Reaching Trump’s 3-percent growth summit will be a tough climb

The Congressional Budget Office (CBO) recently unveiled an online interactive tool that allows users to see for themselves how altering key economic assumptions impacts the agency’s economic and budget projections. It’s a simple but powerful tool for demystifying a complex subject.

Following a decade of tepid economic progress, it provides perspective to the Trump administration’s stated goal of sustained 3-percent growth. As CBO’s online tool quickly demonstrates, accelerating economic growth is easier said than done. 

Labor supply growth

Growing the supply of labor is essential to boosting economic growth.

{mosads}CBO estimates the U.S. supply of labor will grow 0.9 percent for each of the next two years before gradually slowing to 0.3 percent annually by the end of the decade. This reflects the dramatic slowdown in the growth of the labor force in recent decades.

The post-WWII “baby boom” fueled the labor supply starting in the 1960s. The combination of a rapidly growing working-age population and a rising labor force participation rate (as women poured into the workforce), ballooned the labor force.  

From 1971 to 1986, the 10-year moving average for the growth rate of the labor force never fell below 2 percent. 

Then came the “baby bust” and, starting in 2000, a declining labor force participation rate. Economists expected the participation rate to decline as boomers retired, but the combination had a decidedly negative impact on labor supply growth. From 1987 to 2008, the moving average for the growth of the labor force fell steadily from 1.9 percent to 1.1 percent.

Then came the Great Recession and the collapse of the labor force participation rate as prime-age men (ages 25 to 54) — especially those with limited education — dropped out of the labor force with astonishing rapidity. Since 2009, the 10-year moving average fell from 0.9 percent to 0.4 percent last year. 

The slowing growth rate of the labor force is a serious constraint on the economic growth rate. 

Growing the labor supply more quickly will require faster growth of the U.S. working-age population — and that likely means loosening restrictions on immigration — and policies to boost the labor force participation rate. 

CBO estimates the U.S. labor force will add 8.3 million workers by 2028. According to CBO’s online tool, boosting the labor force growth rate 0.5 percentage points (relative to the baseline) would require doubling the number of new workers to 16.6 million.  

In turn, CBO estimates the larger labor force would lift the economic growth rate to 2.2 percent — up from 1.8 percent in CBO’s baseline — and add $3.5 trillion to cumulative GDP over the decade (in 2009 dollars). 

Productivity growth 

Accelerating productivity growth is the second key to boosting economic growth. Unfortunately, as the St. Louis Federal Reserve wrote earlier this year, the U.S. is in the midst of an agonizing “prolonged productivity slowdown.”

From 1948 to 1973, U.S. productivity grew at an average annual rate of 2.8 percent. Then, suddenly and unexpectedly, productivity growth slowed to half that rate until the early 1990s.

Economists nearly exhausted themselves trying to understand the slowdown, but then productivity surged again from 1996 to 2005, growing at an average rate of 3 percent. 

Productivity stalled on the eve of the Great Recession and, as it tends to do following recessions, rebounded briefly in the aftermath of the downturn. 

Since then, productivity growth has all but collapsed in the U.S., averaging 0.7 percent from 2011 through 2017. Productivity growth over this period is the slowest for any seven-year period in the U.S. going back to 1948. And the productivity slowdown isn’t limited to the United States. It’s worldwide. 

CBO’s baseline assumes somewhat faster productivity growth, with annual growth rates ranging from 1 percent to 1.2 percent through 2028.

Boosting productivity growth 0.5 percentage points during that period would lift the economic growth rate to 2.5 percent — up from 1.8 percent in CBO’s baseline — and add $6.8 trillion to cumulative GDP over the decade (in 2009 dollars).

Three-percent growth

Achieving and sustaining a 3-percent economic growth rate will require the U.S. to field a larger, more productive labor force. That is, in fact, the administration’s explicit strategy, as outlined in this year’s Economic Report of the President (see pages 8 and 446). 

The economy is responding positively to Congress’ and the Trump administration’s policy cocktail of regulatory relief and pro-growth tax reform, but additional initiatives — many of which should elicit bipartisan support — are necessary for the U.S. to reach its full economic potential. 

These initiatives include targeted infrastructure investment, workfare reform, a new emphasis on technical and vocational training and making the new tax law’s expensing provisions permanent (and expanding them to cover structures). 

Now let’s get to work. 

James Carter served as the head of tax policy implementation on President Trump’s transition team. Previously, he was a deputy assistant secretary of the Treasury and deputy undersecretary of labor under President George W. Bush.