Trump’s Growth Charade

WASHINGTON, DC – Officials in President Donald Trump’s administration frequently talk about getting annual economic growth in the United States back above 3%. But they are doing more than just talking about it; their proposed budget actually assumes that they will succeed.

If they do, it would represent a significant improvement over recent performance: the US economy has averaged less than 2% annual growth since 2000. And, while an increase to 3% might sound small, it would make an enormous difference in terms of employment and wages.

Unfortunately, left to its own devices, the economy will most likely continue to sputter. And the policies that Trump’s Republican Party has proposed – for health care, taxes, and deregulation – will not make much difference. The assumption of higher growth is more of an accounting smokescreen for tax cuts than anything else. If administration officials acknowledge that a 3% annual rate is not feasible, they would need to face the reality that their forecasts for tax revenues are too high, and that their proposed tax cuts, if enacted, would dramatically increase the budget deficit and the national debt.

The US economy used to grow at more than 3% per year; in fact, this was the norm in the second half of the twentieth century. Since then, however, the US has been forced to confront three major constraints.

First, the US population is aging. As the baby boom generation (born after the end of World War II) retires, the proportion of retired people in the total population increases. Over time, this demographic shift has reduced US potential annual growth by perhaps as much as half a percentage point.

The details of what will happen to health insurance remain unclear. But making it harder or more expensive for lower-income and older Americans to get health insurance is not likely to encourage people to work. The best independent assessment of these policies, produced by the Congressional Budget Office (CBO), does not predict any economic miracles – just that around 20 million fewer Americans will have health insurance.

And lurking in the background are potential policies that would restrict legal immigration. The US currently allows about one million mostly working-age people per year to take up residence and work in the country. Moreover, immigrants’ tendency to have more children than non-immigrants do keeps the US population growing faster than in other developed countries (for example, in Europe or Japan). So any move to reduce annual immigration – some Republicans are proposing 500,000 people or fewer – would make 3% annual economic growth even less likely.

The second economic constraint is the slowing rate of productivity growth. There was a major increase in average output per person in the post-World War II years, as better technology was developed across a wide range of sectors. And there were hopes in the 1990s that the information technology revolution would have a similar effect. But the impact on productivity has been disappointing. Northwestern University economist Robert Gordon’s recent book, The Rise and Fall of American Growth, argues that, despite all the hype from the tech sector, we are unlikely to see a dramatic change on this front.

The Trump administration argues that by reducing taxes and “reforming” healthcare, it can boost productivity – for example, by encouraging capital investment. But the tax cuts that will soon be on the table are likely to resemble closely those implemented by President George W. Bush’s administration, which did not lead to any kind of economic boom (a point that James Kwak and I examined in detail in our book White House Burning).

The third constraint stems from the 2008 financial crisis. One danger inherent in pushing for high growth is that it is always possible to juice an economy with short-term measures that encourage a lot of risk-taking and leverage in the financial system. Deregulation in the 1990s and early 2000s did exactly that, leading to slightly higher growth for a while – and then to a massive crash.

The details of the Trump administration’s plans remain to be determined, but officials will most likely push in the direction of relaxing limits on leverage (thereby allowing banks to borrow more relative to equity). Any boom generated in this way is likely to end badly – not just financial ruin for millions of individuals, but also a long and difficult recovery.

The two least political and most influential official forecasts – those issued by the CBO and the Federal Reserve’s Open Market Committee – both foresee 2% growth, on average, for the coming decade and perhaps beyond. Assuming 3% growth is, to put it generously, wishful thinking.

Worse, it is deeply misleading – and potentially dangerous. If those pushing for tax cuts stick to their guns and refuse to accept reality, their agenda, if enacted, would result in a significantly wider budget deficit, which would increase the national debt to unprecedentedly high levels.