Thursday, May 19 2022

President Biden’s budget proposal includes billions of dollars for clean energy, education and child care – ideas sold for their potential to increase America’s economic potential. One thing it doesn’t include: an outright economic boom.

Under the assumptions underlying the administration’s budget, economic growth is strong in 2021 and 2022 – but strong enough only to bring the economy back to its pre-pandemic trendline, not to exceed the trajectory in which it was. throughout the 2010s.

Then, in 2023, the administration expects gross domestic product, the broadest measure of economic activity, to grow at a slower rate of 2%, then 1.8% per year until in the mid-2020s. This is lower than the average annual growth rate of 2.3% recorded from 2010 to 2019.

The administration’s outlook is consistent with the projections of other forecasters, notably at the Congressional Budget Office and in the private sector. But that does mean that the Biden White House does not expect – at least not formally – the kind of unbridled growth that characterized periods like 1983 to 1989 (with an average annual GDP growth of 4.4%) and 1994 to 2000 (4%). .

These two episodes coincided with much more favorable demographic trends. They also helped propel two presidents to comfortable re-elections.

If the new projections prove to be correct, it would imply two years of strong growth coupled with subdued inflation as the country recovers from the pandemic as the 2022 midterm elections approach, but comparatively weak growth at approaching the 2024 elections.

The sober estimate contrasts with Mr. Biden’s approach to publicly selling his program. The formulation of his signature plans for infrastructure and family support was that they will allow the economy to become more vibrant and productive.

“There is a broad consensus of economists on the left, right and center, and they agree that what I propose will help create millions of jobs and generate historic economic growth,” Biden said in a statement. address to Congress in April.

This is in stark contrast to the approach taken by the Trump administration – a gap between presidential styles buried in the S-9 table of the budgets of the two presidents. The Trump administration’s latest pre-pandemic budget proposal, released in February 2020, forecasted economic growth of about 3% per year through the 2020s.

If Trump’s projections materialize, by 2030 the economy would be more than 11% larger than what Biden’s projections envision. However, the Trump administration has consistently underperformed on growth. GDP grew an average of 2.5% during the three non-pandemic years of his presidency. The results are even weaker if you include the contraction of the economy in 2020.

Casey B. Mulligan, a University of Chicago economist who worked at Trump’s White House, said in an email that the forecast for reduced growth was similar to that recommended by career economics staff during the Trump years. “They consistently overestimated the growth of the Obama era and underestimated the non-pandemic growth of Trump,” but you couldn’t see it in the documents released during the Trump years “because normally politicians appointees like me have a say in what gets published. ”

The Biden administration has been more broadly inclined to a strategy of under-promise and over-delivery, particularly with the roll-out of vaccines.

Even before the official release of the budget, its growth projections became the subject of Republican attacks. “The Obama-Biden administration has recognized slow growth as the American ‘new normal’ while pursuing policies that have sent jobs overseas,” House Republicans said on the Ways and Means Committee in a blog post. “President Biden appears to be lowering the bar even further.”

Political bursts aside, it can be easy both to overestimate the ability of government policy to move the aggregate growth dial – and to underestimate what even small productivity gains can mean when they do. accumulate over many years.

In the boom of the 1980s, for example, the labor force was growing much faster than it is now, aided by demographic trends and an increase in the number of women entering the workforce. In the boom of the 1990s, an increase in productivity was largely the result of innovations in information technology unrelated to public spending.

“We’re a very large economy where there are really great forces shaping what happens to GDP growth,” said Wendy Edelberg, director of the Hamilton Project at the Brookings Institution and former chief economist at CBO.

Even these moderate projections from the Biden administration imply that its policies will increase economic activity growth by a few tenths of a percent each year over a decade. This is significant when compared to the growth one might expect just by looking at demographics and historical averages of productivity growth. The forecast is more inherently optimistic about Mr Biden’s policies – and their potential to increase productivity and the size of the workforce – than it might at first appear.

“To say that your fiscal policies will boost growth by four tenths of a point sounds optimistic, but I can see how they might do it,” she said.

Jason Furman, the former chief economist in the Obama administration, said, “I think there’s a problem people have in their heads – more outlandish ideas about what economic policy can do and what to do with it. how fast she can do it. When you talk about improving productivity, you are talking about composition which becomes a big deal for a long time. “

In other words, the difference of a few tenths of a percent in GDP growth might not mean much for a single year, but a gap of this magnitude that persists for many years has a big impact on the level. of life.

Some of the administration’s policies, by design, would focus on the very long-term impact on the economic potential of the nation. For example, additional funds for community colleges could actually reduce the size of the labor force, and therefore GDP, in the short term if more adults return to school. But this would then increase the production potential of these workers, and therefore their contribution to growth, for the decades to follow.

Conservatives, for their part, see the Biden program as likely to hold back growth, especially once tax increases and new regulatory measures take effect. Mr Mulligan, Trump’s adviser, said he believed the Biden program would reduce the country’s growth trajectory by about 0.8 percentage point per year from its trajectory during the Trump era. Douglas Holtz-Eakin, president of the American Action Forum, said he believes Mr Biden’s policies could create faster growth in the short term but slower growth in the long term because of taxes and spending. .

White House Biden is more optimistic about what is possible for American workers. After the post-pandemic recovery, he projects an unemployment rate of 3.8% from 2023, which is a little lower than the levels predicted by the CBO (an average of 4.2% from 2023 to 2031) or the Fed (4% is its leaders’ median longer-term unemployment forecast). It is also lower than the 4% post-2023 unemployment rate included in the Trump budget.

This reflects the lessons of 2019, when the unemployment rate was consistently below 4% without causing excessive inflation or other problems. It’s a welcome sign for anyone who thinks managing a tight labor market – an economy under high pressure, as Treasury Secretary Janet Yellen calls it – is a good thing.

Forecasts alone are no better than the paper they are printed on. A bold prediction of the coming boom wouldn’t mean much if it didn’t come to fruition. And the world depicted in Team Biden’s forecast is hardly gloomy: low unemployment, low inflation, and steady growth is a nice combination, and one that could describe much of the 2016 to 2019 period. .

The question for Mr Biden is whether that will be enough to qualify as a better rebuild.


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