Don't Count on 4% Growth
During the campaign, President-elect Trump frequently claimed his policies would grow the economy by 4 percent per year, also mentioning growth targets between 3.5 and 6 percent. Unfortunately, this level of growth is nearly impossible to achieve over a sustained period, absent transformative factors outside the government's control. With today's aging population, sustaining just 3.5 percent growth would require productivity to grow at a constant rate that has never been achieved in modern history.
Many elements of Trump's agenda would in fact promote growth, but others would hinder growth, and the effects in either direction would likely be modest. It was for this reason that our co-chairs recently advised President-elect Trump to "promote strong economic growth, without relying solely on growth to fix the debt." Working to accelerate economic growth is hugely important – not just for the budget but for wages and income. But it would be a huge mistake to count on faster economic growth, particularly at impractical and unprecedented levels.
Sustained 4% Growth Hasn't Happened Since the 1960s
Over the next decade, the Congressional Budget Office (CBO) projects that real (inflation-adjusted) growth will average 1.97 percent per year. Similarly, the Blue Chip projection which average more than 50 independent macroeconomic forecasts with varying methods and assumptions project 2.1 percent growth.
Yet in the campaign, President-Elect Trump has argued his plan could more than double projected growth rates. In the third presidential debate, he said “we’re bringing [growth] from 1 percent up to 4 percent, and I actually think we can go higher than 4 percent. I think you can go to 5 percent or 6 percent," and he earlier said 4 percent growth is "easily attainable."
The last time the United States had ten years of sustained 4 percent growth was in the late 1960s through early 1970s. That period had productivity growth similar to the tech boom of the late 1990s and early 2000s but also notably larger labor force growth.
Economists working with the Trump campaign estimated his plans would produce average growth of 3.5 percent rather than 4 percent a year – still 75 percent higher than current law. The last time the United States achieved sustained 3.5 percent growth was during the technological boom of the 1990s, which also benefited from the baby boomers entering their prime earning years.
3.5% Growth Would be Unprecedented With an Aging Population
Historically, economic growth has averaged about 3 percent per year, buoyed by 1.4 percent average labor force growth. In the past, and particularly in the 1960s and 1990s, favorable demographics provided a significant boost to the economy. In the 1960s, the baby boomers were entering the workforce and in the 1990s, they reached their peak earning and production years.
Today, by contrast baby boomers are entering retirement and average labor force growth is projected to total only 0.5 percent per year, about a percentage point below historical averages. This makes achieving 3.5 or 4 percent growth today much harder than it was in the past.
While some policy changes can accelerate growth in the labor force, particularly reforms that increase immigration (which President-elect Trump strongly opposes), most increases in growth are driven by changes in total productivity. Faster growth can also occur through increases in capital stock. Some of Trump's policies to cut tax rates would increase capital stock, but the dramatically increased debt in his current plan would reduce it. For instance, the Penn-Wharton dynamic estimates of Trump's tax plan found a net reduction in capital flows.
If growth were achieved entirely through productivity increases, 3.5 percent annual growth would be very difficult to sustain. With a much slower growing labor force, achieving sustained 3.5 percent annual growth would require increasing productivity growth by nearly 150 percent above projections, from 1.1 percent to about 2.6 percent per year. This level of productivity growth has not been sustained over any decade in modern history. The level of productivity growth required to grow the economy at 4 percent a year would be about one-third (1 percentage point) higher than the modern historical record set in the 1960s.
What Level of Growth Would Trump Achieve?
In the near-term, Donald Trump's plan could significantly increase the size of the economy by injecting debt-financed stimulus into the economy. However, on a sustained basis, his plan is extraordinarily unlikely to result in 3.5 or 4 percent annual growth, and if anything is more likely to slow rather than accelerate economic growth.
President-elect Trump has proposed a number of pro-growth policies. He would reduce individual and business tax rates, repeal the Affordable Care Act, liberalize energy policy, reduce regulations, expand infrastructure, and perhaps negotiate more favorable trade deals. On the other hand, a number of his policies would actually slow economic growth, including policies to erect trade barriers, and crack down on illegal immigration and unauthorized workers. On top of that – combining our campaign estimates with a $550 billion infrastructure plan – Trump's plans would add about $6 trillion to the debt, which would significantly slow growth.
Focusing only on fiscal policies, based on methods and estimates from the Penn Wharton Budget Model and Congressional Budget Office, we estimate Trump's plans would increase economic growth over the next decade from 1.97 percent to 2.00 percent – only a very slight change.
When immigration changes are also included, we estimate Trump's plans would actually slow economic growth to less than 1.7 percent per year. And over the longer term (the second decade), growth could slow to just over 1.5 percent per year.
To be fair, our immigration estimates are very rough and depend heavily on the exact details of President-elect Trump's policy. We also don't include any effects of Trump's regulatory or trade proposals, though a number of economists have found his trade plan would slow growth.
But even if Trump's trade and regulatory policies did significantly increase growth, it would not be close to enough to generate sustained 3.5 or 4 percent growth per year.
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Smart tax, regulatory, and energy reforms can help to boost growth. However, most studies estimate the impact to be relatively limited compared to the boost Trump expects. Moreover, he must offset the cost of his proposals as policies that increase the debt are actually likely to slow economic growth over the longer term.
It is smart to aspire to these high levels of growth: pro-growth reforms can reduce deficits, increase wages, and, most importantly, improve people's lives. But promising this growth and counting on it to keep debt from rising even faster than its current unsustainable path would be a costly mistake.