Encouraging Economic Growth

I hate to say it but I tend to agree with Simon Johnson’s post at Project Syndicate. The Trump Administration is mostly kidding itself (and us) about near term 3% real growth and it shouldn’t be bundling that into its budget requests:

The US economy used to grow at more than 3% per year; in fact, this was the norm in the second half of the twentieth century. Since then, however, the US has been forced to confront three major constraints.
First, the US population is aging. As the baby boom generation (born after the end of World War II) retires, the proportion of retired people in the total population increases. Over time, this demographic shift has reduced US potential annual growth by perhaps as much as half a percentage point.
The details of what will happen to health insurance remain unclear. But making it harder or more expensive for lower-income and older Americans to get health insurance is not likely to encourage people to work. The best independent assessment of these policies, produced by the Congressional Budget Office (CBO), does not predict any economic miracles – just that around 20 million fewer Americans will have health insurance.
And lurking in the background are potential policies that would restrict legal immigration. The US currently allows about one million mostly working-age people per year to take up residence and work in the country. Moreover, immigrants’ tendency to have more children than non-immigrants do keeps the US population growing faster than in other developed countries (for example, in Europe or Japan). So any move to reduce annual immigration – some Republicans are proposing 500,000 people or fewer – would make 3% annual economic growth even less likely.
The second economic constraint is the slowing rate of productivity growth. There was a major increase in average output per person in the post-World War II years, as better technology was developed across a wide range of sectors. And there were hopes in the 1990s that the information technology revolution would have a similar effect. But the impact on productivity has been disappointing. Northwestern University economist Robert Gordon’s recent book, The Rise and Fall of American Growth, argues that, despite all the hype from the tech sector, we are unlikely to see a dramatic change on this front.
The Trump administration argues that by reducing taxes and “reforming” healthcare, it can boost productivity – for example, by encouraging capital investment. But the tax cuts that will soon be on the table are likely to resemble closely those implemented by President George W. Bush’s administration, which did not lead to any kind of economic boom (a point that James Kwak and I examined in detail in our book White House Burning).
The third constraint stems from the 2008 financial crisis. One danger inherent in pushing for high growth is that it is always possible to juice an economy with short-term measures that encourage a lot of risk-taking and leverage in the financial system. Deregulation in the 1990s and early 2000s did exactly that, leading to slightly higher growth for a while – and then to a massive crash.

I think that more robust growth is possible but politically difficult. Most of it boils down to eliminating deadweight loss. The lowest hanging fruit would be bringing the business income tax rate down with OECD norms. That wouldn’t generate a huge amount of growth but it could generate little.

Regulatory reform would help a little, too. In the United States not only are their federal regulations but 50 states generating regulations of their own and thousand of cities and counties, ditto. Surely some standardization is possible and that, too, would produce a little growth.

I doubt that we’ll get much additional growth at all by tinkering with the marginal personal income tax rates but that seems to be the keystone of the administration’s tax reform policies.