Question

Answer the following questions for the U.S. and Russia:

What is the future 5-15 year economic outlook for each country?

What are your policy recommendations for improving each economy and helping promote long-run economic growth?

Answer 1

1. The Federal Reserve predicts that economic growth, as measured by gross domestic product, will slow to 2.3 percent in 2019. It will be 2 percent in 2020 and 1.8 percent in 2021. That's within the ideal range of 2 to 3 percent.

While a candidate, Donald Trump promised to boost growth to 4 percent. Growth at that level could create a recession by 2021. It could set off a dangerous boom-and-bust cycle. Fortunately, there are five steps that will protect you from the next economic crisis

In March 2019, the Federal Reserve warnedthat climate change could threaten the financial system. Extreme weather caused by climate change is forcing farms, utilities, and other companies to declare bankruptcy. As those loans go under, it will damage banks' balance sheets just like subprime mortgages did during the financial crisis.

Munich Re, the world's largest reinsurance firm, blamed global warming for $24 billion of losses in the California wildfires. It warned that insurance firms will have to raise premiums to cover rising costs from extreme weather. That could make insurance too expensive for most people.

Trump's tax plan repealed the Obamacare tax on those who don't have health insurance as of 2019. Experts believe 13 million people will drop coverage. Since most of them are healthy, it will raise costs for insurance companies. They will transmit those costs to the insured, raising health care costs.

In 2018, the Trump administration expanded access to association health plans and short-term health plans. They won’t have to comply with the Affordable Care Act's rules and state licenses.

The U.S. debt exceeded $22 trillion in 2019. It had remained stable after sequestration kicked in. With that action, Congress required a mandatory 10 percent federal budget cut through 2021.

The U.S. debt-to-GDP ratio is 106 percent, a level that is not sustainable as interest rates rise. It will increase the interest payments on the debt. It’s above the 77 percent tipping point recommended by the International Monetary Fund.

Trump promised to reduce the debt. But so far, his policies will increase it by $5.6 trillion. The Tax Cut and Jobs Act alone added $1 trillion. Supply-side economics says that lowering business taxes frees up funds to hire more workers. But it doesn't work when the maximum tax rate is below 50 percent, according to the Laffer Curve. Instead, it just adds to the debt.

Real GDP growth in Russia surpassed expectations in 2018, reaching 2.3 percent, mostly due to oneoff effects of energy construction. Forecasted growth of 1.2 percent in 2019 and 1.8 percent in 2020 and 2021 reflects a more modest outlook.

Russia’s macro-fiscal buffers remain strong, with fiscal surpluses across all tiers of government and low public-debt levels. When compared to advanced economies, Russia spends less on health and education. Rebalancing in favor of these categories could improve the overall efficiency of public spending. Short-term inflationary risks have abated, with the Bank of Russia signaling a return to a neutral policy rate. Lending activity is recovering, but the banking sector remains afflicted with high concentration and state dominance. Having eased slightly, the poverty rate remains in double digits with many households close to the poverty line and lacking formal employment. Informal employment is rising in the face of close-to-zero net job creation by medium-sized and large formal enterprises.

Key risks to medium-term growth include the expansion of economic sanctions, renewed financial turmoil in EMDEs, a dramatic drop in oil prices, and souring of the global trade environment. The recent double-digit expansion in household credit may also pose a risk to financial stability in the case of a deterioration in the macroeconomic environment.

2. Policy recommendation for US

• Enhancing the rate of growth of hours worked by increasing the size of the labor force through more high-skilled immigration and higher labor force participation of older workers by delaying retirement;
• Improving the quality of the labor force with higher education financing reforms that would encourage efficiency and limit tuition increases, and improving the effectiveness of worker training programs;
• Increasing the quantity and quality of investments through deficit reduction, tax reform, and infrastructure investment;
• Reducing the negative impact of regulations; and
• More private and public spending on R&D.

Policy recommendation for Russia

• Improving the investment climate. Reforms in Russia should start with strengthening property rights and contract enforcement to reassure investors. Russia should also reduce its burdensome business operating and licensing standards, and heavy regulation, which often discourage international participation in the domestic economy.
• Investing in infrastructure. As the world’s largest country, Russia’s transport network—roads, railways, and ports—is vast but unevenly distributed across regions and of poor quality. Investing in this type of infrastructure would increase connectivity. It would also improve the profits of firms through reduced transportation costs, easier access to domestic and foreign markets, and enhanced mobility of labor, allowing people to relocate for better paying jobs.
• Creating a more efficient goods market. Reducing burdensome procedures associated with trade, such as complicated customs clearing procedures on imports and exports, would increase exposure to international competition, thereby increasing the efficiency of domestic firms.
• Strengthening trade relationships. Russia’s preferential trade agreements with neighboring countries should be extended beyond immediate neighbors. This would open the door to new foreign markets and integrate the country into global commerce. If Russian prices get more competitive, exporting Russian companies would be able to benefit more.