President Trump’s economic team paints a rosier picture about what his policies could accomplish than the economics profession is willing to endorse.
His team is formulating budget and tax proposals that project 3 percent annual growth, while the number crunchers at the Congressional Budget Office estimate only 1.9 percent.
How fast the economy can grow comes down to the simple sum of likely worker productivity and labor force growth. Since the financial crisis, productivity has advanced about 1 percent a year, as compared to the 2 percent in prior decades.
Thanks to Baby Boomer retirements and a declining birth rate, the prime working age population—those aged 25 to 65—is not likely to grow even 1 percent annually—even with well-conceived, needs-based immigration reforms and changes in entitlements programs that encourage more adults to work.
The premise underneath Mr. Trump’s program—lower taxes, health care reform, deregulation, infrastructure spending and tougher trade policies to lower the import deficit—is to make the United States a more attractive location to invest and innovate than, for example, China or Mexico.
No doubt, cutting corporate and personal income taxes and spending more on roads and highways could give the economy a Keynesian jolt and raise growth above 3 percent for a few quarters but his policy reforms are likely to be watered down by political infighting.
The prospects those will carry long-term punch for productivity and growth are limited by Congressional politics and perhaps more fundamentally, conditions limiting the efficacy of pushing up investment through tax cuts.
As with health care, the GOP in Congress is sharply divided on tax reform. For example, should corporate reform tax imports to make the package revenue neutral or accept a somewhat bigger federal deficit? And Mr. Trump and Speaker Ryan are unlikely to get much help from Democrats to forge a bi-partisan majority.
Similarly, paying to improve roads and bridges with private money has some potential but many improvements will likely require unpopular new taxes and user fees. Mr. Trump’s promise to get tough on trade faces strong opposition among skeptics inside his own White House.
More importantly, though, many economists believe low labor productivity growth is baked into the cake. Led by Northwestern University Professor Robert Gordon, most hew to the notion that the faster pace of productivity growth accomplished during the American industrial era—roughly 1870 to 1970—resulted from ground breaking innovations like electricity, the interstate highway system and antibiotics whose effects are not likely to be repeated.
They argue, these days important new technologies do more to entertain and enhance our leisure time—game machines and hand held devices that permit comparison shopping while roaming the aisles at Target—than boost productivity.
The problem is that economists are really good at explaining what just happened—in this case the productivity slowdown of the last few decades—but are lousy at telling us much about the future.
Our models look at recent trends, cast those in the concrete and then extrapolate into the future. Those can’t accurately predict GDP growth two or three quarters from now, never mind tell us much about how emerging innovations will change work and the broader contours of the economy one or several decades into the future.
Breakthroughs in artificial intelligence and robotics have the potential to replace up to 90 percent of job categories as we currently know them. Or those technologies will at least be able to make the workers occupying most positions profoundly more efficient. From robots that perform routine tooth repairs for dentists to artificial intelligence programs that accelerate the work of designers for the automobile and fashion industries.
In the decades ahead, machines that can feel and think—replace the tactile advantages of the human hand and genuinely solve tough problems as opposed to merely accelerating the searching and processing of information—will boost productivity in ways we can hardly fathom.
Vision and imagination have a way of winning out over pessimism and ossified thinking, and perhaps it’s a good thing that the White House has only a thin representation of economists and other experts telling President Trump what can’t be achieved.
His supporters keep talking about rekindling animal spirits but perhaps they will fill America’s biggest deficit—the shortage of confidence that vexing challenges can be turned to our advantage.