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3% or Bust: Fanciful Forecasts and the GOP Tax Plan
It keeps happening. The latest member of Team Trump to offer overly optimistic takes on the GOP tax plan is Ivanka Trump. Here she is on “Fox & Friends” this morning:
Tax reform is a critical component of our plan to invigorate the economy…. This deregulation philosophy coupled with tax reform is going to have an enormous impact that we think conservatively will lead to sustained GDP growth of three percent, but more aggressively four and five percent.
Of course this assertion went completely unchallenged. Yet such an estimate is based on loads of wishful thinking. The above chart from the Committee for a Responsible Federal Budget shows the various growth forecasts from different non-White House economic models. As the CRFB concludes:
No study to date suggests the TCJA can increase economic growth by the 0.4 percentage points per year claimed to offset the plan’s cost by Senate Majority Leader Mitch McConnell (R-KY), let alone lift the annual growth rate to 2.6 percent as assumed in the budget resolution or 3 percent as assumed in the President’s budget. Based on PWBM growth estimates, tax reform might boost the real GDP growth rate to 1.9 percent over the next decade. Even under estimates from Feldstein and the Tax Foundation – both of which ignore the negative effect of higher debt – economic growth would remain between 2.0 and 2.2 percent.
And I think it’s safe to say few economists would argue that the GOP tax bill (plus the sort of deregulation we’ve seen) would somehow produce 3% to 5% annual GDP growth on a sustained basis. (Not a few quarters. Year after year.) I mean, why should we think that? Why would that be the natural, reasonable assumption? Because we had fast growth after the Reagan tax cuts? Sure real GDP growth was 4.4% from 1983 through 1989. But not only did that expansion occur after a deep recession not accompanied by a financial crisis, the economy had a demographic tailwind that no longer exists, as this McKinsey chart shows:
As former Obama White House economist Jason Furman explains:
There are two components to economic growth: adding more workers and increasing their productivity. Faster growth in the 1980s was the result of the former, an expanding workforce driven by two irreproducible demographic factors: the baby boomers’ entering their prime working years, and women’s continuing influx into the workforce. From 1980 to 1990, labor productivity — the amount of goods and services the average worker can produce in an hour — grew only 1.6 percent a year, below the figure marked since 2001. Today, the baby boomers are hitting retirement. As a result, Reagan-era productivity gains of 1.6 percent a year would now generate economic growth of only 1.7 percent.
So to grow as fast in the future as in the past, we need a pretty big productivity bump. And maybe one is coming. But it is poor governance to count on one.
Published in Domestic Policy, Economics
Jim,
Really this is so easy to answer. Our growth is being held back by our high labor costs. Just fire Congress and presto 4-5% growth. I guarantee it.
Regards,
Jim
So if I am reading those graphs right if we would have had the same labor growth that we had in the 80’s in the 00’s we would have seen 3% growth on average over the period. SO what is holding us back is demographics. Europe has consistently done even worse than us with respect to growth rates is it because their demographic growth is even worse than ours? Does this also explain Japan?
It’s safe to say that if they pass nothing we will have a nice collapse. It will give you something to write about when the dems give us stimulus ad infinitum.
Check out this and others from David P Goldman.
https://www.firstthings.com/article/2009/05/demographics-depression
He also writes for Asia Times. Sometimes as himself and sometimes as ‘Spengler’
I’m trying to recall the predictions made in advance of the spectacularly successful Reagan tax cuts. Seems to me that both Dems and Bush Republicans decried them as voodo economics.
But the question is were the Reagan Tax cuts the cause of the book or did they merely precede it? We know the later is true as a matter of fact, but how do you prove the former? It isn’t that easy I think to scientifically validate the causal relationship between the tax cuts and growth. But this is what people are claiming and making decisions based on those claims. Are they fools or liars? Maybe both maybe neither.
An interesting article. Personally I am skeptical of demographic doomsayers, but our changing demographics will alter the economic patterns. Our measures of wealth are based on the observations and conventions of a different demographic dynamic. If that dynamic collapses those measurements should follow suit. But are those the only measures possible? If the population shrinks, but the wealth stays the same or increase slightly, maybe per person growth will still seem good and be good? The fear in the article seems to be that the ever growing population was the sink for accumulated savings. But how does that not run in to a malthusian trap? You can’t keep doubling the population indefinitely. At some point we would hit a plateau and a possible decline. That is the nature of population growth. Limits are reached? The boom we saw in population was because of drastic changes in technology in the first half of the century. That is what we need to shake lose from stagnation. Once you gather all the low hanging fruit, each piece higher up is less rewarding and harder to get. New technology will give us new possibilities.
We cannot capture effort, innovation, cleverness, perseverance, resource and investment shifts in a static model. Moreover, labor supply will unambiguously grow if we cease paying people not to work. The combination of reduced regulations and lower taxes raises expected returns to effort, innovation, risk taking but we can’t know by how much because expectations are in people’s heads and are realized in the future. These models can only use static measurements of past averages. There are an infinity of ways those averages could have been reached but that information was lost by averaging them and would be obsolescent in any event. So wildly optimistic estimates are no more falsified by these models than their stagnant estimates and do not offer arguments against reforms that we know are positive. I’ll put it another way. Economies are living systems whose nature is to grow. It takes a lot of very special efforts to keep them from growing. My guess is that were we to peel back all the rent seeking parasitical distortions, repressions, and misguided controls we’d grow faster than we grew over the last half dozen decades when we were creating these distortions, repressions and misguided controls.