January 25, 2017

Is Trump's Promise of 4 Percent Economic Growth Actually Feasible?

Bruce Yandle

Distinguished Adjunct Fellow
Summary

So what can we make of the prospects for 4 percent growth? Not much. The new Trump administration might lower their sights to achieving a norm of 3 percent. And that would be a marked improvement.

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If wishing could make it come true, a statement found on President Trump's whitehouse.gov website would surely chase away some pretty ugly clouds: "To get the economy back on track, President Trump has outlined a bold plan to create 25 million new American jobs in the next decade and return to 4 percent annual economic growth."

The jobs part of the statement is a bit of a stretch, but 4 percent annual economic growth? We haven't seen a 4 percent growth for a full year since 2000, and that was 16 years ago. The Trump plan calls for this to happen along the way to 2027. Granted, a lot can happen in 10 years, but can the pace of the economy accelerate from a pitiful norm of a bit more than 2 percent to a magnificent 4 percent norm in 10 years and hold to the growth rate? Let's take a look.

The simple recipe for calculating GDP growth tells us to add the annual growth rate of the workforce to the growth rate of labor productivity. Doing so says we may hit 4 percent occasionally, but sustained growth at that level just can't happen.

Here's why: Bureau of Labor Statistics data tell us that future labor force growth is crippled by aging Baby Boomers who are leaving the workforce and by a smaller next generation of workers entering it. Across the next decade, labor force growth will be less than 0.5 percent. That calls for at least 3.5 percent growth in productivity if we are to see 4 percent.

What do labor productivity numbers say about the prospects? First, let's admit that there is no way to know what future innovations may do for productivity, but we can know what has happened in the last 64 years. An examination of labor productivity growth from 1950 to 2014 tells us that the 10-year running average never hits or exceeds 3.5 percent. Remember, we are looking for a norm, not occasional spikes.

This is not very encouraging. The results are better if we focus on a five-year running average and refer to that as a weak norm. In that case, 3.5 percent growth is achieved twice in more than 50 years of data: 1965 and 2003. There are two five-year periods in the last 64 years when productivity growth averaged 3.5 percent or more. This is still not very encouraging.

But let's not get out the sackcloth and ashes quite yet. Isn't it possible to open immigration's door and encourage some quick labor force growth?

Why would I even think such a thing? Trump has already closed off that possibility. What about the possibility of unprecedented productivity acceleration due to innovations and the clipping away of noxious regulations? Couldn't that happen? Yes, but past data are not encouraging.

So what can we make of the prospects for 4 percent growth? Not much. The new Trump administration might lower their sights to achieving a norm of 3 percent. And that would be a marked improvement.