Is 3% Economic Growth Possible?


Donald Trump was elected President because of strong support from blue-collar workers in the battleground states such as Wisconsin, Michigan, Pennsylvania and Ohio. The American Enterprise Institute scholar, Nicholas Eberstadt, has explained clearly why this happened.  It is largely a result of a slowdown in economic growth in recent years which has hit blue-collar workers especially hard.

Can this recent slow growth trend be reversed?  The economist, Edward Lazear, has a positive answer to this question in today’s Wall Street Journal.  According to Mr. Lazear:

  • 3% growth is the long term norm. The annual growth rate in the 30 years preceding the 2007 recession was 3.1%. It has averaged just 2% annually since the end of the recession in June 2009.
  • GDP growth is the sum of two components: growth in productivity and in labor hours. Historically productivity has grown at a rate of about 2% per year and labor at about 1%.
  • Nonfarm labor productivity rose by a total of 7% between 2009 and 2016 which amounts to only 1% per year. It rose 18% between 2001 and 2008 or 2.3% per year.
  • Both President Trump and the House Republicans advocate business expensing (immediate tax write-offs for new investment) as an important part of tax reform. It has been estimated that just this one change in policy will induce an increase in GDP of from 5% to 9% over ten years. This would raise GDP from the current 2% annual growth to between 2.5% and 2.9% annually.
  • The Social Security Administration predicts no increase in the U.S. population age 20 to age 64 between 2020 and 2030.
  • But note that the labor participation rate fell during the recession by 2% among Americans between ages 25 and 54, the prime working age. Two drivers of this loss of workers are: 1) a large increase of the disability rolls and 2) the fact that the ACA will likely reduce the number of hours worked by about 2% between 2017 and 2024.
  • Eliminating burdensome business regulations will also help significantly.

Conclusion. There is clearly much that can be done to speed up both labor productivity and the number of hours worked by Americans. President Trump and the Republican Congress have a good shot at increasing economic growth to 3% annually.

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