It’s one thing to hear that the White House, unlike pretty much every other forecaster, sees economic growth of over 3% every year for the next half decade.
It’s another to visualize it. This chart shows the big gap between the White House view of the U.S. economy, the nonpartisan Congressional Budget Office’s, and Wall Street’s (taken from the Blue Chip-compiled consensus, which is the average of about 50 private forecasts).
There’s about a half-point gap in this year’s projection of the U.S. economy, widening to about a full point over the next decade.
That’s not to immediately dismiss the views of Larry Kudlow, Kevin Hassett and the rest of the White House number crunchers. For the White House view to be right, though, productivity would need to accelerate.
The good news for the White House is that productivity has accelerated in three of the last four quarters, reaching 1.8% year-over-year in the October-to-December period of 2018.
If productivity can average somewhere above 2% annually, then 3% growth per year is not an absurdity, particularly if labor-force participation can improve, say by tackling the opioid addiction crisis that is weighing on male participation, or improving child-care availability that is hurting female participation.
That said, there’s a reason CBO — and the scores of economists in the private sector — don’t expect productivity to rebound. Taking out the two readings above 3% right after the Great Recession, and the only concerted period with productivity above 2% recently was in the 1998-to-2005 period of dramatic technological innovation.
Prior to that, the 1960-to-1973 era also had sustained productivity improvements, before inflation took root.
So for Kudlow and Hassett to be right, an era of tax cuts and deregulation will need to lead to a substantial pickup in business investment. And that pickup hasn’t materialized so far, and is not one that many outside of 1600 Pennsylvania Avenue forecast.
