Populist policies cause immediate misery. Or not.

As a professional economist, I am quite certain that most readers of this blog could cancel their insurance policies and spend the savings on a pleasant party. And with any luck, the good times could go on for, as the Fed would say, a considerable period.

The Wall Street Journal, a few weeks back, described a preliminary White House economic forecast in which the Trump administration’s potentially deficit-ballooning tax and spending proposals are made less alarming by an economy growing at a 3% to 3.5% rate. Nearly instantly a host of mainstream economists[1] decried this optimistic forecast. For 6 years, real GDP growth has hovered around 2%, as the economy slowly but steadily put the unemployed back to work after the crisis. With the jobless rate now near historic lows, the argument goes, we should expect slower job gains and a lower trajectory for growth going forward. Ergo, depending on big acceleration to keep the budget deficit reasonable is taking a colossal riverboat gamble.

We think these criticisms dangerously ignore the distinction between the near term and what the economy can achieve in the longer term. As we said in December, we’ve down-weighted the various bad Trump scenarios for now and see a most likely scenario involving short-term stimulus from fiscal/tax policy and deregulation-this pushes years into the future any nasty longer-term implications of such policies. Thus, we understand objecting to 3.2% as the likely longer-term U.S. growth rate, but rejecting the possibility of a couple of years of robust growth is another matter.

More to the point, critics who dismiss the chance of near-term faster growth based upon calculations of what is sustainable for the long haul are setting themselves up for derision, and they are teeing up gloating tweets pointing out that the experts have once again missed the wisdom of Trump policies. Of course, both the expert pessimism and the Trump gloating will miss the point: governments can goose economic growth, and Trump’s policies may well do that.

The mainstream economists we are referring to are basically setting themselves up for the same egg-on-the-face moment faced by Brexit foes who asserted that recession would quickly follow a vote for exit. As we know, the recession didn’t come, and the Brexit fans found more reason to question the orthodoxy. But those arguments for immediate recession, though plausible, were never based on anything very reliable. Economists, do, however, have reliable things to say about longer-term welfare losses.

Just so in the United States. We may or may not skirt the various bad Trump scenarios. If we do, a brief bounce in growth seems more likely than not. How long the party lasts is another matter.

Let’s skip past the next couple years, however, imagining that in those years, the economy absorbs any remaining slack in the labor markets. Achieving a growth rate of 3.2%, from say 2020 through 2026, as the Trump forecast envisions, is a daunting proposition. We can split overall growth into labor force gains and advances for labor productivity. Given the slow pace for U.S. internal population growth, Trump’s commitment to slower net immigration, and the ongoing reality of a swelling of baby boomer retirements, it is hard to see labor force growth of much more than 0.4%. [2]

Thus, to sustain 3.2% growth in the 2020s, you’d need productivity growth of 2.8%. We have just come through seven remarkably lean years for productivity gains, with the 0.6% average about as bad as the U.S. has done over any significant period. A wager that productivity growth will be somewhat better might be quite reasonable. The CBO forecast, for example, sees a jump to 1.5% for productivity growth. But the Trump forecast would necessitate a seven-year run of at least 2.8%. There are examples of 7-year runs of that magnitude. In the post-war era, however, the economy failed to make that grade a bit more than 80% of the time.[3] Trump’s forecast of 3.2% growth for the long haul? A HUGE Riverboat Gamble.

Notes:

1. e.g., Krugman and Yglesias [back]

2. This number just comes from taking some Census Bureau, pre-Trump, projections and knocking a bit off net immigration. [back]

3. That is, for more than 4 out of 5 years since 1956, the trailing 7-year average productivity growth is less than 2.8%. [back]