Wednesday, March 1, 2017

How Fast Can The US Economy Grow?

This article provides a good primer on the factors that determine GDP growth.  One important measure is potential GDP.  Its a lot easier to grow an economy when there is a large gap between potential GDP and the current level of GDP.  The US fell well below its potential during the financial crisis and it has moved much closer to the current measure of its potential this year.  The implication is that either our measure of potential GDP is wrong or that it will be hard to grow the economy much faster than it is growing today.

Donald Trump argues that his policies will double our current growth rate.  That assumes that we have a large number of potential workers who could be made available to do the work needed to grow the economy faster.  The current unemployment rate is close to where it is when we have full employment.  There may be some workers who are not looking for work and are not counted in the unemployment rate calculation.  Its unlikely, however, that there are a large number of potential workers who could fill the kinds of jobs that may become more available.

Its also possible that the output that we get from each worker could be increased.  If US productivity were to increase substantially from its current rate we might be able to increase the GDP growth rate without increasing the size of the effective labor force.  However, the productivity growth rate has been stuck at its current rate for a long time.

We do have some slack in manufacturing capacity.  If demand for products increased we have some room for expansion.  We also have some slack in office space capacity.  However, we have not been adding office space fast enough to absorb substantial demand for offices space.

We have not touched upon the demand side of the equation.  If consumers, government and businesses increased spending that would put pressure on businesses to increase the output of goods and services.  The Trump administration argues that it can double the GDP rate by cutting taxes and regulations which are assumed to be constraining business expansion.  Government spending on infrastructure and the military can also increase the growth rate.  At present, there are no specific plans, approved by Congress, to pass the legislation that would be required to make substantial changes in tax policy or federal spending on infrastructure.  Moreover, our recent experience with tax cuts and deregulation have not lived up the expectations promised by previous administrations.  Democrats would support Republicans on the right kind of infrastructure spending but they are far apart on how that would be done.  Conservatives in the House are also wary of any increases in government spending and tax cuts which would expand the economy without producing budget deficits and adding to the national debt.

The bottom line is that we may be in for an extended period of slow growth and we are far away from any concrete proposals that might increase potential GDP.

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