One Huge Problem With Trump's Promise To Grow The U.S. Economy
On paper President Trump's newly unveiled budget proposal is balanced. But that's predicated on an extraordinarily rosy projection for U.S. economic growth: Trump says he expects to achieve annual increases of 3 percent — a substantial boost from the 2016 annual rate of 1.6 percent.
Such pledges were a frequent theme of Trump's campaign. And they were often coupled with the observation that countries such as China and India have been enjoying fast-paced growth for years.
But are comparisons like this meaningful? And could the U.S. realistically achieve even a 3 percent growth rate (let alone the 7 to 8 percent of China and India)?
We looked into the question last fall — after then-candidate Trump raised the issue during the Oct. 19 presidential debate.
India, and even more so China, have been growing at such impressive rates year after year for decades with almost no interruption (though China is down from its heyday of double digit increases). But the consensus among economists is that it's not possible for the U.S. economy to regularly expand at similar rates. Poor countries are always able to grow much faster than rich ones because they're starting from a lower baseline, explains Amanda Glassman of the Center for Global Development. They have "nowhere to go but up."
And to get there, they can take advantage of several drivers of economic growth that are less beneficial to rich countries, says Tamin Bayoumi of the International Monetary Fund, who is currently a senior fellow of the Peterson Institute for International Economics. Rich countries like the United States have already made use of many of these opportunities to reach their current, wealthy state. So there's less untapped opportunity to fuel further growth.
One of those drivers of growth: education. That's because, generally speaking, the more educated a worker is, the greater his or her potential to contribute to the country's economic output. In poor countries a huge share of the population is uneducated, so as more of the population becomes educated and ushered into the workforce, the country reaps huge economic gains. But those returns diminish as more of a country's workforce becomes educated.
"Let's say I'm China and I have 10 educated people per 100 of my population, versus the U.S. where I have, say 50 educated people per 100," says Bayoumi. "If I add one educated person to the pool in China I've increased the share of my workforce that is educated by 10 percent. In the U.S. adding one educated person to the pool only increases the share of educated people by 2 percent."
Another way a country can grow quickly is to redirect its workers into jobs where they could be more productive. A classic example: when countries shift people from rural areas, where they are peasant farmers, into urban areas, where more productive types of jobs are available, say in factories. Bayoumi says this is a big reason for China's recent galloping growth — and for growth that the United States and the United Kingdom enjoyed at various points during the 19th century.
"Before then, there were too many people in agriculture, so their productivity was low," says Bayoumi. "It was large families doing peasant farming." Over time, farming became more productive — allowing a smaller number of people to get the same or greater yields — and freeing up the rest to move to cities where they could engage in other work and massively boost the country's overall economic output. But, again, that shift was completed in the United States ages ago, whereas it is still playing out in China and India.
China and India have also been able to jump-start their development by adopting — in one fell swoop — technological advances in agriculture and indeed other sectors that the United States, in particular, had to spend years coming up with. "We've never grown at China's rate because we've not really had the technology to borrow from someone else — we were always at the frontier," says Dean Baker, an economist who is co-director of the Center for Economic and Policy Research.
On the rare occasions when the United States has seen annual growth top 7 percent — the last time was in 1984 — it's been because the economy was bouncing back from a recession, or, in the case of the double-digit growth during World War II, because the government was spending massively.
But when it comes to growing the economy under normal circumstances, rich countries must rely on drivers that produce more modest annual increases.
One big driver for the United States has been its ever expanding pool of workers. Baker notes that starting in the 1960s through the 1980s the U.S. economy benefited enormously from the baby boomer generation's entrance into the workforce. Also crucial from the 1960s through 2000, he says, was the surge in women joining the labor pool.
Another key driver for the United States has been the continued improvement in the productivity of the workforce — meaning a given worker's ability to produce more output from one year to the next. This improvement generally happens as innovations make workers more efficient, whether it's railroads that greatly facilitated the transport of goods and materials in the 1800s or electricity, which made factories more efficient in the 1900s. More recently, says Bayoumi, in the 1950s through the 1960s the United States was able to reap the benefits of technologies that were accelerated during World War II, such as air travel. Similarly, says Baker, during the 1960s there was a great deal of government investment in infrastructure such as the highway system. "This allowed for the development of the suburbs," he says.
Productivity growth abruptly slowed in the mid-1970s — and to this day economists do not agree on why. But it picked up again with the information technology revolution and mass spread of computers and Internet use through the workplace.
All these factors have allowed the United States to enjoy several sustained periods of growth at levels that, while not on par with China and India, certainly look enviable today. The "golden age," says Baker, was the 1960s, when the growth rate topped 6 percent for multiple years — helped along by generous government spending and reductions in individual and corporate tax rates.
Most recently the U.S. economy grew by more than 4 percent every year from 1997 to 2000.
Still, argues Baker, that last bout of sustained high growth was largely due to the stock market bubble. And at present many economists question whether continuous growth at such rates will be achievable in the foreseeable future. For one thing, apart from immigration, there aren't as many ways to rapidly increase the size of the U.S. workforce. The boomer wave is long past. And while women are still underrepresented in the labor pool, such a large share have already joined that upping their numbers won't have the same impact as it did from the 1960s to 2000.
As for gains in productivity, those slowed once again in 2005. Some economists maintain that we are unlikely to see another game-changing technological breakthrough any time soon. Others point with hope to robotics. Baker says in that event the United States could hope for a return to growth rates of as high as 4 percent. Still that's a hypothetical scenario that requires a robot revolution that for now at least, has not materialized.
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