The WSJ reports that the Trump administration’s budget planning assumes very high economic growth over the next decade — between 3 and 3.5 percent annually. How was this number arrived at? Basically, they worked backwards, assuming the growth they needed to make their budget numbers add up. Credibility!
But the purpose of this post is mainly to explain why such a number is implausible — not impossible, but not something that should be anyone’s central forecast.
The claimed returns to Trumpnomics are close to the highest growth rates we’ve seen under any modern administration. Real GDP grew 3.4 percent annually under Reagan; it grew 3.7 percent annually under Clinton (shhh — don’t tell conservatives.) But there are fundamental reasons to believe that such growth is unlikely to happen now.
First, demography: Reagan took office with baby boomers — and women — still entering the work force; these days baby boomers are leaving. Here’s UN data on the 5-year growth rate of the population aged 20-64, a rough proxy for those likely to seek work:
Just on demography alone, then, you’d expect growth to be around a percentage point lower than it was under Reagan.
Furthermore, while Trump did not, in fact, inherit a mess, both Reagan and Clinton did — in the narrow sense that both came into office amid depressed economies, with unemployment above 7 percent:
This meant a substantial amount of slack to be taken up when the economy returned to full employment. Rough calculation: 2 points of excess unemployment means 4 percent output gap under Okun’s Law, which means 0.5 percentage points of extra growth over an 8-year period.
So even if you (wrongly) give Reagan policies credit for the business cycle recovery after 1982, and believe (wrongly) that Trumponomics is going to do wonderful things for incentives a la Reagan, you should still be expecting growth of 2 percent or under.
Now, maybe something awesome will happen: either driverless or flying cars will transform everything, whatever. But you shouldn’t be counting on it.