What History Tells Us About Trump's 3% Growth Rate Forecast

Larry Summers, along with most reputable economists, has been highly critical of the 3% growth forecasts made by the Trump administration.  He argues that it is inconsistent with US history.  His analysis of US history shows why the Trump forecast is highly improbable but it also provides a good lesson about the factors that drive economic growth.

Summers argues that GDP growth per adult is a critical factor.  We get more GDP growth when the number of adults producing output rises; we also get more growth when the output per person increases (productivity).  He then looks at GDP growth history in terms of those factors.

Between 1961 and 2000 GDP growth was driven by two factors.  The adult population grew at 7.4% and the percent of women in the workforce grew from 33% in 1960 to 62% in 2000.  The population growth rate will by only be 0.2% between 2021 and 2027.  Moreover, the percent of women in the workforce has been constant at 62% since 2000.  There will be no boost to the GDP growth rate over the Trump forecast period from population growth or the entry of women into the workforce.

The Trump forecast is for 2.8% growth per adult between 2021 and 2027.  We have seldom had a seven year period with that kind of growth per adult.  That is because the business cycle always includes downturns or recessions over a seven year period.  Even if the underlying growth rate was 3% we can't assume a business cycle with no downturns or recessions.

We had three periods of 2.8% growth per adult since 1961.  They were all driven by a tailwind from the business cycle.  That is, we moved from a period of high unemployment to a period of lower unemployment.  Reductions in the unemployment rate led to a faster growth rate. The Trump forecast is for a 2.8% growth rate from a period of low unemployment.  It will not be driven by a business cycle tailwind like our other periods of 2.8% growth rates over seven years.

Summers concludes that the Trump growth forecast ignores what we have learned from US history.  He then asks why Trump's team of investment bankers made such an aggressive growth forecast?  They would not have invested in business with that kind of forecast when they worked on Wall Street.  The answer is pretty simple.  It was necessary to support Trump's boast that he would "Make America Great Again".  Moreover, it would not be possible for Trump to cut taxes without producing large budget deficits unless they produced unprecedented economic growth.  Ronald Reagan made huge tax cuts that did increase the growth rate but they were boosted by a business cycle tailwind as we recovered from recession.  The growth rate was also boosted by the Fed which cut interest rates substantially.  Interest rates can't be reduced much more today.  We expect that the Fed will begin to raise interest rates.  Trump's economic team has given Trump what he needed, but it do so at the cost of its credibility.  We are not surprised when Trump makes false claims; it is disappointing that his economic team cannot be trusted to make honest forecasts.