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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.