US political ‘threat’ to economic growth

Posted on September 15, 2016

WASHINGTON, DC - SEPTEMBER 06: Early morning light begins to rise behind the US Capitol, September 6, 2016 in Washington, DC. Today the House and Senate are scheduled to return from summer break. (Photo by Mark Wilson/Getty Images)©Getty

America’s malfunctioning political system has become the biggest menace to its future economic competitiveness, according to a Harvard Business School report.

Average annual growth rates of 1.6 per cent in the current recovery lag behind those of any previous rebound since the 1940s, the study found, arguing that the country’s economic performance peaked in the 1990s and has been eroding ever since.

    While many studies have focused on the legacy of the financial crash in explaining the country’s muted economic performance, the report found that the challenges were of a longer-term, structural nature. Key barriers identified by businesses were in the ambit of federal government policy, among them reform of the tax code, regulation and US infrastructure.

    Some 50 per cent of Harvard Business School alumni surveyed for the study said they expected US competitiveness to decline further over the coming three years, compared with 30 per cent who expect improvement, according to the report released on Wednesday evening. The business environment looks worse for small companies than large ones across the board, the report found.

    “Political dysfunction is the single largest barrier to US competitiveness,” said Jan Rivkin, a professor at the strategy unit of Harvard Business School.

    He said that this conclusion was not intended to take the heat off business for having responsibilities, or state and local government, but added: “When you look at the things that are holding us back, many of them fall at the feet of the federal government.”

    The breakdown of political co-operation in Congress has made progress in key policy areas elusive in recent years, as evidenced by repeated showdowns over the government debt ceiling and difficulties agreeing long called-for reforms of the country’s haphazard corporate tax code. “The existing political parties have done a pretty good job of locking in the paralysis,” said Mr Rivkin.

    Several policy changes that would have clear competitiveness benefits were achievable given the right political will, the study argued. Among them was a boost to infrastructure spending — something both Donald Trump, the Republican candidate, and Hillary Clinton of the Democrats are advocating, and which received the highest backing of business leaders according to the survey.

    The American political system is now threatening the American economy, and vice versa. We need a sober look at the strengths and weaknesses of the US economy

    – Jan Rivkin, Harvard Business School

    In addition, politicians should focus on reforming corporate taxation, including a reduction in the headline rate, and easing immigration barriers for highly skilled individuals. The silver lining identified in the report was that many of the hurdles to improved competitiveness could be addressed relatively easily.

    “America can reform its tax code faster than other countries can develop a rich context for entrepreneurship,” it noted.

    The survey showed that a large majority of the business school’s alumni believe the political system is obstructing growth. Some 56 per cent of Democrats held that view, 82 per cent of Republicans and 74 per cent of independents, it said.

    Mr Rivkin added: “The American political system is now threatening the American economy, and vice versa. We need a sober look at the strengths and weaknesses of the US economy, so that leaders in government, business, and other parts of society can work together on a national economic strategy for shared prosperity.”

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