But this can be partly or wholly offset if households and businesses lack confidence in the long-term fiscal outlook for our nation. It would be greatly beneficial if the Administration and Congress could more effectively work together to craft a coherent fiscal policy. As I see it, this would consist of two elements – continued near-term fiscal support to underpin economic activity and long-term fiscal consolidation to ensure debt sustainability. Without action in Washington, fiscal policy will turn sharply restrictive in 2012 – exerting a direct drag on real GDP growth of more than one percentage point. At the same time, the long-term path under current policy is unsustainable. It should be possible, even in a time of sharp ideological differences, to agree on some common pro-growth principles: support for demand today made possible by credible longterm fiscal consolidation, and a mix of fiscal adjustments that are supportive of future growth. This would involve making an appropriate distinction between outlays that support current consumption versus outlays that lift the economy’s long-run potential such as investment in infrastructure, research and human capital – similarly, between taxes that inhibit work and investment versus those that are more neutral in their impact. Broadening the tax base and making tax system simpler might also be helpful. Progress on the fiscal front would have an important ancillary benefit – a demonstration that Washington can put aside partisan interests and step up to the challenges our nation faces would boost household and business confidence.
The United States has an extraordinarily flexible economy with a strong entrepreneurial bias that generates new opportunities, jobs and income. Our higher education system is second to none and the country remains a magnet for talented people around the world. The United States has better demographics than most developed countries and some very impressive institutions – such as the U.S. Army – that provide a pathway upward for all based on merit regardless of background. America’s place in a fast-adapting world economy and the prosperity and economic strength of our nation will depend upon the choices we make. In this fundamental sense our economic destiny is in our own hands. Let’s get at it. Thank you for your kind attention. I would be happy to take a few questions. BIS central bankers’ speeches  9  10  BIS central bankers’ speeches  BIS central bankers’ speeches  11