CAN TRUMP DELIVER 4% GROWTH?
MANY ECONOMISTS CONSIDER IT A LONG SHOT, WITH 2% MORE LIKELY
Can President Trump give the aging U.S. recovery a B-12 shot?
Trump has promised 3% to 4% economic growth over the long run, compared with the modest 2% average throughout the 8-year-old recovery.
But economists think he will be hard-pressed to deliver because of some inherent shackles on the economy. They include a labor market that’s already at full employment, an aging population and sluggish business productivity. The president also faces significant hurdles pushing his economic blueprint through a deficit-wary Congress. If he does, that likely would blow up the deficit — the gap between federal income and expenses — creating its own drag on the economy.
“There’s no way to connect the dots between his policies and that level of growth,” says Mark Zandi, chief economist at Moody’s Analytics.
Don’t grade Trump just yet. The government reported last week that the economy grew at an anemic 0.7% pace in the first three months of the year, but Trump took office about a third of the way through the period, and his policies have yet to be
“There’s no way to connect the dots between his policies and that level of growth.” Mark Zandi, chief economist of Moody’s Analytics
implemented.
Long term, there are two ways to lift economic growth: add workers at a faster clip or increase each worker’s output, or productivity.
The challenge for Trump in moving the needle on hiring is this: The current 4.5% unemployment rate means there are relatively few jobless Americans actively looking for work. As a result, monthly payroll growth this year is expected to slow to an average of 160,000, from 180,000 last year and 226,000 in 2015. The labor force, which includes those working and those who are looking for jobs, also is expanding more slowly because an average 10,000 Baby Boomers are retiring each day, says Carl Tannenbaum, chief economist of Northern Trust. Immigrants, he says, could pick up the slack but Trump has vowed to restrict immigration.
Boosting workers’ output significantly will also be a tall order. Growth in productivity has been feeble since 2011. Businesses have been hesitant to invest in new technology that could raise each worker’s output, partly because demand from customers has been tepid. Also, many have seen little reason to buy machines to replace workers when slow wage growth has made those workers relatively inexpensive.
Fewer people have moved to find jobs that better tap their skills since many owe more on their mortgages than their homes are worth after the housing crash. And the recession discouraged risk-taking start-ups, which tend to be more productive than established companies.
Now that wages are rising more rapidly, fewer homeowners are underwater and business confidence is booming, Zandi expects productivity growth to accelerate somewhat. But at best, he says, that likely will simply offset the slowdown in employment gains, keeping economic growth treading water at just above 2%.
Trump’s tax plan, unveiled last week, would cut the corporate rate to 15% from 35% and slash individual taxes, spurring more business and household spending, Zandi says. But with his proposal likely to add trillions of dollars to the national debt, Zandi expects a compromise with Congress that would lower the corporate rate more modestly, to 28%.
Similarly, he expects Trump’s vision of spending $1 trillion over a decade to upgrade the nation’s crumbling roads, bridges and waterways to be whittled down to $200 billion over four years.
In the end, Zandi estimates such a compromise stimulus package would push economic growth to 2.7% in 2018 from a baseline of 2.3%. But increasing the deficit, he says, would quickly push up interest rates, discouraging borrowing and reducing economic growth enough in subsequent years to offset the short-term gain. The Federal Reserve, he says, would raise rates to temper the faster inflation Trump’s plan would spark, further nudging up borrowing costs and curtailing economic activity.
Trump administration officials have said the plan would pay for itself because the faster economic growth will sharply increase federal tax revenue. Many economists are skeptical.
But Joseph LaVorgna, chief U.S. economist of Deutsche Bank, believes his colleagues underestimate the self-reinforcing positive effects of Trump’s agenda.
“If we have the right policies, I see no reason why we can’t get to 3% growth,” he says. Yet even he believes that a more muscular economy is likely to be shortlived unless Trump’s aggressive plan sails through Congress with few changes.
If it does, however, that could mean a bigger deficit and the economic hazards that come with it.
A story Thursday about the Trump administration’s tax proposal should have made clear that individuals are subject to the estate tax for any inheritance exceeding $5.5 million. For married couples, inheritance exceeding $11 million is taxable.