Commentary Type

Trump Is More Optimistic than Reagan, and That’s Not Good

Jason Furman (PIIE)


President Trump has outdone Ronald Reagan in at least one respect: unrealistically rosy forecasts for economic growth. In 1981, President Reagan's first budget predicted growth well above the consensus of private forecasters, in a bid to justify large tax cuts and increased defense spending. When the promised growth did not materialize, the deficit and debt ballooned.

Now Mr. Trump is leading the economy down a primrose path that is even more unrealistic. The administration's budget, released this week, assumes long-run growth of 3 percent, a full percentage point higher than the Blue Chip consensus of professional forecasters and 1.1 percentage points above the prediction of the nonpartisan Congressional Budget Office.

Few will be surprised that Mr. Trump is a brash budgeter, but the magnitude of his stretching here is breathtaking. Under the 24 budgets produced by Presidents Bill Clinton, George W. Bush, and Barack Obama, the long-run growth forecast never exceeded the Blue Chip consensus by more than 0.1 percentage point.

Defenders of Mr. Trump's optimism might argue that a continuation of 1.8 percent annual growth, the average since 2001, isn't inevitable. During the Reagan era, the economy grew 3.1 percent a year, purportedly spurred by tax cuts and regulatory reforms. A closer look, however, shows that the 1980s are not an argument for optimism—precisely the opposite.

There are two components to economic growth: adding more workers and increasing their productivity. Faster growth in the 1980s was the result of the former, an expanding workforce driven by two irreproducible demographic factors: the baby boomers' entering their prime working years, and women's continuing influx into the workforce. From 1980-90 labor productivity—the amount of goods and services the average worker can produce in an hour—grew only 1.6 percent a year, below the figure marked since 2001.

Today the baby boomers are hitting retirement. As a result, Reagan-era productivity gains of 1.6 percent a year would now generate economic growth of only 1.7 percent. It is certainly possible that productivity growth could soar even higher, or that workers who have dropped out of the labor force could rejoin it, driving growth up to or above 3 percent. But it is not very likely. My simulations, based on historical data, suggest a 1 in 25 chance of hitting this target over the next decade.

Of course the right set of policies can make a difference, and I have no objection to dynamic scoring in principle. The Obama administration, like its predecessors, incorporated the effects of its proposed policies into its budget calculations. The problem is that the Trump administration has locked in its assumption of 3 percent growth despite having yet to release detailed plans for tax reform and other proposals. One can debate the net economic effects of new trade restrictions, limits on immigration, deregulation and tax cuts. But the administration's forecast does not reflect even a cursory analysis of these plans. It simply presupposes 3 percent growth without explaining how the administration's policies will get the country there.

These forecasts are far from an exact exercise. Over the past eight years growth consistently underperformed the Obama administration's expectations, as well as most other projections. But the primary purpose of the larger economic forecast is to project the path of the federal budget deficit. Under the Obama administration the deficit generally was lower than we predicted, in part because interest rates and unemployment rates consistently fell faster than expected.

Compounding the Trump budget's problems is an elementary arithmetic mistake. Whereas Reagan explicitly included in his budget the cost of the tax cuts that were supposed to produce the claimed growth, Mr. Trump has omitted this cost (with the exception of an allowance for the repeal of the Affordable Care Act). As a result, the budget effectively double-counts the tax cut's economic effect—using it once to pay for the tax cut itself and a second time to boost revenue by $2.2 trillion, so as to show a lower projected path for the deficit.

Any business that made plans based on such Pollyannaish projections for sales growth—compounded by basic accounting errors—would invite bankruptcy. The president's budget assumes unrealistic 3 percent growth to justify tax cuts, increased defense spending, and a promise not to touch Medicare or the retirement portion of Social Security. In reality it will run up the deficit, slow economic growth and increase the national debt. Mr. Trump is digging a hole for himself with this budget. Congress should think twice before jumping in alongside him.

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