Maya MacGuineas: Why is Trump's 3-percent growth target pure folly? Because math.
Maya MacGuineas is president of the nonpartisan Committee for a Responsible Federal Budget and head of the Campaign to Fix the Debt. She recently wrote an opinion piece for The Hill newspaper. It is reposted here.
Three percent does not sound like a huge number. It does not seem like the outcome of massive exaggeration. But the assumption in the president's budget that economic growth will reach and remain at 3 percent has led to an outcry from many experts — including us — that the administration is guilty of wishful thinking and fuzzy math. Here's why:
Since 1950, the economy has grown on average by 3.2 percent per year. Yet now, the Congressional Budget Office — consistent with other forecasters — is projecting growth will average below 2 percent over the next decade. Thus, a top national objective should be to increase our economic growth to provide America with a larger economic pie. On that, hopefully, we can all agree.
But there have been calls to shoot for implausible sustained growth rates of 4 and 5 percent and even higher. The campaign included even more ambitious claims. Some have chastised us as pessimistic not to believe we can get to at least 3-percent growth.
Office of Management and Budget Director Mick Mulvaney recently said, “The 1.9 percent growth rates that the previous administration assumed toward the end of their administration, and the 1.9 percent growth rates for the entire 10-year window that the CBO assumes ... are something we simply reject. That is a pessimistic look at what the potential for this country and for what this country’s people is. We reject that pessimism.”
But it's not about optimism or pessimism, it's about math. One can think this country is great and filled with potential, and that there are policies that will lead to higher growth, but still believe in the laws of economics. Economic growth results from growth in labor, capital and total factor productivity.
Our major challenge is demographic. We are an aging society with more and more baby boomers leaving the workforce every day. Not only does aging shrink the labor force’s contribution to growth (it is projected to contribute only one-quarter of what it has historically), it creates a drag on capital as seniors spend down their savings, and it grows our debt due to strains on our entitlement programs, which crowds out private investment.
In the 1960s, we grew at an average rate of 4.3 percent; that’s when baby boomers entered the workforce. In the 1990s, we grew at 3.5 percent as the boomers reached their prime working years. Now, in order to achieve 3 percent sustained growth given that the boomers are retiring, we would need to exceed the nation’s record levels of productivity growth or implausibly see a return of capital growth, productivity growth and labor force participation to above what we experienced in the 1990s.
That’s not going to happen. The problem is that the president’s budget relies on the assumption that it will occur, for a whopping 40 percent of its total savings — or $2 trillion — making it the single largest savings item in the budget. In comparison, the budget saves $270 billion over the decade from reforming welfare, $140 billion from student loans, and $40 billion from agriculture reforms.
We ran the numbers using several different more realistic assumptions and found that instead of achieving balance as it projects, the president’s new budget would see deficits ranging from $500 billion to $1 trillion at the end of the decade. That is in fact an improvement from current law, but it is by no means the balanced budget they laid out as a goal.
By all means, we should aspire to grow the economy. The White House has pinpointed many of the right approaches, including tax reform, debt reduction, infrastructure spending and regulatory reform (immigration reform and raising the retirement age would also help). But better to set an aspirational goal and use realistic assumptions than to over-promise and under-deliver. When it comes to budgeting, that approach could leave us in a trillion-dollar hole.
"My Views" are works published by members of the Committee for a Responsible Federal Budget, but they do not necessarily reflect the views of all members of the Committee.