Don't Listen To The Naysayers — 3% GDP Growth Is Possible

Investor's Business Daily: Growth: One of the elements of President Trump's first budget that raises the hackles on economists and financial pundits is the projection that the economy can grow at a rate north of 3% a year. Not possible, they say. Sorry, but we've heard this before.

"If Trump thinks he can get more than 3% economic growth, he's dreaming," a Los Angeles Times headline guffawed.

"3% Growth? Really?!" sputtered FX Street.

Even the august Wall Street Journal got into the act: "Trump's 3% Growth Target Looks Out of Reach."

Do a Google search. Many others have said pretty much the same thing.

But we recall the early days of the Reagan administration, when economists and even some in his own party openly scoffed at the idea that Reagan's plans for broad tax cuts and fewer regulations would lead to strong economic growth, declining inflation and soaring job growth.

The scoffers were wrong.

In the 1990s, again, we wrote frequently about what we then called "The New Economy," which was able to grow much faster than in recent decades thanks to booming productivity growth from the internet revolution, capital gains tax cuts and welfare reform. We were frequently criticized for being Pollyannas when it came to the economy.

But, in fact, the 1990s boomed.

Today, after a decade without a single year of 3% GDP growth, we think the naysayers may once again be wrong.

The critics note — correctly — that the long-term elements of economic growth are 1) labor force growth, 2) productivity growth and 3) capital growth, also known as investment. And, they correctly note, none of them is growing fast enough to yield economic growth of 3%. In fact, they're not even growing fast enough to reach 2%.

Why? Today, the U.S. is in a pronounced productivity slowdown, with just 1% growth or less expected over the next 10 years. At the same time, labor force growth has slowed to just 0.2%, well below the levels of close to 1% during the postwar baby boom. And capital investment is expected to grow just 0.7%, down from 1% historically. Add it all up and it looks pretty grim.

Unfortunately, such an analysis treats labor force, capital investment and productivity as if they are immutable constants set in cement, and can't be altered by new policies. This is the big mistake that's made in every economic cycle.

President Trump has put forward specific policies that we think would break this demographic-economic logjam.

Take his plans for tax reform: In particular, cutting current excessively high corporate tax rates from 35% to 15% or 20% would have a — dare we say it? — "yuuuge" impact on business investment by raising the returns on investment significantly. And so would Trump's proposal to unfreeze all the cash that's now stockpiled in overseas accounts because of high U.S. tax rates.

By providing a one-time tax break on that $2.5 trillion or so now sitting in foreign banks, a flood of investment capital would return to the U.S. And companies that are now not expanding or hiring or investing would have enormous incentives to do so. Hiring would take off. So would training and education, since companies will need greater and greater expertise among their youngish staffs to compete.

Trump has also proposed letting businesses expense investments, rather than write them off over years. This too would encourage investment.

And make no mistake, business investment is the key to growth. Since 2009, real gross domestic investment has increased by just 3.5% a year, less than half the average rate since 1950. By deregulating, cutting taxes and restoring incentives to hire workers, we can restore business investment — the real engine of growth — to something approaching its long-term average.

As for the slowdown in the workforce, the share of working-age Americans age 20 to 64 with a job has fallen from more than 63% before President Obama took office to about 60% currently. For instance, he notes, the Congressional Budget Office has estimated that work disincentives built into ObamaCare alone will reduce the number of hours worked over the next 10 years by as much as 2% a year.

We are discouraging, as never before, people from working, while also discouraging businesses from hiring.

With upward of at least 12 million people willing to work but not having a job, the immediate upside potential for the labor force is much bigger than thought. In the long run, there are nearly 95 million adults of working age not in the labor force, but if the economy provided greater opportunities for working, earning and saving, many of those with skills and talents now lying fallow would come off the sidelines and return to work.

Over-regulation is another part of the growth logjam, costing the economy upward of $2 trillion a year, according to recent estimates. Trump's proposals to deregulate the economy will free up resources for companies to hire more workers and pay them more — boosting productivity in the process.

"Combined with often imprudent regulations crafted in the midst of crisis, the engine of American prosperity has slowed," Treasury Secretary Steve Mnuchin told the Senate Banking Committee last week. "I believe that a goal of 3% GDP or higher economic growth is achievable if we make historic reforms to both taxes and regulation."

We agree. Republicans now in control of Congress would be wise to start passing Trump's growth agenda and stop listening to those who say it's impossible. If they don't, 2018 might find some of them out of a job, and another excellent chance for real change squandered.
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Investor's Business Daily shared the above editorial which was recommended by Americans for Limited Government.

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