US Secretary of the Treasury Steven Mnuchin discusses the Trump administration's tax reform proposal in the White House briefing room in Washington. REUTERS/Carlos Barria
At times in last year’s election, the discussion of US GDP growth began to sound like an auction. “I hear 3%, 3%, who will give me 4? Can I get a 4? 4! Can I get a 5…?” The idea, apparently, was that a higher bid would show voters that the candidate was more committed to unleashing the true potential of the American economy.
At a Chicago Council on Global Affairs' panel discussion yesterday, there was a striking amount of bipartisan agreement on how fast the economy could really go. Both Douglas Holtz-Eakin, former top economic adviser to Sen. John McCain’s presidential campaign, and Austan Goolsbee, former top economic adviser to President Barack Obama, settled on the same target: 2.5% growth would be excellent.
Source: Federal Reserve Economic Data
Holtz-Eakin explained that such growth rates are, mathematically, the product of two factors:
1) How fast is the work force growing?
2) How fast is output per worker (productivity) increasing?
The work force (number of workers) in the US economy is not growing as fast as it did when the economy would exhibit 4% growth. That could, in theory, be offset by higher productivity growth. But that’s hard to summon up. Not impossible, but difficult.
When Holtz-Eakin was asked why leading officials like Treasury Secretary Steve Mnuchin would push for a number like 4% growth, he pointed to one of the side-effects of bringing in business people to run the government. In the business world, one can resolve to buckle down and double growth. A business, he noted, can grow faster than its market. It does so by driving competitors out of business and taking their market share. That analogy does not carry over to running the American economy.
Note, there may be a temptation here to think of international competition. Couldn’t the American economy grow faster if it increased sales in China or Europe? But the potential growth calculation has to do with capacity, not market demand or sales. When a business expands, it can hire new workers and lease new buildings in a way a country can’t. A country can turn to more liberal immigration policies, but that does not seem to be the Trump administration’s inclination.
Goolsbee argued that there was a downside to the unrealistic claims we’re hearing about American growth potential. If you’re expecting 6% GDP growth, and someone offers a policy reform that will bump growth up by 0.3%, you’ll likely be unimpressed. If you’re expecting a more realistic 2% or 2.5%, you’ll welcome the gains. No holding out for the crazy high bid.
(For a more detailed treatment of the question, with colorful graphs, see this recent report from the Center for a Responsible Federal Budget)