Five challenges facing the American economy in 2014


Traders work on the floor of the New York Stock Exchange January 21, 2014.

Article Highlights

  • The most important priority for the US trade agenda in '14 will be the successful conclusion of the Trans-Pacific Partnership Agreement.

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  • If inflation rises, the Fed will need to tighten and the stock market will fall.

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  • A strong economy relies on a stable housing market, which depends on the preponderance of home loans being low risk.

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As the U.S. economy continues to sputter, American Enterprise Institute economists identify five areas that could heavily affect an American recovery in 2014: trade, the Federal Reserve, housing, taxes and the Internet.

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. - Claude Barfield

Federal Reserve
The Fed faces extraordinary challenges in 2014. 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 two percent inflation target.

If inflation rises, however, the Fed will need to tighten - even if its lower unemployment rate target has not been reached - and the stock market will fall.

If, however, 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. Otherwise, persistent disinflation or deflation will boost real interest rates and weaken growth. Either way, the Fed will have a tough 2014. -John H. Makin

A strong economy relies on a stable housing market, which depends on the preponderance of home loans being low risk. However, the government's control of housing finance promotes risky lending: nearly one-half of home loans guaranteed recently by government agencies - FHA, Fannie Mae or Freddie Mac - had down payments of 5 percent or less. Consequently, 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 faster than rents and incomes.

This makes it difficult for first-time home buyers to purchase a home and creates the risk of another housing bubble. The solutions: increase the market's reliance on private capital, return the FHA to traditional, sustainable lending practices, and allow interest rates to return to market levels. -Edward Pinto and Stephen Oliner

Tax Reform
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, which holds down productivity and reduces wages. Congress and the President have failed to address this problem. Furthermore, the reforms being considered would barely reduce the tax burden on investment in the United States.

One solution would eliminate the corporate tax and instead tax corporate income fully at the stockholder level. Another approach would allow all investment costs to be immediately deducted rather than written off over years. Either of these reforms would simplify the tax system, encourage investment, and boost wages. -Alan Viard, Aparna Mathur, and Matt Jensen

The Internet
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. Eight of the top 10 Internet properties - including Facebook, Google and Microsoft - are "Made in the USA," and U.S. firms dominate markets from smart phones to main frames.

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. -Jeffrey Eisenach

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.

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