has suggestions, although they seem a little too sweeping to be helpful. Here are some comments on tax reform:

The U.S. personal and business tax system needs to be simpler and less distortionary, with lower tax rates and fewer exemptions. The redesign of the tax system should aim to raise labor force participation, mitigate income polarization and support low- and middle-income households. Given the unfavorable debt dynamics and the resources needed to strengthen the supply side, tax reform ought to be designed to be revenue enhancing over the medium term.

On health care:

Health care policies should protect those gains in coverage that have been achieved since the financial crisis (particularly for those at the lower end of the income distribution). Doing so will have positive implications for well-being, productivity, and labor force participation. This, in turn, will strengthen growth and job creation, reduce economic insecurity associated with the lack of health coverage, and have positive effects for the medium-term fiscal position.

On one of the top priorities of the current U.S. administration, deregulation:

In international comparisons, the U.S. already scores favorably on regulatory barriers to entrepreneurship, trade, and investment. In addition, U.S.-specific research on the evidence of negative economic implications of regulations is scant. Nonetheless, a simplification and streamlining of federal regulations as well as an effort to harmonize rules across states would likely boost efficiency and could stimulate job creation, productivity, and growth.

To sum up:

Reforms should include building a more efficient tax system; establishing a more effective regulatory system; raising infrastructure spending; improving education and developing skills; strengthening healthcare coverage while containing costs; offering family-friendly benefits; maintaining a free, fair, and mutually beneficial trade and investment regime; and reforming the immigration and welfare systems.

OK, right. We'll take care of all that next week.

What's interesting to me, though, is that most of these suggestions seem to come with the subtext that other affluent countries have devised approaches in these areas that the U.S. would do well to emulate. I got into economic journalism in the mid-to-late 1990s, when the U.S. was outperforming most other rich economies and policy makers in France, Germany, Japan and elsewhere were looking to New York, Washington and Silicon Valley for ideas on how to spur growth and dynamism.

The U.S. still seems to hold a big advantage over the rest of the world (although China has made some inroads) in birthing and nurturing the global corporate titans of the digital age, which has to be worth something. It also, by the IMF's reckoning, has a relatively healthy financial system. But on all sorts of other matters -- taxation, labor markets, health care, education -- the U.S. has become more a cautionary tale than a shining example.

One major difference between the U.S. and most of the rest of the developed world is ideological: People and politicians in the U.S. are much more ambivalent about the modern welfare state than their peers in other wealthy nations and have been less willing to raise taxes to finance it. A report from the IMF or an opinion column by the likes of me isn't going to change a lot of minds on that. Perhaps in part because otherwise their economies would have collapsed under the weight of all that welfare-state generosity, though, other wealthy countries also seem to have figured out better, more cost-effective ways of raising revenue, providing education, helping the jobless, fighting poverty, and keeping citizens healthy than the U.S. has. This country has some catching up to do.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”

1. I realize that these aren't the only possible measures of living standards. But they're not bad measures.

To contact the author of this story: Justin Fox at justinfox@bloomberg.net.

To contact the editor responsible for this story: Brooke Sample at bsample1@bloomberg.net.

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