Daunting challenges loom in major areas of the economy this year

2014-01-27T00:00:00Z Daunting challenges loom in major areas of the economy this yearBy American Enterprise Institute Economists (EDITORS: The writer is ad dressing the question, “What are the five most vital domestic policy moves the U.S. should make in 2014?” NEEDS A TWEAK OF THE EXPLANATION BOX TO REFLECT THAT IT’S NOT PRO/CON) Arizona Daily Star

As the U.S. economy continues to sputter,  five areas may heavily affect a recovery in 2014: 

  • Trade (Claude Barfield): The most important priority for the U.S. trade agenda in 2014 will be the successful conclusion of the Trans-Pacific Partnership Agreement, with 11 trading nations in the Asia-Pacific.

The imperatives are both economic and diplomatic: the TPP is a central element of President Obama’s “pivot” to Asia and it forms the central core of a broader Asia regional economic architecture. Failure to conclude this agreement would have large-scale negative consequences for U.S. leadership in the Asia Pacific region and risk ceding the game to Beijing.

  • Federal Reserve (John H. Makin): Under the new leadership of Janet Yellen, the Fed’s successful management of its pro-stimulus policy is an essential element of economic expansion in 2014. Its aggressive stance aimed at lowering the unemployment rate does not conflict with its 2 percent inflation target.

If inflation rises, however, the Fed will need to tighten . But if inflation keeps falling, the Fed will need either to buy even more securities and/or commit to a more extended period of zero short-term interest rates. 

  • Housing (Edward Pinto and Stephen Oliner): A strong economy relies on a stable housing market, which depends on the preponderance of home loans being low-risk. But the government’s control of housing finance promotes risky lending: Nearly half of home loans guaranteed recently by government agencies  had down payments of 5 percent or less. So even a small drop in home prices would leave these borrowers underwater. The Fed’s policy of keeping interest rates at historically low levels is driving up house prices .
  • 
    The solutions: Increase the market’s reliance on private capital, return the FHA to traditional lending practices, and let interest rates return to market levels.
  • Tax reform (Alan Viard, Aparna Mathur, Matt Jensen): Over the last 25 years, many countries have lowered their corporate tax rates, leaving the United States with the highest rate in the developed world. This discourages investment here.

One solution would eliminate the corporate tax and instead tax corporate income fully at the stockholder level. 

  • The Internet (Jeffrey Eisenach): Since being privatized in the mid-1990s, the Internet has operated with minimal government intrusion. This free-market digital environment is fertile ground for American entrepreneurial spirit.  Yet less market-oriented governments would have the United Nations as an international Internet regulator. They have gotten a big boost from the NSA spying revelations, which they say demonstrate the need for international oversight.

These forces will try again in April at a U.N. meeting in Buenos Aires. Nothing could be worse for the United States.

Claude Barfield, John H. Makin, Edward Pinto, Stephen Oliner, Alan Viard, Aparna Mathur, Matt Jensen and Jeffrey Eisenach specialize in various areas of the economy at the American Enterprise Institute for Public Policy Research.

Copyright 2014 Arizona Daily Star. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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