At his Thursday confirmation hearing, Steven Mnuchin, Donald Trump’s choice for Treasury secretary, predicted that Trump’s economic reforms could deliver growth of 3 to 4 percent per year. It’s a vow Mnuchin has made before and one that’s been echoed by commerce secretary nominee Wilbur Ross. And it sets out a clear, objective yardstick for judging the Trump administration’s economic policies over the next four years.
It’s a pledge that may come back to haunt the Trump economic team.
The US economy hasn’t consistently delivered growth higher than 3 percent per year in many years. And since the 1980s, each recovery has been slower than the one that came before it:
And note that these are the growth rates the economy enjoyed during recoveries. If you factor in the intervening recessions, the US economy has grown at an average rate of 2.5 percent over the past 25 years and 1.3 percent over the past 10.
One factor is slowing population growth. Americans are having fewer babies than we used to, and that means we’re adding fewer workers to the economy each year and producing less new stuff as a result.
Even on a per capita basis, economic growth has been disappointing. Economists aren’t sure why, but they have a number of theories. Last year, I ran down a list of eight leading theories on the subject. Some of them suggest there are steps that Trump could take to boost the growth rate:
- One theory holds that excessive regulation is holding back growth. If that’s true, Trump’s deregulatory initiatives might boost growth.
- Some economists argue that consolidation across a number of industries has slowed down growth rates. Trump talked a strong game on this issue during the campaign, denouncing a proposed merger between AT&T and Time Warner. But many experts expect Trump’s administration to be more favorable to mergers than his predecessor.
- Since taking the helm at the Federal Reserve, Janet Yellen has acted cautiously, steadily raising interest rates — and potentially slowing growth — as the economy has improved. Some economists believe that premature tightening by the Fed has held back growth. Trump could put this theory to the test by appointing a Fed chair who is committed to maintaining loose money until we get either growth or higher inflation.
- Research suggests that an aging population holds back growth on a per capita basis. Theoretically, Trump could address this issue by championing a big increase in legal immigration by young workers. But given his general skepticism about immigration, that’s not likely to happen.
But even if Trump takes several of these steps, there’s a possibility that he is simply fighting an economic force of gravity. Economist Robert Gordon has popularized the theory that the world is running out of ideas for major inventions.
In this view, the period from about 1870 to 1970 was an anomalous period when a series of major inventions — electricity, the internal combustion engine, indoor plumbing, and so forth — temporarily allowed the American economy to grow very rapidly. But at this point we’ve already reaped most of the gains from those inventions, he argues, and with few major inventions on the horizon, the prospects for further growth are diminishing.
If Gordon is right, then nothing Trump does (short of allowing massive immigration, which he isn’t going to do) could produce sustained growth higher than 3 percent per year. Economic growth is ultimately driven by two factors: population growth and technological innovation. And there’s only so much the government can do to affect either factor. If Trump found a way to boost fertility rates, it would still take 20 years before all those new babies entered the workforce and started expanding the economy.
Trump’s economic team evidently believes it can succeed despite these headwinds. They believe the slow growth of the Bush and Obama years represent bad policies, and better policies can get the economy going again. We’ll find out over the next four years if they’re right.