But what if economic growth can no longer perform this vital function? What if the economy has entered a prolonged period of slow growth that frustrates millions of Americans? What if the glue no longer holds? These questions are already posed by rising economic inequality. Now the debate enters a new phase with the release of President Trump’s first annual economic report and the more scholarly report of the Council of Economic Advisers (CEA).
These documents frame the economic debate between Trump and his detractors. “The [Trump] economic forecast . . . is the most absurd I’ve ever seen,” Harvard economist Jason Furman, chairman of President Barack Obama’s CEA, told Vox’s Dylan Matthews. Trump’s economists estimate the economy will grow 3 percent annually for the next decade; Furman and others say about 2 percent. The difference is huge.
To understand the debate, look at the table below. As it shows, economic growth can be separated into two factors: labor-force growth (the number of workers) and workers’ productivity (efficiency) — what they produce. Add these factors together, and you get the economy’s overall growth rate.
The figures portray history. In the first decades after World War II (1950-1973), both the labor force and productivity grew rapidly. Women were beginning to take paid jobs in large numbers. There were many new technologies: jet aircraft, synthetic fibers, antibiotics, air conditioning. The economy’s growth averaged 4 percent annually.
More recently (2008-2016), both labor-force and productivity growth have slowed, reducing the overall growth rate to 1.4 percent. The outlook for the next decade — as projected by the Congressional Budget Office, which supplied all these figures — is for economic growth to average 1.8 percent.
SLOWING ECONOMIC GROWTH
(Percent annual change)
Source: Congressional Budget Office
*Projected by CBO
These trends won’t easily reverse, say critics such as Furman. Slowing labor-force growth reflects the retirement of baby boomers; that won’t change radically, even if some workers delay retirement. What caused the productivity slump is a mystery, but — because it reflects so many influences, from technology to management — it’s hard to cure. Growth isn’t likely to double, Furman argues. That’s what he calculates is needed to reach Trump’s 3 percent economic growth target.
The rebuttal comes from Kevin Hassett, chairman of Trump’s CEA. At a news briefing, he contended that the recent massive cut in corporate taxes would spur companies to invest in new technologies, raising worker productivity. Likewise, Trump’s deregulation policies would increase investment by cutting red tape. Adding up all the possible gains, “it’s pretty easy to get . . . to 3 [percent annually] over a 10-year horizon,” he said.
Time will settle this argument. The evidence seems to favor Trump’s critics, but that’s hardly guaranteed. The truth is that economists have an atrocious record in predicting changes in productivity, either for better or worse. It’s conceivable that Trump and his economists could be right for the wrong reasons: Productivity could take a surprising upward swing, driven by unanticipated causes.
Of course, the surprises could just as easily go in the opposite direction. Trump’s budget projects massive deficits for years; there are signs that inflation, long dormant, is inching up. The Federal Reserve is slowly raising interest rates. There are all manner of seen and unseen economic threats.
We should also remember the larger role played by the economy in shaping the nation’s political and social climate. Unless we are able to raise the rate of economic growth — a task whose inherent difficulty ought to be obvious by now — we face an increasingly contentious and politically strained future.
We can expect intensifying competition among Americans (the rich and the poor, the young and the old, cities and states, businesses and governments) for ever-larger shares of the nation’s slow-growing income. We’ll also miss the muffling effect that higher economic growth has on the nation’s other conflicts and grievances.
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