Last week, four A-list Republican economists published a “validator” document to support the contention that economic plans by the Trump administration and congressional Republicans will boost the real GDP growth rate from 2 percent to 3 percent.
This is the sort of piece you get when policymakers, having put forth a plan that they say will accomplish something, ask their allies on the outside to publish a document validating their claim (I don’t know if that’s the origin of this particular piece). Such documents do not necessarily argue that 2 + 2 = 5; validators can be honest or phony, and an honest validation doc can be a useful tool, one that helps the media, for example, to assess the credibility of the underlying claim.
For reasons I’ll share in a moment, the piece is unconvincing. But when Steve Liesman and I discussed it on CNBC the other day, he posed an interesting challenge. Steve granted my rap about why these guys are wrong. “But what’s wrong with trying?” he asked. Shouldn’t Democrats also be for faster growth (assume for the purposes of this discussion that such growth is environmentally sustainable)?
It’s a fair question.
The fundamental problem with the study is its lack of evidence to back up the authors’ claims. As regards the administration’s vague agenda to boost the growth rate by half, the authors merely assert (my italics): “We believe it can. We judge that such a policy package, in part by encouraging firms to expand by bringing new investment to production, can help raise trend labor productivity growth to around 2.3 percent per year in the non-farm business economy and perhaps higher…”
The piece offers no evidence to support such beliefs or judgments. They instead assert that “high marginal tax 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.”
But there’s no such simple, empirical relationship between “high marginal rates” and investment, productivity, or GDP growth, either over time in the United States or across countries (see scatterplots here and on page 256 here). President Bill Clinton raised high-end tax rates in the 1990s and productivity boomed later in the decade (2.5 percent per year, 1995 to 2000); President George W. Bush lowered top rates and, a few years later, productivity growth started to slow. To be clear, I’m not saying that higher taxes boost growth. Instead, I’m strongly warning you to reject simplistic claims either way.
That “lack of a clear monetary strategy” bit is a swipe at the Fed, again offered without evidence. In fact, as I show in this recent testimony, the Fed’s aggressive response to the Great Recession was effective in lowering key interest rates in the economy and thereby helping to pull the recovery forward.
A more credible attempt at calibrating the growth effects from the Trump budget comes from the recent Congressional Budget Office evaluation. As opposed to more than tripling the rate of productivity growth, the budget office finds that (my bold) “average growth in inflation-adjusted GDP over the 2018—2027 period would be about 0.1 percentage point higher under the president’s proposals than under CBO’s baseline.” And they get that small increment to growth only by accepting team Trump’s promise that they’ll offset their tax cuts with increases to be named later (the old “magic asterisk” approach).
But here’s where Liesman’s challenge comes in. Democrats should not take the above to imply that better policies can’t lead to at least somewhat faster growth, and most important, growth that reaches the poor and the middle class.
It’s tempting for progressives to conclude that if Trump is pushing it, we must push against it. But being against Trump doesn’t mean we’re against growth. To the contrary, Democrats need their own growth agenda, one that’s evidence-based and inclusive. The rap on Democrats is that they care only about redistribution, never about growth. That’s demonstrably false, and progressives shouldn’t let ourselves be painted into that corner.
(We could, for the record, point out that growth has, in fact, done better under Democrats, but sorry, I just don’t think there’s much of a substantive argument there.)
So, what’s a pro-growth Democratic agenda? Funny you should ask, because congressional Democrats are rolling out their “Better Deal” agenda this week. As I understand it, it’s a plan to increase jobs and pay, reduce the cost of some of the more expensive parts of the lives of moderate-income families (e.g., prescription drugs, higher ed, child care), and to help workers who’ve been stuck on the job-market sidelines by boosting apprenticeships (“earn while you learn”), and incentivizing companies to train and then hire workers whose skills need an upgrade.
I’m not here to write a validator paper on their agenda, although I’ll let you know what I think as I learn more about it. I can tell you that these measures have a much better chance of reaching those who need an economic boost than trickle-down tax cuts. In terms of growth, improved quality of the labor force is an input into faster productivity growth; family-friendly labor policies have been shown to significantly boost labor supply, especially of working moms.
What’s more, such ideas exist at that rarefied intersection of good politics and good policy. Republicans claim to be at that intersection, but as the health-care debate revealed, they’re way on the other side of town. That leaves a vacancy the other side needs to fill.