In major statements this fall, presidential candidate Donald Trump made aggressive claims about growing the U.S. economy. In a speech to the Economic Club of New York on Sept. 15, Trump asserted that his economic plan would raise U.S. gross domestic product (GDP) by more than 4 percent per year. The next month, he stepped up that claim during the third presidential debate saying: “And I actually think we can go higher than 4 percent. I think you can go to 5 percent or 6 percent.”
For the record, the United States has not seen consistent economic growth of 5-6 percent since the 1940s, or 4 percent since the 1950s and 1960s. Growth in the 1970s, 1980s and 1990s was only slightly above 3 percent. Since 2000, it has been less than that, at 1.6 percent. For the next decade, the nonpartisan Congressional Budget Office (CBO) has projected U.S. GDP growth of approximately 2 percent per year.
Trump’s proposed fiscal policy of tax cuts and increased government spending are not likely to result in a sustained increase in GDP expansion. We think real growth will be short of the 50-200 percent increase over CBO projections that have been promised. We would like to be wrong on this point, but to date we evaluate Trump’s fiscal proposals as unlikely to overcome major headwinds of high debt, low productivity growth and stagnant workforce growth. The latter two have not generally been negative headwinds, but rather have been strong tailwinds for growth for most of U.S. history — so strong that the pernicious negatives of debt were masked when debt-to-income levels were lower than exist today.
We wrote in MinnPost more than a year ago (“The Peril of America’s Private Debt,” May 26, 2015) about the negative effects of high levels of private debt relative to GDP (essentially an estimate of national income) on the U.S. economy. We said excessive private debt was a principal cause of the Great Recession and a significant drag on subsequent economic growth. Debt growth that over time reaches a high level relative to GDP implies that debt funds, on average, have been used for nonproductive investment, current consumption and debt service. Eventually the debt burden causes both demand and productivity to suffer, independent of demographic and innovation factors. Additionally, excessive debt levels serve to magnify economic downturns as debt transmits panic and contagion (as occurred during the onset of the Great Recession, for example). Empirical studies have tied high debt-to-income ratios to low economic growth, confirming these effects.
U.S. private debt relative to GDP has been increasing almost steadily for the past 65 years. Since 2000, government debt has also surged. This has resulted in total U.S. private and federal government debt accumulation in excess of $58 trillion, about equal to three times annual GDP or income. A major red flag is that the recent growth rate of total debt continues to exceed the growth rate of nominal GDP, signaling subpar investment outcomes and the burdensome weight of the accumulated debt load. Our worry is that Trump’s fiscal expansion will exacerbate this debt cycle and actually work to suppress long-term economic growth.
Japan is often cited as the best current example of how debt suppresses growth. Trump has to hope that under his leadership all debt-funded investment, both private and public (infrastructure), is highly productive beyond anything attained in the last 15 years. Grand entrances to airports and bridges to nowhere do not meet this standard. Neither does defense spending, even if otherwise necessary. Projects such as fixing the railroad bottleneck in Chicago, however, would be investments that could be evaluated in terms of positive economic returns.
The second persistent problem for economic growth is the reduced productivity growth of American workers and businesses. Many commentators have been lamenting the decline in productivity in recent years and its direct negative impact on economic growth. The lead article of the Wall Street Journal on Aug. 10, for example, was “Productivity Fall Imperils Growth.” The author observed that a 0.5 percent decline in productivity during the second quarter of 2016 was of serious concern, as hours worked increased faster than the output of goods and services. He added that Federal Reserve Chair Janet Yellen had “described the outlook for productivity growth as a ‘very difficult question’ that has divided economists.”
Last month the Washington Post’s Robert Samuelson cited U.S. Bureau of Labor Statistics data indicating that U.S. productivity growth from 2010-15 averaged only 0.4 percent per year, down from 1.9 percent during the 1990-2010 period and way down from 2.6 percent during the 1950-1970 period. Historically, productivity gains have been an important engine for wage increases as well as GDP growth. It is little wonder that neither have been robust in the past 25 years.
Unfortunately, it is not clear what is causing the serious decline in productivity. Samuelson reported that former Fed Chair Alan Greenspan believes that entitlement programs are draining funds from investment that could otherwise improve productivity. Debt is the vehicle through which this tradeoff operates. In addition, Greenspan believes economic and political uncertainty have restrained such investments.
Others have said, somewhat in the same vein, that we are lacking game-changing new technologies (such as electricity, cars or personal computers were when initially introduced). A recent Wall Street Journal article raised the problem of both 1) the lack of sufficient data and 2) the complexity of data that currently exist, that are needed to make computationally based productivity advances in both manufacturing and services. Today’s technology is hard and not easy for the current generation of senior managers to implement. In addition, social weaknesses, such as education deficiencies and drug addiction, also contribute to the decline in productivity growth.
How do Trump’s policies address these productivity problems? One of his proposed policies would operate only indirectly, through the immediate tax write-offs of new investments. But it is not apparent how those deductions would stimulate development of the technology necessary for needed productivity advances. And the impediments to technology development are not insignificant. Several studies, for example, have touched on the impact of the China trade on innovation. They found that the trade actually lowered U.S. innovation due to its pressure on profit margins, which led to cuts in domestic investment. This is the same thing as saying that if management has the choice between undertaking hard-to-implement new technologies or outsourcing labor to another country using current technology, the latter will always be selected. Trump’s nascent industrial policy of taking away the foreign outsourcing option (e.g., no Carrier move to Mexico) may be a vehicle to shift this balance for the better.
However, services delivered in the United States, such as education and health care, are not affected by such policies and are a drag on overall increased growth because they appear resistant to significant productivity improvements. (As one wag put it: “Who wants a faster haircut or a speedier dentist?”) Trump’s other focus on energy independence may be a way of increasing innovation and productivity. Our observations, however, are tentative. Trump has not brought forth formal proposals to improve productivity. It remains a major headwind to growth.
The third big trend that adversely affects economic growth and threatens Trump’s apparent intentions is the stagnation in the growth of the U.S. labor force. Recent articles have highlighted both the aging of the existing U.S. workforce and the leveling off of the number of new entrants. As an example, the annual rate of U.S. population growth has been declining for almost 25 years, from 1.40 percent in 1992 to only 0.77 percent in 2016. As this demographic reality sinks in, the relative decline in numbers of workers will have a direct negative effect on economic growth.
In addition, the decline in labor force participation by American men over the past 70 years has been a significant drag on economic growth. A recent book by conservative political economist Nicholas Eberstadt, “Men Without Work,” explores this problem. Eberstadt observes that 7 million American men in the prime working age group of 25-54 are not working at this time. The proportion of men aged 25-54 who are working declined from 94 percent in 1948 to 85 percent in 2016 — and for those without a high school diploma, 67 percent. (For comparison, Eberstadt states that the work rate for immigrant men in this age group is about 93 percent.) There has also been a modest decline (about 3 percent) in the work rate of women of this age group since 2000. Men and women not at work are not producing goods and services.
While the total U.S. workforce has increased over the years in more or less direct proportion to the overall population increase (subject to economic conditions and changes in labor participation rates), a significant part of that growth in recent years has been due to immigration. The current U.S. population is 324 million persons, which is about a 34 percent increase in 30 years (or very roughly 1 percent per year). Legal immigration during those 30 years has been roughly 1 million persons per year, approximately three-eighths of the increase. Absent legal immigration, the rate of growth would have been close to 0.6 percent instead of 1 percent — a very significant difference with a potentially large adverse effect on economic growth. There are also estimated to be about 11 million undocumented immigrants currently in the United States, of whom about 8 million are estimated to be working (according to the Pew Research Center).
Unsolved impediments, unrealistic claims
Increased private and public debt, reduced productivity growth and a stagnation of labor force growth, including a decline in the male labor force participation rate, have each adversely affected GDP growth over an extended period. These three trends result from difficult and complex problems. We have not solved any yet. It appears Trump favors policies that will increase private and public debt. We have not yet heard how he might address the second trend, falling productivity. He did, however, speak to the decline in labor force participation, and we hope he makes progress in addressing it. But if Trump deports undocumented immigrants and cuts the flow of legal immigrants who could be in the workforce, he will adversely impact economic growth.
In any case, Trump’s campaign claims to increase GDP growth by 4 percent — or even 5 percent or 6 percent — in the near future were extremely unrealistic. The more recent scaled-back claim of Treasury Secretary-designate Steven Mnuchin to “absolutely get to sustained 3 percent to 4 percent GDP” is still too rosy, absent an unforeseen miracle. Even if Trump does deliver a program of targeted growth-producing tax cuts and infrastructure projects that are economically productive, the three impediments discussed above will make it very difficult to achieve sustained growth materially in excess of 3 percent per year. Poorly designed tax cuts and stimulus would only increase the federal debt and result in a further drag on future growth.
Trump would be wise to address the complex impediments to growth that have built up over the years first, rather than make extravagant claims.
David Edstam of Edina is a retired senior finance executive. Steve Carlson is a former Edina resident (now in Connecticut) and retired finance lawyer and former Minnesota deputy commissioner of commerce (2011-12).
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