WASHINGTON, June 21, 2017 – President Trump’s effort to increase economic growth has been somewhat thwarted by politics. He would like to solve the health care issue and reform the tax code, which is really what is needed to increase economic growth.
Despite that, he has already issued some growth inducing executive orders. Some economists believe that Trump’s policies could increase growth to 4% per year.
Many Americans are weary of forecasts by economists. And there is a good reason for that. For the past eight years, economic growth has averaged about 2% annually. This contrasts to the long-term average of about 3% and is far below the growth rate usually experienced after a recession.
After the deep recession in 1981, the federal government reduced tax rates substantially, for all Americans. Economic growth accelerated. In 1984 GDP grew at more than a 7.5% annual rate. From 2009 to 2014, the Obama administration economists gave the public rosy forecasts for economic growth that never materialized.
Obama’s administration forecasted growth of 4.6% in 2009, 4.3% in 2010, 4.4% in 2011, 4.1% in 2012, 3.6% in 2013 and 3.4% in 2014. Each year that estimate was twice the growth rate that actually occurred.
Strong economic growth is needed to solve the economic and many social problems we are experiencing today. Growth would provide an opportunity for Americans, raise their wages, reduce government spending, increase tax revenue, draw discouraged workers into the labor market and raise the standard of living. Growth would also solve the income inequality problem.
Is 4% growth possible?
Ruchir Sharma, chief global strategist at Morgan Stanley doesn’t think the economy can grow at a 4% annual rate. “Slow growth is the new norm,” she said. “Get used to it.” The Wall Street Journal recently said that the consensus view is that the economy “can’t possibly grow at 3%.”
Since there are two basic inputs into the economy, capital and labor, increases in those inputs, in the right environment, will accelerate economic growth. The productivity of those inputs depends on technology, human capital, natural resources, and entrepreneurship. Since the US mostly leads the world in technological advancements, makes significant investments in human capital and has a large supply of natural resources, we should already be experiencing higher growth rates.
Since the US mostly leads the world in technological advancements, makes significant investments in human capital and has a large supply of natural resources, we should already be experiencing higher growth rates.
The problem under the Obama administration was that economic growth was never a high priority goal. As such, Obama’s policies made it easier for a person to sustain themselves without working by easily getting foods stamps, welfare, and free healthcare. The result was a decline in the labor input, which can be seen by the labor force participation rate dropping to historical lows.
The input from capital also declined as Obama raised the income tax rates for the highest income earners who supply capital to the economy. Obama also raised the capital gains tax rate from 15% to 23.8% further reducing the input from capital.
Obama also added growth restricting regulations.
Trump has already issued executive orders that have removed some of the growth-restricting and counter-productive regulations.
“Every regulation should have to pass a simple test,” Trump said. “Does it make life better or safer for American workers or consumers? If the answer is no, we will be getting rid of it — and getting rid of it quickly.”
President Trump knows that plentiful and reasonably priced energy will help to fuel growth. As such he removed Obama era regulations on the energy sector.
“President Trump will unleash innovation across the nation, and it will allow our economy to grow, help lower energy costs for consumers, and help American workers,” said American Petroleum Institute President Jack Gerard.
Trump can’t do it alone.
There is a limit to how much Trump can accomplish through executive order, although he likely will do what he can to make food stamps, welfare and free health care more difficult to get for able bodied Americans. Congress, though, will have to act to really get the economy going. That will require them to fix healthcare and restructuring the tax code.
Yesterday, House Speaker Paul Ryan has said that he has a plan to reduce tax rates and simplify the tax code. Others in Congress, as well as President Trump himself, have offered similar plans. If Congress can pass a tax reform bill that does lower the tax rates for all Americans and adds new capital, growth will be stimulated.
A new health care law must be passed to replace the failing Affordable Care Act. The new law will have to lower costs, maintain coverage and reduce the burden on business.
If all of that happens, get ready to see some rapid growth in the US economy.