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Studies Show Other Industrial Economies Following U.S. Downward

Daily Policy Digest

International Issues

Wednesday, November 28, 2001

Now that it is official that the United States has been in recession since March, reports are indicating other major industrial economies are also running out of steam. That's not surprising, since the U.S. accounts for roughly one-quarter of the world's output.

  • The Organization for Economic Cooperation and Development forecast this month that the world's 25 richest economies would shrink 0.3 percent in the second half of this year -- the first drop in over two decades.
  • The International Monetary Fund last week slashed its 2001-2002 estimates for world growth to 2.4 percent -- half last year's growth rate.
  • The European Commission has lowered its 2002 growth estimate to 1.3 percent -- from this year's already weak 1.6 percent.
Moreover, a recent IMF study found that from 1974 to 2000, shifts in the U.S. economy explained 28 percent to 78 percent of the changes in Gross Domestic Product for other major countries -- such as Japan, Germany, France, Italy and the U.K. -- confirming the old saw that when the U.S. sneezes, the rest of the world catches a cold.

Now the OECD, which has never been a great fan of tax cuts to stimulate economic performance, suggests the U.S. cut taxes on capital and income for everyone -- including the rich -- in order to get the world's economies back in a strong growth mode.

It proposes a top income tax rate of 28 percent -- significantly lower than the current 39.6 percent rate.

Source: Terry Jones, "A New Domino Theory: Industrial Economies Tumbling One by One," Investor's Business Daily, November 28, 2001; "Economic Survey on the United States - 2000," November 27, 2001, Organization for Economic Cooperation and Development.

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