Growth: It's a given among pundits and mainstream economists that President Trump's budget forecast of 3% GDP growth is a nonstarter, an outlandishly grandiose estimate of how fast the economy can grow, an impossibility. While the critics make good arguments, they're wrong.
Recent headlines tell the story:
"The Economic Growth Forecasts The Administration Relied On Are Totally Unrealistic," U.S. News & World Report opined.
"Trump 3% GDP Growth Plan Makes No Sense," the Business Insider sneered.
"Trump's Growth Forecasts Are the Budgetary Equivalent Of Putting Your Fingers In Your Ears And Yelling, 'Na Na Na Na Na,' " was Salon's subtle offering.
In their defense, their reasoning isn't entirely wrong. It all boils down to this: In classical growth accounting, long-term GDP growth basically equals growth in the workforce (or hours worked) plus growth in productivity. Since the workforce is now growing at about half a percent or so a year and productivity is barely above 1%, that yields a sub-2% growth rate. Therefore, President Trump must be insane.
There's a problem with their logic, however. They treat labor force growth and productivity as unchangeable constants. They're not. By the pursuit of good policies, both of those numbers can be altered rather dramatically, and fairly quickly.
In a piece on the Hoover Institution's website, four well-known economists with extensive White House and Fed experience — John F. Cogan, Glenn Hubbard, John B. Taylor and Kevin Warsh — explain why. They note that slow growth in hours worked and productivity are due to the failed policies following the 2007-2009 Great Recession.
Typically, the U.S. economy has come roaring out of deep downturns — that is, except when bad government policies have made it impossible. That's happening now. So instead of the 3% growth that's the norm, we have been stuck at 2% or less.
"Economic theory and historical experience indicate economic policies are the primary cause of both the productivity slowdown and the poorly performing labor market," the economists write.
"High marginal rates, especially those on capital formation and business enterprises, costly new labor market and other regulations, high debt-financed government spending (largely to fund income transfer payments), and the lack of a clear monetary strategy have discouraged real business investment and reduced both the supply of — and the demand for — labor."
Will undoing these problems get the U.S. to 3% growth? Yes, but it'll require specific policy changes, including: Continuing Trump's regulatory reforms. Cutting taxes on corporations and small businesses, and reforming taxes for the rest of us. Reforming entitlements. And ending the Fed's failed era of experimentation to make it follow a rules-based policy.
Together, the quartet argues, these moves should yield 2% productivity growth and a return to 1% labor force growth — that is, 3% GDP growth. Sure, it won't be easy. But, despite the snide, Trump-hating headlines that suggest otherwise, it can be done.
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