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© 2010 International Monetary Fund

July 2010

IMF Country Report No. 10/248

United States: Selected Issues Paper

This selected issues paper on United States was prepared by a staff team of the International Monetary Fund as background documentation for the periodic consultation with the member country. It is based on the information available at the time it was completed on July 12, 2010. The views expressed in this document are those of the staff team and do not necessarily reflect the views of the government of United States or the Executive Board of the IMF.

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Title Page

INTERNATIONAL MONETARY FUND

UNITED STATES

Selected Issues

Prepared by Nicoletta Batini, Oya Celasun, Thomas Dowling, Marcello Estevão, Geoffrey Keim, Martin Sommer, and Evridiki Tsounta (all WHD)

Approved by Western Hemisphere Department

July 12, 2010

Contents

• I. The Great Recession and Structural Unemployment

  • A. Introduction

  • B. Methodology

  • C. Policy Implications

• II. Prospects for the U.S. Household Saving Rate

  • A. Introduction

  • B. Experience of Nordic Economies

  • C. Cross-Country Models of the Saving Rate

  • D. What is the New Optimal Wealth Level?

  • E. Conclusions

• III. Production and Jobs: Can We Have One Without the Other?

  • A. Introduction

  • B. How Does this Recession Compare to Previous Ones?

  • C. How Will the Recovery be Like?

  • D. Conclusions and Policy Implications

• IV. The Financing of U.S. Federal Budget Deficits

  • A. Introduction

  • B. Post-Crisis Financing Patterns

  • C. Baseline Projections of Demand for Treasury Debt

  • D. A Model of Saving-Investment Flows

  • E. Conclusions

• V. The U.S. Government’s Role in Reaching the American Dream

  • A. Introduction

  • B. Impediments of the Current System

  • C. Lessons from Other Countries

  • D. Conclusions and Policy Implications

• VI. The U.S. Fiscal Gap: Who Will Pay and How?

  • A. Introduction

  • B. Methodology

  • C. Results

  • D. Conclusions

  • A. What is the Fiscal Gap?

  • B. What Are Generational Accounts?

• Figures

• I. l. Increase in Skill Mismatch Index Since Onset of Recession

• I.2. Labor and Housing Market Dispersion

• I.3. Change in Foreclosure Rates, 2005–2009

• I.4. Estimated Equilibrium Unemployment Rate at End-2009 by State

• II.1. U.S. Household Saving Rate Adjustment Could be Protracted

• III.1. Real GDP Growth and the Change in the Unemployment Rate, 1902–2009

• III.2. Long-Term Unemployment Across U.S. Postwar Recessions

• III.3. Rolling Okun’s Law Coefficients and Growth Compatible with Stable Unemployment, 1915–2009

• III.4. Comparing the Steep Recessions and Job-Rich Recoveries

• III.5. Comparing the Most Recent Recessions and Jobless Recoveries

• III.6. Comparing the Great Depression and the Great Recession

• III.7. Stock Market Volatility versus Rolling Okun’s Law Coefficients

• III.8. Impulse Responses from a Tri-Variate SVAR

• III.9. Unemployment Scenarios

• V.1. Housing Finance in the United States and Other OECD Countries

• VI.1. U.S. Debt in Percent of GDP (1930–2083)

• VI.2. U.S. Federal Fiscal Overall (solid) and Primary Deficit (dotted) in Percent of GDP (1980–2083)

• VI.3. Total Revenues and Tax Revenues in Percent of GDP—Advanced G-20 Countries

• Tables

• I.1. Explaining Changes in State-Level Unemployment Rates

• II.1. Household Saving Rate: Baseline Regression Results

• III.1. Estimating Labor Demand and Okun’s Law for a Panel of Countries

• IV.1. Projections of Baseline Demand for U.S. Treasury Securities and the Impact of Excess Supply on Long-term Bond Yields

• V.1. United States and Canada: Housing Finance

• VI.1. Macroeconomic Assumptions Underlying Budget Projections

• VI.2 U.S. Fiscal Imbalance in Terms of the Present Discounted Value of GDP

• VI.3. Fiscal Imbalance in Terms of the Present Discounted Value of GDP, 3 Percent Discount Rate

• VI.4. Lifetime Net Taxes as a Share of Present Value of Labor Income under Different Scenarios, 3 Percent Discount Rate

• VI.5. Impact on Fiscal Gap (as % of PVD of GDP) of Fiscal Adjustment by 2015 and of Cap on Medicare

• VI.6. Additional Percent Increase in Taxes and/or Cut in Transfers Necessary to Close the Fiscal Gap if Adjustment Starts in:

• Appendices

• II.1. State-Space Model for Saving Rate and Wealth

• VI.1. Definition of Fiscal and Generational Gaps

• Appendix Tables

• II.1. State-Space Model: Coefficient Estimates