Will Trump Deliver a Growth Miracle? Don’t Count on It
His policies promise marginal improvement at best. But then, he could always get lucky again.
Photo: iStock/Getty Images
By
Alan S. Blinder
Jan. 22, 2017 5:14 p.m. ET
256 COMMENTS
The stock market has been turning cartwheels since Donald Trump’s election. They say it’s the prospect of faster economic growth that got stock traders so excited. Really?
Mr. Trump has promised a huge jump in the growth rate of real gross domestic product, to perhaps 3.5%, 4% or more. As he said in his Las Vegas debate with Hillary Clinton, “I actually think we can go higher than 4%. I think you can go to 5% or 6%.” Good luck with that.
Here’s an interesting historical fact. Since Harry Truman, the growth rate has fallen every time a Republican president replaced a Democrat and has risen every time a Democrat replaced a Republican. President Obama’s second term will finish with an average GDP growth rate right around 2.2%. Merely beating that mark would be a remarkable departure from history.
How could the Trump administration possibly achieve, say, 4% growth? Mainly by fiscal stimulus, markets seem to think. So let’s start on the demand side.
You may recall that in 2009 Republicans claimed that fiscal stimulus doesn’t boost growth at all. But that was then and this is now. Today, many of those same Republicans will tell you that fiscal stimulus is very powerful, especially if it’s income-tax cuts. Oh?
We know that fiscal policy packs more punch when the economy has more slack and when the spending or tax cuts are well targeted to produce demand. Both conditions held, at least partly, in 2009. Neither will hold in 2017, with the economy approximately at full employment and Mr. Trump’s proposed tax cuts heavily skewed to the rich.
Besides, the Federal Reserve will be making sure the economy doesn’t overheat. Fed officials must be shaking their heads in disbelief. For years they practically begged Congress to help lift the economy out of the muck by stimulating demand; but Congress did the opposite. Now, with stimulus no longer needed, Congress is poised to deliver it. The predictable result will be higher interest rates.
OK, but couldn’t the Trumpian growth miracle emanate from the supply side instead? Been there, done that, and it doesn’t work. A 2016 comprehensive review of the voluminous scholarly research on the supply-side effects of tax cuts by economists William Gale (a Democrat) and Andrew Samwick (a Republican), concluded that “U.S. historical data show huge shifts in taxes with virtually no observable shift in growth rates.” But cutting top bracket rates does redistribute income from the have-nots to the haves. And that, I suspect, is why stock traders cannot contain their glee.
Someone will point out that there is more to Mr. Trump’s supply-side program than tax cuts. That’s true. The idea of building more infrastructure is a good one, though near-term stimulative effects would be small. Furthermore, as Alan Krueger and I wrote in these pages last month, Mr. Trump’s plan to leverage private equity would not finance the sorts of infrastructure projects we need. Fortunately, incoming Commerce Secretary Wilbur Ross testified in his confirmation hearing that the Trump infrastructure plan would include more than private equity.
Much the same can be said of erasing regulations. Some of them deserve to go, but only magical thinking will produce large growth effects from doing so. More important, the effects of deregulation depend on which regulations get killed. As one prominent example, Mr. Trump has pledged to “dismantle” Dodd-Frank. Yes, the 2010 financial-reform law is maddeningly complex and might even depress the growth rate a tad. But it offers strong protections against the kind of calamity that befell the world in 2008. Some environmental regulations may exact a small price in GDP growth, but they also help ensure that we don’t get sick from the water we drink and the air we breathe.
Mr. Trump’s best hope for a supply-side miracle is sheer luck. Here’s why: Long-run growth is fueled mainly by technical progress. But the upward march of technology—or, more precisely, its effect on GDP—slowed abruptly during the George W. Bush administration and did not revive under President Obama. Specifically, what economists call “multifactor productivity growth”—think of it as getting more output from the same inputs—averaged a robust 1.6% per annum between 1995 and 2005 but then plummeted to 0.4% per annum between 2005 and 2015. Economists have some hunches about what caused this, but no one really knows.
Since no one knows why productivity growth collapsed, no one knows when it might snap back. If President Trump is as lucky as candidate Trump, the multifactor productivity growth rate might mysteriously bounce back to, say, its 1948-2005 average—which was 1.3%. Should that happen, 2.2% growth would turn into 3.1% growth without the Trump administration lifting a finger—and without any help from Vladimir Putin.
No sensible person would bet on such an outcome. But then again, no sensible person bet on Donald Trump becoming president.
Mr. Blinder is a professor of economics and public affairs at PrincetonUniversity and a former vice chairman of the Federal Reserve.