The Trump Administration Is Optimistic About Economic Growth. Be Skeptical.
But even if higher capital investment can’t do all the lifting of generating 3 percent growth, there remain those other two possibilities, of hours worked or total factor productivity,
that could help achieve the 3 percent growth forecast even after the lift from tax cuts and capital investment fades.
He sees inflation rising to between 2.5 percent and 3 percent by late 2019, which could send long-term Treasury bond yields up to 5 percent, well above the 2.9 percent today
and the 3.1 percent the administration forecasts for 2019.
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,
and even 6 percent,” and he has spoken wistfully of emerging economies where growth can reach higher than that.
Suppose the Trump administration’s growth forecast really does materialize: Tax cuts
and deregulation fuel productivity-enhancing capital spending; some good fortune arises in terms of the labor force and total factor productivity; and economic growth returns to its pre-2000 norm of around 3 percent.
The retirement of the baby boomers and stabilization of the proportion of women in the work force mean
that potential hours worked will rise only 0.4 percent a year in the coming decade, according to the C. B.O.’s forecast (compared with 1.3 percent a year from 1950 to 2016).
It would be great for the long-term prospects for the economy —
and for the Trump administration’s forecast — if total factor productivity started rising faster.
“The new tax law would be a one-time shift, spread out over several years, after which there would be a 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.
