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Macroeconomic Issue Essay

903 words - 4 pages

Macroeconomic Policy and U.S. Competitiveness
The United States is on a glide path to fiscal disaster, with experts projecting that the federal government will take in far less money than it spends—indefinitely. Although in our experience business leaders have a general sense that this state of affairs is dangerous, they’re unclear on exactly how fiscal policy shapes the competitiveness of the nation and of their companies. The current policy is eroding competitiveness in several ways, and business conditions in the United States will deteriorate if there’s no change in direction. A better understanding of how fiscal policy and competitiveness are linked may make such a change more likely. ...view middle of the document...

The tax side of fiscal policy also has the potential to support or hinder competitiveness. Revenues are required to fund public goods, so taxes are essential to competitiveness. At the same time, by reducing the returns on investment and hard work, taxes can distort the allocation and use of both human capital and physical capital. Some taxes are much better than others.
Finally, when the government runs a deficit, it competes for funds that could be invested in the private-sector capital stock, putting upward pressure on the cost of borrowing for companies. This effect is especially severe when government deficits accumulate in a large debt and lenders demand substantially higher returns.
The Deficit: A Drag on Private-Sector Investment
Current U.S. fiscal policy is deeply worrisome on all three dimensions. The evidence suggests that we are not investing enough in the public goods—primarily infrastructure and education—that are vital for competitiveness. Indeed, some presidential candidates have recommended the elimination of entire federal departments, including Commerce, Education, and Energy, whose activities directly support the nation’s productivity. Worse, projections based on current policy show a dramatic shift away from investment in public goods and toward entitlements, especially Medicare. The dysfunction of the corporate tax code (which levies high rates but raises little revenue), the persistence of the mortgage-interest deduction (which steers funds into housing and away from more-productive investment), and the absence of a value-added tax, or VAT (used in most advanced countries to bring in revenue without discouraging saving or investment), mean that we raise funds for public goods in unnecessarily distortionary ways. Recent U.S. deficits are understandable given the Great...

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