David Stockton, Karen Dynan and Joseph Gagnon of the Peterson Institute took on this task and elaborated on their analysis of the global economy at the semiannual “Global Economic Prospects-Spring 2017” seminar on April 12.
All three believe there is potential momentum in the world economy with some regions expected to fare better than others. In the United States, tax reform, healthcare reform, rolling back of regulations and fiscal spending suggest solid growth prospects in the near future.
This optimism is tempered by concerns in both fiscal and monetary policy. In fiscal policy, the Trump administration has been inconsistent at times on its precise policy objectives and has already had difficulty in passing health care and tax reform.
Monetary policy may counteract growth as the Federal Reserve raises interest rates and begins to normalize its balance sheet in 2017.
Fiscal policy, monetary policy and the divergent growth between the United States and Europe could lead to further appreciation in the dollar, making US manufacturers less competitive globally. And short term policy changes will not be able to offset the long term effects of stagnant labor productivity growth and demographic changes. These demographic changes will cause a yearly 0.2% decline in the labor force participation rate for the foreseeable future.
Immigration is a potential remedy to this solution, but the Trump administration’s policy on immigration will only exacerbate this decline.
Additionally, the economists expressed concerns over the border adjusted tax (BAT) and the potential this tax has to upset global trade. Gagnon noted his research suggests BAT could lead to a 25% change in the value of the world’s reserve currencies.