Sunday, January 28, 2018

Paul Krugman on longterm 3% growth

The Trump Administration and the Congressional Republicans have been promising that their magic tax cut will produce 3% growth over an extended period. That was part of the official assumption to minimize the projected deficit the tax cut produces.

Krugman explains why that is unlikely, to put it mildly (What the Economic Data Don’t Tell Us New York Times 01/28/2018). It involves an economics theory known as Okun's Law:
Potential output – the economy’s productive capacity – grows fairly smoothly. But recessions leave some of that capacity idle, and the economy can temporarily grow fast as that capacity is put back to use. The unemployment rate is an imperfect measure of idle capacity; still, there’s a strong relationship – Okun’s Law – between changes in the unemployment rate – capacity going into or out of use – and short-run economic growth
The unemployment rate is currently at a low point. Looking at the variable rates of quarterly growth and how 2017 fits into the Okun's Law trend, he concludes that a longterm 1.5% rate is far more realistic:
Why is potential growth so low? Unfavorable demographics are one big culprit: the baby-boomers are getting old (you kids get off my lawn), so the working-age population is barely growing. Oh, and cracking down on immigration is, you know, not likely to help on that front.

Productivity growth is also lackluster, despite all the hype about robots and all that. [my emphasis]
There is a lot more to say about unemployment and the constraints on labor participation rates, of course. But Krugman is giving a brief explanation about why the longterm 3% growth rate the Republicans are projecting/fantasizing is not a realistic expectation.

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