Download Will Trump Deliver a Growth Miracle

Will Trump Deliver a Growth Miracle?
Don’t Count on It
His policies promise marginal improvement at best. But
then, he could always get lucky again.
Photo: iStock/Getty Images
By
Alan S. Blinder
Jan. 22, 2017 5:14 p.m. ET
256 COMMENTS
The stock market has been turning cartwheels since Donald Trump’s election. They say
it’s the prospect of faster economic growth that got stock traders so excited. Really?
Mr. Trump has promised a huge jump in the growth rate of real gross domestic product,
to perhaps 3.5%, 4% or more. As he said in his Las Vegas debate with Hillary Clinton, “I
actually think we can go higher than 4%. I think you can go to 5% or 6%.” Good luck
with that.
Here’s an interesting historical fact. Since Harry Truman, the growth rate has fallen every
time a Republican president replaced a Democrat and has risen every time a Democrat
replaced a Republican. President Obama’s second term will finish with an average GDP
growth rate right around 2.2%. Merely beating that mark would be a remarkable
departure from history.
How could the Trump administration possibly achieve, say, 4% growth? Mainly by fiscal
stimulus, markets seem to think. So let’s start on the demand side.
You may recall that in 2009 Republicans claimed that fiscal stimulus doesn’t boost
growth at all. But that was then and this is now. Today, many of those same Republicans
will tell you that fiscal stimulus is very powerful, especially if it’s income-tax cuts. Oh?
We know that fiscal policy packs more punch when the economy has more slack and
when the spending or tax cuts are well targeted to produce demand. Both conditions
held, at least partly, in 2009. Neither will hold in 2017, with the economy
approximately at full employment and Mr. Trump’s proposed tax cuts heavily
skewed to the rich.
Besides, the Federal Reserve will be making sure the economy doesn’t overheat. Fed
officials must be shaking their heads in disbelief. For years they practically begged
Congress to help lift the economy out of the muck by stimulating demand; but Congress
did the opposite. Now, with stimulus no longer needed, Congress is poised to deliver it.
The predictable result will be higher interest rates.
OK, but couldn’t the Trumpian growth miracle emanate from the supply side instead?
Been there, done that, and it doesn’t work. A 2016 comprehensive review of the
voluminous scholarly research on the supply-side effects of tax cuts by economists
William Gale (a Democrat) and Andrew Samwick (a Republican), concluded that “U.S.
historical data show huge shifts in taxes with virtually no observable shift in growth
rates.” But cutting top bracket rates does redistribute income from the have-nots to the
haves. And that, I suspect, is why stock traders cannot contain their glee.
Someone will point out that there is more to Mr. Trump’s supply-side program than tax
cuts. That’s true. The idea of building more infrastructure is a good one, though nearterm stimulative effects would be small. Furthermore, as Alan Krueger and I wrote in
these pages last month, Mr. Trump’s plan to leverage private equity would not finance
the sorts of infrastructure projects we need. Fortunately, incoming Commerce Secretary
Wilbur Ross testified in his confirmation hearing that the Trump infrastructure plan
would include more than private equity.
Much the same can be said of erasing regulations. Some of them deserve to go, but only
magical thinking will produce large growth effects from doing so. More important, the
effects of deregulation depend on which regulations get killed. As one prominent
example, Mr. Trump has pledged to “dismantle” Dodd-Frank. Yes, the 2010 financialreform law is maddeningly complex and might even depress the growth rate a tad. But it
offers strong protections against the kind of calamity that befell the world in 2008. Some
environmental regulations may exact a small price in GDP growth, but they also help
ensure that we don’t get sick from the water we drink and the air we breathe.
Mr. Trump’s best hope for a supply-side miracle is sheer luck. Here’s why: Longrun growth is fueled mainly by technical progress. But the upward march of
technology—or, more precisely, its effect on GDP—slowed abruptly during the
George W. Bush administration and did not revive under President Obama.
Specifically, what economists call “multifactor productivity growth”—think of it as
getting more output from the same inputs—averaged a robust 1.6% per annum
between 1995 and 2005 but then plummeted to 0.4% per annum between 2005 and
2015. Economists have some hunches about what caused this, but no one really
knows.
Since no one knows why productivity growth collapsed, no one knows when it might
snap back. If President Trump is as lucky as candidate Trump, the multifactor
productivity growth rate might mysteriously bounce back to, say, its 1948-2005
average—which was 1.3%. Should that happen, 2.2% growth would turn into 3.1%
growth without the Trump administration lifting a finger—and without any help from
Vladimir Putin.
No sensible person would bet on such an outcome. But then again, no sensible person bet
on Donald Trump becoming president.
Mr. Blinder is a professor of economics and public affairs at Princeton University and a
former vice chairman of the Federal Reserve.