The Trump Administration can be Optimistic About Economic Growth. Be Skeptical.

President Trump has been nothing if not bold in his promises to generate supercharged economic growth.

When a report showed a strong 3.3 percent growth rate last fall, he said, “I see no reason why we don’t go to 4 percent, 5 percent, as well as even 6 percent,” as well as he has spoken wistfully of emerging economies where growth can reach higher than which.

Even if you treat those musings as presidential bombast, his administration can be doing detailed projections which the economy will expand much faster from the decade ahead than the idea has in recent years — a forecast which underpins the Trump policy agenda.

The administration forecasts growth from the neighborhood of 3 percent through the next decade, compared with around 2 percent projected by private forecasters as well as the economists at the Congressional Budget Office as well as the Federal Reserve. If the administration’s forecast comes true, the idea will imply an economy 12 percent bigger in 2028 than which projected by the more cautious forecasts — an extra $2.8 trillion in economic activity which year, in today’s dollars.

although when you look closely at the details of the forecast, not all of the idea quite adds up. To come true, the idea might require some of the strongest improvements in productivity seen in decades, yet also require which interest rates not react the way they have historically when growth strengthens.

To understand some of the Trump administration’s buoyant assumptions as well as the apparent contradictions buried within them, the idea helps to go step by step on where economic growth comes via as well as how the idea relates to interest rates, employment as well as inflation.

Capital spending can fuel higher growth, although not forever

Think of the simplest arithmetic on how just one company can produce more goods as well as services. There are three ways:

  • Workers can put in more hours of labor. If the company hires more people, or has current workers do longer shifts, the idea can increase production.

  • The business can invest in more capital to make workers more effective. The latest equipment or software can mean each hour of labor creates more stuff.

  • The business can adjust its management techniques as well as how the idea operates to try to get more productivity out of the same workers as well as equipment.

The same idea applies to the economy as a whole. Growth comes via either more hours being worked, or more capital for each worker, or the third, which can be called “total factor productivity.”

The Trump administration leans heavily on the second of these — more capital — as justification for its optimism. With lower taxes on business, as well as regulatory policies which are more favorable to capital, the budget statement says, the idea will unleash “growth-enhancing policies” in terms of more capital from the economy per worker.

the idea can be indeed plausible which these policies will encourage more capital investment from the next few years, said Joel Prakken, chief U.S. economist at Macroeconomic Advisers, with higher productivity growth as a consequence.

although which should be a one-time adjustment, after businesses increase their capital stock in response to more favorable policies. Once which process can be complete as well as has resulted in higher productivity, there’s no reason to think which capital investment might keep rising as a share of the economy.

In different words, the benefits in terms of productivity growth as well as economic growth should fade over time, which the administration acknowledges.

“The brand new tax law might be a one-time shift, spread out over several years, after which there might be a brand new steady state growth path for labor productivity,” DJ Nordquist, chief of staff at the White House Council of Economic Advisers, said in an email. “Nevertheless, in which brand new steady state, faster growth than we have seen in recent years can still be expected because of the elimination of excessive regulations, to which This specific administration can be committed as well as because of our infrastructure plan. This specific deregulation will have enduring benefits to the rate of growth.”

Some private economists are not persuaded these effects are powerful enough to account for continued strong growth a decade via right now. “I try to fit these numbers into a mainstream paradigm as well as I can’t make them fit,” Mr. Prakken said.

What about different sources of growth?

although even if higher capital investment can’t do all the lifting of generating 3 percent growth, there remain those different two possibilities, of hours worked or total factor productivity, which could help achieve the 3 percent growth forecast even after the lift via tax cuts as well as capital investment fades.

although demographic trends are putting a lid on potential growth via more hours of work. The retirement of the baby boomers as well as stabilization of the proportion of women from the work force mean which potential hours worked will rise only 0.4 percent a year from the coming decade, according to the C.B.O.’s forecast (compared with 1.3 percent a year via 1950 to 2016).

Moreover, the Trump administration’s immigration policies, if anything, might tilt which number in a negative direction, as deportations, tighter border security as well as more restrictive issuance of work visas reduces the potential supply of labor.

Ms. Nordquist argued which Trump administration policies might help increase the labor force, as well as hence growth potential.

“We think which labor force participation has dropped from the past decade in part because of government policies which discourage work,” said Ms. Norquist, including growth in Social Security disability insurance as well as the Affordable Care Act. “There can be much room for the Trump administration to improve on those policies, for example through marginal individual income tax rate cuts,” citing evidence which older, near-retirement workers may be more likely to work when taxes are lower.

Then there’s total factor productivity, the black-box driver of growth. Economists don’t actually understand the idea, as well as calculate the idea only as a residual — the idea can be the number left over after calculating how much a rise in output comes via more hours worked or more capital.

the idea might be great for the long-term prospects for the economy — as well as for the Trump administration’s forecast — if total factor productivity commenced rising faster. although the idea’s hard to predict, as well as the idea doesn’t show much relationship with either corporate taxes or government regulation. For example, the idea was quite high via 1950 to 1973, when corporate income taxes were between 48 as well as 52 percent (they were recently cut to 21 percent). as well as the idea was quite low via 1982 to 1990, amid the Reagan era tax cuts as well as deregulation.

The interest rate paradox

Suppose the Trump administration’s growth forecast actually does materialize: Tax cuts as well as deregulation fuel productivity-enhancing capital spending; some not bad fortune arises in terms of the labor force as well as total factor productivity; as well as economic growth returns to its pre-2000 norm of around 3 percent. which might be positive news for the economy. although the idea also might be likely to have different effects, particularly on interest rates.

Over time, interest rates tend to move in tandem with the nominal growth rate. Part of the reason interest rates have fallen sharply from the last decade can be which low growth has translated into what economists call a low “natural rate” of interest as well as low inflation levels.

although the Trump administration projects similar interest rates to those envisioned by more cautious forecasters, despite projecting higher growth.

the idea implies something of an immaculate expansion: returning to pre-2000 growth rates without also returning to pre-2000 interest rates.

from the 1990s, for example, G.D.P. growth averaged 3.3 percent per year, as well as the 10-year Treasury bond yield averaged 6.7 percent. The administration projects economic growth nearly which strong, although rates peaking at 3.7 percent.

Even some who are on board with more optimistic forecasts of growth say which higher interest rates as well as inflation are likely to accompany the idea. Allen Sinai, a longtime forecaster, shares the administration’s view which businesses will invest in more capital because of the tax law, thus achieving higher productivity.

although in addition to which, he argues, the economy will be at risk of overheating. He sees inflation rising to between 2.5 percent as well as 3 percent by late 2019, which could send long-term Treasury bond yields up to 5 percent, well above the 2.9 percent today as well as the 3.1 percent the administration forecasts for 2019.

“At some point inflation gets high enough, as well as the market takes interest rates up,” said Mr. Sinai, the chief economist at Decision Economics. as well as higher rates, the idea’s worth adding, might raise the cost for the government to service the national debt, in turn doing deficits higher.

Ms. Nordquist notes which the forecasts published Monday were developed in November, when interest rates were lower than they are right now. “If we were to redo the interest rate forecast today, we might project higher rates,” she said.

The art of the forecast

Have some sympathy for those who build these forecasts. Predicting anything 10 years in advance can be inherently hard, as well as no forecast can be ever perfectly correct. As the last 10 years show, there can be a lot which can be just unknowable about the forces which will buffet the economy.

although you do want those forecasts to line up with what we already know about the economic as well as demographic forces which will shape the future. as well as a lot will have to go right for the Trump administration’s forecasts to come true.


Because of an editing error, an earlier type of This specific article misstated the gender of DJ Nordquist, the chief of staff of the White House Council of Economic Advisers. Ms. Norquist can be female, not male.

Neil Irwin can be a senior economics correspondent for The Upshot. He previously wrote for The Washington Post as well as can be the author of “The Alchemists: Three Central Bankers as well as a World on Fire.” @Neil_IrwinFacebook