|
 U.S. employment rose by 390,000 in May. Job growth
is slowing. Price and wage inflation are also showing signs of slowing,
according to the same government data.
For policymakers this is good news. The objective of the Federal Reserve’s tough
talk on inflation and interest rate hikes is to cool down an overheating U.S.
economy. For most Americans, it means inflation will slow down. But the slowdown
could mean fewer job opportunities and some pain in the not-so-distant future.
Even though job openings remain high, they are also already ticking down.
To cool down an overheated U.S. economy, the Fed will have to raise rates
further.
While the rate hikes are necessary, too much monetary tightening could result in
a lot of pain on Main Street. As the Fed combats inflation more aggressively,
growth will slow further, and the risk of a downturn will increase.
Since supply-side constraints are part of the inflation problem, there’s much
state and local governments can do to help put the U.S. economy on a sustainable
growth path.
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Unfortunately, too many government policies restrict competition, punish
innovation, reduce labor supply, and even limit the construction of new housing
units. This poses a problem because the tax and regulatory environment matters
for economic growth.
Take Illinois, for example. Illinois has the 36th worst business tax climate of
any state, according to the Tax Foundation, and the tax burden faced by
Illinoisans is the highest in the country. Illinois is also among the most
regulated states in the country.
Yet, there’s plenty of evidence supporting how a reduction in income tax coupled
with increased sales taxes could encourage people to save, increase labor
supply, and boost innovation to expand the economy’s productive capacity and
bring down inflation.
To help bring down inflation without much economic pain, the U.S. needs a
productivity boost. Improving the tax and regulatory climate at the state level
would go a long way to support that effort. |
