Trump’s puffery squanders an opportunity for US growth - Financial Times

Trump’s puffery squanders an opportunity for US growth

by: Martin Sandbu

When the Trump administration released its budget proposal this year, Free Lunch warned that “serious people should hesitate before commenting” because of its habit of putting style before substance in all policy announcements. The US Congressional Budget Office does not have the choice, however, and last week it released its analysis of the plan. 

Free Lunch focused on the composition of the tax and spending choices and the worldview they revealed (military good, diplomacy and economic development in poorer US regions bad). The impartial CBO emphasises the drier macroeconomic aggregates, in particular its estimate of the budget deficit over the 10-year horizon of the plans. And on this, it is poles apart from the administration. The Trump budget projects the deficit will be fully closed in 10 years. The CBO sees it stabilising in absolute terms at $700bn, in a range of about 3 per cent of the economy. That is admittedly less than the CBO’s baseline comparison of no policy change.

This is a big difference, although not one that makes material difference to fiscal sustainability. On the CBO projection, the public debt burden stabilises at about its current level. The more interesting contrast lies in why the CBO projects a different deficit path. By its own account, this is almost entirely because “the Administration projects higher revenue collections — stemming mainly from a projection of faster economic growth. CBO and the Administration use different economic forecasts, reflecting differences in projections of economic activity under current law and also economic effects that the Administration attributes to its proposals.”

The CBO, in other words, has refused to go along with the White House and the Treasury’s breezy claim that growth will increase because of its policies. That means it has been one of few institutions to stick to reason. “Because the details on many of the proposed policies are not available at this time,” the CBO says, it “cannot provide an analysis of all their macroeconomic effects or of the budgetary feedback that would result from those effects.” It sees nothing in the president’s policy plans, in other words, to make a higher growth rate likely.

That much is unsurprising. The US executive branch is led by a person who over a lifetime has placed puffery above truth. But it returns us to the interesting question of whether the US economy could grow at a faster rate if serious policies were put in place to make that happen. Could an administration that applied itself more to proper policymaking lift the growth rate from the 2 per cent or so the CBO and many other observers project to the 3 per cent on which it now premises its budget?

There are plenty of reasons to think that is the case — at least for the medium run, if not permanently.

One such reason is that there are signs the economy is still below its potential rate of economic activity at the moment — in which case simply adding more monetary and fiscal stimulus would boost the growth rate until it catches up. Gavyn Davies’s latest analysis of the US inflation slowdown is important in this regard. If price growth is, as he argues, still not picking up but rather moving away from the Federal Reserve’s target, it stands to reason that a stronger stimulus of aggregate demand would show up in real output growth and not runaway inflation.

Another is that even at full capacity, we may be too pessimistic about the potential for a higher growth rate. I have explained why there is much more hidden slack in the labour force participation than most people think. Put differently, there is significant scope for pulling more of the US population into the labour force (especially the elderly), which would produce stronger growth in the transition even if productivity growth doesn’t pick up. 

And then there is productivity growth. The slowdown, not just in the US but across the industrial world, has occasioned widespread pessimism about the growth potential of these economies. But new research by Nicholas Crafts and Terence Mills shows that recent performance is a poor guide to future productivity growth: “Indeed, forecasting on this basis would have missed the productivity slowdown of the 1970s, the acceleration of the mid-1990s, and the slowdown of recent years — in other words, all the major episodes during the period!”

The upshot is that it may be natural for human observers to expect the recent lacklustre growth performance to continue, but there is little rational justification to privilege this prediction over others. We simply know very little. All the more reason to try out policies that can sensibly be thought to accelerate economic growth.

This admonition not to be too fatalistic does not, however, redeem the Trump administration. The CBO’s implication holds: Trump and his team have done little to make higher growth happen than to claim, for no reason, that it will happen. That adds another basis on which to criticise this administration: its economic policy is so far one of wasted opportunity.