William Galston, a supporter of the Biden Administration, has an interesting observation in his Wall Street Journal column (free link):
During the next two years, Mr. Biden’s spending surge would help return the economy to full employment faster than staying at the status quo. This is a good thing. But between the beginning of fiscal 2024 and the end of fiscal 2031, the administration’s projections show GDP rising by $8.9 trillion, barely distinguishable from the $8.8 trillion in CBO’s baseline.
The bottom line: The economy will stay stuck at 2% growth, extending the period of slow growth that began early in the 21st century. Even during the first three years of the Trump administration, large spending increases and an enormous tax cut yielded growth averaging 2.5%, well below the 3.5% level of the 1990s.
Does this mean that government is powerless to influence economic growth? Not exactly. But it does require an understanding of why the growth rate has been so disappointing during the past two decades, particularly compared with the last half of the 20th century.
According to a recent CBO report, the principal driver of slow growth since 2008 has been a sharp slowdown in the growth of the labor supply. As baby boomers joined the workforce, the annual increase in labor supply averaged more than 2%, peaking at 2.5% between 1974 and 1981. As late as the 1990s, annual labor-force expansion averaged 1.2%. But as the population aged and baby boomers began to retire, annual increases fell to 0.5% between 2008 and 2020, a figure that the CBO expects to fall to 0.4% in 2021-25 and 0.3% in 2026-31.
Additionally, output per work, another key determinant not only of GDP growth but of rising incomes, is stalled. The reason for that is obvious: productivity is dependent on business investment. If businesses aren’t investing at sufficient levels to increase productivity, it won’t just increase on its own. Why aren’t businesses investing?
IMO the Biden Administration would prefer growth at 2% per annum that it can control and benefits the sectors it picks over 4% growth in sectors it hasn’t picked and wouldn’t prefer. I would add that I think that deadweight loss is preventing growth that would otherwise be taking place.
