The fiscal 2018 budget, due to drop Tuesday, will likely reflect assumptions that economic growth of 3 percent or more will make President Trump's spending proposals work. Those are bad assumptions, according to a new research paper from the Committee for a Responsible Federal Budget.
During his campaign, Trump promised to deliver 4 percent GDP growth, a number that dropped to 3 percent after he took office. In February, the president told Fox News that his $54 billion defense budget would be paid for by a "revved-up economy," and that 3 percent growth would represent "a whole different ball game." Treasury Secretary Steve Mnuchin stuck to that statistic in his testimony yesterday before the Senate.
But the number is unrealistic, said Marc Goldwein, senior policy director at the bipartisan CRFB, in a press briefing. A more credible number is just south of 2 percent, more than a percentage point below the 3.2 percent average annual rate the U.S. has enjoyed since 1950.
"If you assume 3 percent growth rather than 1.8 percent the entire decade, basically it is a $3 trillion difference," said Goldwein. "Getting $3 trillion by assuming it definitely makes your job easier. Unfortunately, it doesn't do anything to accomplish that growth, and it doesn't do anything to accomplish that deficit reduction."
Goldwein broke down the contributions that labor, capital, and productivity--the "subcomponents of real GDP growth"--make to that 1.8 percent. He concluded that labor--accounting for just 0.2 percent--was the notable laggard. For more than 50 years, the flood of baby boomers and women into the labor force pumped more and more work hours into the economy. Now retirement is culling the boomers and the percentage of employed women may have reached its peak. Even restoring the labor-force participation of prime-age workers experienced in the 1990s would only get the economy 1/7 of the way to 3 percent, according to the CRFB paper.
If labor is the greatest drag on the economy, it is also, potentially, the most effective lever. Immigration reform, according to the Congressional Budget Office, would boost annual growth by 0.3 percent. "If you increase the number of people, you increase the number of workers," said Goldwein. "If you increase the number of workers, you increase the size of the GDP." But while more immigration expands the pie, the risk remains that it will shrink the size of each individual's slice. Earlier estimates by the CBO suggest that Americans' wages might decline in the short term but then rise over time.
Goldwein also advocated for policies that "get folks to work a little later in life...to move to more phased retirement and encore careers. I think there are certainly opportunities to get that labor number up," he said. The paper cites CBO estimates that pushing back Social Security eligibility by two years would boost economic growth by 0.15 percent.
The paper also called out several other areas of potential pro-growth policy, including tax reform and deficit reduction. Pursuing those is a good idea, according to the CRFB. Still, their effect will likely be modest. Even if the economy could achieve the unfathomable and recreate its performance from the 1990s--"the banner decade for economic growth," Goldwein said--"we are still at about 2.9 percent."
The CRFB also warns against using false projections to justify appealing but deficit-stoking policies. "Assuming growth numbers that aren't realistic," said Goldwein, "may encourage us to pursue policies like $1 trillion of unpaid-for infrastructure or a multi-trillion dollar tax cut under the assumption that it will create enough growth to pay for themselves. When, frankly, no major piece of tax or infrastructure legislation has ever paid for itself."
Goldwein believes the upper limit of what is reasonable, considering the tax and regulatory reforms being discussed, is probably just over 2 percent. "To get to 2.1 percent, 2.2 percent, 2.3 percent--that would be a tremendous feat and over the long run would make a big difference," he said. However, he pointed out that any individual change--even to immigration law--would goose growth by no more than a few decimal points.
"The bottom line," said Goldwein, "is we should not be buying magic beans. Three percent growth is not completely impossible. But it would be a heroic feat to get there."