Trump's great growth debate
WASHINGTON -- The argument between the Trump administration and its critics over a sustainable rate of economic growth raises profound questions about America's future. Have we entered a prolonged period of slow growth? If so, how does that alter society and politics? Or will the "right" policies raise growth to past levels?
If you haven't paid attention, here's a brief overview of the debate.
In its budget, the White House projected annual inflation-adjusted economic growth of 3 percent over the next decade. This almost equals the average rate of 3.2 percent since 1950. Meanwhile, the Congressional Budget Office and many private economists project an annual growth rate of around 2 percent, or roughly what it has been since 2010.
Predictably, the Trump forecast has been savaged. Jason Furman, head of the Council of Economic Advisers under President Obama, notes that the gap between the administration's forecast and the "Blue-Chip" consensus of private forecasters is much wider than anything experienced in "the 24 budgets under Presidents Bill Clinton, George W. Bush and Barack Obama." Furman estimates the chances of reaching 3 percent growth at about 1-in-25.
Economist Simon Johnson of the Massachusetts Institute of Technology argues that adopting the faster growth rate is intended to justify tax cuts. "If administration officials acknowledge that a 3 percent annual rate is not feasible," he writes, "they would need to face the reality that their forecasts for tax revenues are too high, and that their proposed tax cuts ... would dramatically increase the budget deficit and the national debt."
The economy's slowdown stems from two causes. One is an aging population. Large numbers of retiring workers are blunting growth of the labor force. The CBO expects the workforce to increase 0.5 percent annually, about a third of the post-1950 rate.
Slumping productivity is the other major cause. Productivity -- efficiency -- reflects technology, worker skills and competitive markets, among other things. The CBO is projecting that productivity will grow 1.3 percent annually. That's down from the post-1950 average (1.7 percent) but up from recent experience (0.5 percent since 2011). Taken together, low productivity and labor force gains guarantee a plodding economy.
Precisely, retort some conservative economists. But these conditions are not immutable. The right policies can change behavior. Lower tax rates, less regulation and limited government spending can boost growth by raising after-tax profits and promoting investment.
"Focused primarily on 'stimulus' in the short-term, the conduct of economic policy [in the post-financial crisis years] did little to reset expectations higher for long-term growth," write economists John Cogan, John Taylor and Kevin Warsh of Stanford and Glenn Hubbard of Columbia in a paper. "That policy failure ... adversely [affected] consumption and, especially, investment spending."
It is not, they argue, outlandish to think that productivity and the labor force will respond to better policies. The needed increases are well within historical experience. For example: From 1999 to 2012, non-farm business productivity equaled or exceeded 2.3 percent two-thirds of the time. Similarly, July's 4.3 unemployment rate suggests more people may join the labor force.