3% Growth? Really?!
Greg Ip, my favorite Wall Steet Journal commentator, also provides a set of reasons why Trump’s 3% Growth Target Looks Out of Reach.
Mr. Trump—moving in the opposite direction of President Barack Obama —promises lower taxes and less regulation, which should increase business investment and thus worker productivity. Moreover, a less-generous social safety net could prod some people back to work. More workers who are more productive are the ingredients of faster growth.
Yet there are good reasons independent economists think the U.S. can’t return to its historic growth of 3%. The U.S. working-age population grew 1.2% a year from 1950 through 2000. With the baby boomers retiring and families shrinking, it will grow less than 0.3% a year over the next decade. To make a credible case for 3% growth, Mr. Trump has to identify some wellspring of workers or productivity, that is output per worker, that his predecessors have missed.
Mr. Mulvaney thinks prodding many people off social safety-net programs and back to work will be good for them, and for growth.
In principle, that’s true, but the magnitudes are doubtful. About half of household heads on food stamps and three quarters of those on Medicaid already work, says Robert Moffitt, an economist at Johns Hopkins University. At most, 13 million recipients of Medicaid and 6.5 million recipients of food stamps don’t work (and the two groups overlap). The growth of people on disability insurance can be slowed with tougher eligibility, but experience suggests getting existing recipients off is almost impossible.
When welfare was cut off in the 1990s for single mothers able to work, the share of those not working dropped by up to a third. That kind of effect on 13 million Medicaid recipients or 6.5 million food-stamp participants would generate only a modest, and one-off, boost to a labor force of 160 million. The effect on gross domestic product would be even more muted because, Mr. Moffitt notes, these workers have extremely low skills and thus productivity.
The Tax Foundation, a pro tax-cut think tank, reckons lowering the corporate rate to 15% as Mr. Trump wants would only raise growth to 2.3% from 1.9%, and that boost would peter out once all the newly profitable capital projects had been undertaken.
Even that is probably high. Most large U.S. trading partners have slashed their own corporate rates but none has enjoyed a noticeable growth dividend as a result. Businesses generally report that tax rates are unimportant in deciding whether to invest; customer demand is paramount.
Presidents are supposed to be optimists, and Mr. Trump would hardly be the first to fall short of his target. But a great deal is at stake with this one. Many of his other promises rely heavily on the 3% growth goal. For example, the budget is supposed to balance by 2027, with the help of nearly $600 billion a year in added revenue attributable solely to a more aggressive growth forecast.
Until Mr. Trump presents a credible vision for achieving that growth, the rest of his promises are best viewed with deep skepticism.
Mish Three Reasons
Here are my three reasons once again.
- Very unfavorable demographics
- Huge debt overhang
- Poor prospects for growth in real wages
Greg Ip missed the debt overhang but his points are all valid, especially demographics and shrinking family size.
One of the reasons for shrinking family size has to do with student debt (debt in general), a point I mentioned.
Kids are graduating from college loaded up with debt they cannot service. Record numbers have moved back home with their parents. Some have done so because they do not have high enough wages, others because of a need to take care of their aging parents.
Still others share households and apartments because the cost of homes and the price of rent have soared far beyond what many can afford.
Rising real wage prospects are dim, and productivity has little to do with it.
Also consider the knock on effect of low rates of family formation. How many more Walmarts, Pizza Huts, nail salons, etc do we need? We have store saturation at a time when increasing amounts of items are purchased online.
Automated cars and truck are just around the bend, and millions of truck driving jobs will vanish. That will boost productivity, but it will do nothing for real wages.
The Fed, hell bent on causing inflation in a demographically-deflationary word enhances point number three.
Benefits of Deficit Reduction
Whether or not Trump can hit 3% growth, there are still benefits of reducing the bloated public sector.
Entitlements need to be cut, as do military spending budgets, public sector pensions, and numerous government programs.
Mike “Mish” Shedlock