Trump's budget is unrealistic, economists say
What are the odds that the Trump administration will meet its annual economic growth goal of 3 percent? To find out, a noted think tank ran 10 million different simulations to answer this question, with variables ranging from population increases to productivity improvements. The answer: The chance of reaching that level is a mere 4 percent.
If that's right, achieving 3 percent GDP growth is highly unlikely, according to the analysis, which was done by the Peterson Institute for International Economics. Here's the problem that conclusion brings up: The White House's just-released budget -- which envisions a surge in fresh tax receipts and slashes domestic spending -- is predicated on hitting that 3 percent growth level.
But attaining that target pace, wrote study author and Petersen fellow Jason Furman, would mean "requiring the economy to repeat some of the fastest productivity growth it has seen over the past seven decades."
Numerous economists, both Democrats and Republicans, doubt that 3 percent is a realistic expectation, given the dynamics at work in U.S. society today. And many regard the Trump projection -- which shows the growth rate advancing from 2.3 percent in 2017 to 3 percent by 2021 and staying at that level until 2027 -- as far-fetched.
President Donald Trump's proposed budget, released Tuesday, needs such an optimistic GDP growth assumption because his taxing and spending plans rest upon it. "This rate allows the budget to assume large tax cuts and still project a balanced budget after 10 years," Furman noted.
The U.S. economy in recent years has been puttering along at a subpar rate of around 2 percent. Compared to the 3.1 percent average rate since 1950, that's pretty pathetic. In this year's first quarter, it was a soporific 0.7 percent, the lamest showing in three years.
The nonpartisan Congressional Budget Office projects 1.9 percent long-term growth, and the consensus estimate of the Blue Chip survey of private forecasts is 2 percent. In the 24 presidential budgets since the Clinton administration, the gap between the White House's prediction and the Blue Chip survey's was never more than 0.1 percentage point, Furman said.
Appearing before the U.S. House Budget Committee on Wednesday, the administration's budget chief, Mick Mulvaney, argued that the CBO's 1.9 percent represented a "pessimistic look at what the potential for this country" is. Mr. Trump rejects that downbeat assessment, Mulvaney declared.
The fruits of a 3 percent growth rate will be bountiful, the administration contends. One outcome it expects: Balancing the federal budget over the next 10 years, thanks to an extra $600 million yearly in federal revenue. Part of that would stem from Mr. Trump's stimulus program, which includes large tax cuts. Whether Congress will go along with his plan remains to be seen.
Even some GOP lawmakers took issue with the 3 percent forecast. "This budget assumes a Goldilocks economy," said Rep. Mark Sanford, R-South Carolina. "And I think that's a very difficult thing" to support a budget on.
Problems with getting to 3 percent GDP increases are:
The next recession. Of course, the Trump economic growth forecast assumes no recession during the next 10 years, a highly dubious notion. According to the National Bureau of Economic Research, since World War II, the average economic expansion has spanned 59 months. The current one, which started in mid-2009, has lasted 94 months, the third-longest in the postwar period.
Goldman Sachs (GS) puts the odds of a recession over the next nine quarters at 31 percent. And Intensity Corp., a research group, used an artificial intelligence program to pinpoint March 2019 -- 22 months from now -- as the onset of the next downturn.
Once a recession begins, the economy shrinks below zero growth. Also, tax receipts contract and federal spending balloons to pay for things like surging unemployment compensation claims.
Productivity sluggishness. Potential for the economy to boom has flagged starting in the previous decade, before the Great Recession started. Better productivity growth equals better economic growth. Yet since 2007, productivity has inched up at a paltry annual rate of 1.1 percent, the Bureau of Labor Statistics reports. The postwar average has been 3.2 percent. The last productivity surge occurred during the 1990s, when the internet and information technology generally were adopted throughout the U.S. workplace.
Business capital spending falls short. Reduced capital outlays are another hallmark of an economy whose growth expectations are low. Corporate corner offices detect slow consumer demand, and so they pull back on buying new equipment and on implementing other plans that might spur productivity. In 2015, the last year for which there's data, the Census Bureau said capital expenditures increased by just 2.5 percent, way below the mid- to high-single digits that have been the postwar norm.
Demographics. More workers usually means more consumer spending and hence more fuel for economic growth. From 1950 through 2000, an era when hordes of baby boomers joined the labor force, along with women in general, the U.S. working population increased 1.2 percent annually. Now, with baby boomers retiring, it's expected to grow only about 0.3 percent.
Full employment. In April, the unemployment rate notched down to 4.4 percent as the economy added a robust 211,000 jobs. That doesn't suggest a lot of people are around to support the swelling job openings that a surging economy would create.
Some argue that there are hidden pools of potential workers who would join the workforce if the economy were clicking along at a rapid pace, but where are they? Perhaps some baby boomers would be enticed out of retirement. And some who now depend on social programs, which the administration wants to cut, could join, too. Trouble is, they tend to be low-skilled, so their contribution to economic growth would likely also be low.
For the economy to attain and maintain a 3 percent growth tempo, said Gregory Daco, head of U.S. economics for Oxford Economics, it would need supercharged productivity and capital spending gains. That's why, said Daco, the administration's growth assumptions are "overly optimistic."