The U.S. economy grew 2.5 percent last year and the new White House budget assumes real GDP growth will come in at 2.8 percent or better every year over the next decade. Economists elsewhere — like those at the Fed or the Congressional Budget Office — are far less optimistic.
The difference is significant. “If the administration’s forecast comes true, it will imply an economy 12 percent bigger in 2028 than that projected by the more cautious forecasts — an extra $2.8 trillion in economic activity that year, in today’s dollars,” The New York Times’ Neil Irwin writes.
But there’s little reason to believe that the assumptions baked into the White House budget will play out as projected. “A decade after the financial crisis, there is still no sign the economy can generate the consistent growth of 3% a year many continue to hope for,” Jason Furman, who chaired the Council of Economic Advisers under President Obama, writes in a Wall Street Journal op-ed.
Why do those dismal scientists see the economy bumping along more than booming? The short answer, Furman explains, is demographics:
“Slower growth is less the fault of President Trump than of his generation. Mr. Trump, born in 1946, was in the first wave of boomers. Forty percent of the people born that year have left the workforce. This was predictable, which is why in 2005 the Social Security Trustees projected that the economy would grow 1.8% a year from 2020-30. If anything, additional data since then would lead us to revise that forecast down. Americans simply have forgotten this basic reality.”
Cyclical factors are doing about all they can to drive economic demand, Furman writes. Meanwhile, the workforce is likely to keep growing more slowly that it did back when Baby Boomer men and women were first joining the job market.
And while the White House argues that its tax cuts and regulatory easing will lead to faster productivity growth, even if the annual growth rate climbs from its average 1 percent over the past decade to the 1.6 percent average over the last 50 years, it would only lift overall economic growth to 2.1 percent, according to Furman. (The American Enterprise Institute’s James Pethokoukis notes that the Reagan administration “also touted its growth-enhancing policies in the early 1980s, but there was no productivity surge until the mid-1990s.”)
The point is that, barring a surge of former workers coming back off the sidelines, a major shift in immigration policy or a new productivity boom, economic growth isn’t likely to jump to the levels the President Trump and his administration are predicting. And counting on those higher levels of growth might only be setting ourselves up for pain. “To the degree that policy and business decisions are based on false hopes for much higher growth,” Furman writes, “the result can only be dashed expectations.”