With interest rates at record lows and zero political appetite for more fiscal stimulus, it is difficult to find feasible steps the Obama Administration can pursue to inflate the American economy. The traditional levers of government action seem to be tapped out. In the medium term the situation looks even bleaker. Interest rates have nowhere to go but up, and entitlement reform for programs like Medicaid and Medicare are likely to reduce government spending.
However, it would be remiss to conclude that the U.S government has no medium term options to boost growth. Indeed, there is a bevy of untraditional action that appears likely in the next 1-5 years that would greatly contribute to economic activity. The first of these actions is international trade agreements. The Doha Development Agenda has been stalled for a decade and its ambitions have been scaled back to such a degree that many are skeptical of the benefits it would bring. Yet, the failure of the WTO to produce further reductions in trade barriers has resulted in a silver lining: the rise of bilateral and regional trade agreements. Conveniently this is also one of the few issues on which Republicans and Democrats can agree. America recently concluded agreements with South Korea, Peru, and Colombia. There is now talk of agreements crossing both of the world’s major oceans: The Trans-Pacific Partnership recently added Japan to its negotiating members and will be sped along in order to counter a rising China and bellicose North Korea. There is also work being conducted on a U.S.-E.U. trade deal that would greatly reduce trade barriers between the world’s two largest markets.
U.S immigration reform a friend, not enemy
A second unconventional method for boosting America’s economy is immigration reform. Critics have long pointed out the difficulty highly-skilled workers have in obtaining U.S visas, redirecting them to places with easier immigration laws such as Canada or Australia. On the other side of the coin, observers often groan about low skilled immigrants taking jobs from Americans. While this argument may hold water in specific cases over a short time period, it is largely based on the erroneous lump of labour fallacy. In other words, the demand for labour in an economy is not fixed, which would suggest a zero-sum competition for jobs. Rather, labour demand is highly flexible and having immigrants who are employed, consuming, and paying taxes serves to stimulate the economy and in turn create additional jobs. Thus, most serious economists see immigration as having a generally positive impact on growth and employment.
There are also a variety of legislative efforts whose details are less clear but would be positive for the economy. Simplifying the tax code by eliminating deductions and reducing marginal rates is just one example. While the U.S may appear to have its hands tied with regard to traditional mechanisms to stimulate growth, observers should not overlook alternative methods and should not be surprised if economic growth outpaces expectations in the medium term.