What Would We Need for Persistent 5% Growth?

By :: June 15th, 2011

Last week, I argued that Governor Tim Pawlenty’s aspiration for 5% economic growth over a full decade, is implausible since the United States has achieved such steady growth only once since World War II.

Over at Economics One, Stanford economics professor John Taylor offers a more positive take, defending the goal and offering a recipe for achieving it: 1% from population growth, 1% from employment growing faster than the population, and 2.7% from productivity growth.

Add it all up and you get 4.7% growth, a bit short of Pawlenty’s target but close enough for government work.

That sounds great, and I hope it happens, regardless of who is president. But let’s take a moment to kick the tires on Taylor’s assumptions.

Two seem fine:

  • His population growth assumption is perfectly reasonable. Indeed, it matches the estimate used by the President’s Council of Economic Advisers in its most recent Economic Report of the President (Table 2-2).
  • His productivity growth assumption is optimistic, but realistically so. Nonfarm productivity has grown at a 2.7% pace, on average, since 1996. Few analysts see that persisting. CEA forecasts assume 2.3%, for example. But the U.S. economy has demonstrated that 2.7% productivity growth is possible for a decade or more.

Three other assumptions are problematic.

  • Taylor uses a very optimistic assumption about how much employment growth can exceed population growth. Today, about 58% of the working age population has a job. That woefully low level ought to rise as the Great Recession recedes. Taylor assumes that we can boost that ratio back to its 2000 level of almost 65%. But 2000 was the tail end of a technology boom that lifted America’s employment-to-population ratio to record heights. Since then, the working population has aged, so the employment-to-population ratio will be persistently lower even in good times. CEA thus forecasts that labor force changes will trim about 0.3% annually from potential growth in coming years. Getting the employment-to-population ratio back up to 65% thus won’t happen unless we have an even bigger boom than the late 1990s delivered.
  • Taylor assumes that workers will keep working the same number of hours that they do today. That sounds innocuous except for one thing: average hours have been declining. CEA estimates that trimmed 0.3% per year from potential economic growth from 1958 to 2007 and will trim another 0.1% per year from 2010 through 2021.
  • Taylor assumes that the rest of the economy will enjoy the same productivity growth as the nonfarm business sector. In reality, the other parts of the economy – most notably government – are lagging behind. CEA estimates that slower productivity growth outside the nonfarm business sector trimmed 0.2% from potential economic growth from 1958 to 2007 and sees an even bigger bite, 0.4% annually, in the coming decade.

Taylor’s scenario thus assumes that everything breaks right for the U.S. economy for a full decade, with remarkable job growth and remarkable productivity growth in the economy as a whole. Not impossible but, unfortunately, not likely either.

5Comments

  1. Michael Bindner  ::  3:14 pm on June 15th, 2011:

    One way to boost government productivity is to let the pre-Bush tax rates come back. Not only can spending rise, but lower benefits for investors make it that much less likely for them to pursue “productivity gains” that essentially promote unemployment and wage stagnation in a labor market best described as monopsonisticly competitive – even more so in a down economy.

    More unionization would also lead to more productivity, since workers making more money would spend more.

  2. AMTbuff  ::  3:49 pm on June 15th, 2011:

    The sooner we get the fiscal restructuring (aka bankruptcy from impossible government promises) behind us, the faster we can resume economic growth. Its foundational element is complete and convincing repudiation of all government benefit promises to the non-poor. This will happen by necessity after the government bond crashes if we don’t do it preemptively now.

    Eliminating today’s ominous financial clouds should be our first step.

  3. John Irons  ::  3:51 pm on June 15th, 2011:

    Note that the 1% population growth number assumes “high” levels of immigration. Native population growth is under 0.5 percent — to get to 1% you need to go to Cencus’ “High Net International Migration Series” here: http://www.census.gov/population/www/projections/2009summarytables.html

    Of course, under Taylor’s formulation, you could get to 5% by increasing immigration further (not sure Pawlenty would go there).

    Better target would be per-capita growth. Better yet would be median income growth so that we don’t over emphasize the impact of high-income earners. Best would be to have a more nuanced view of economic performance… on the other hand 5% is a nice round number.

    -ji

  4. Quick Hits: Debt Crisis Conference Follow-Up | The Policy Brief  ::  6:00 am on June 16th, 2011:

    […] and Hoover Institution Fellow John B. Taylor says we can reach 5% with the right policies in place. Donald Marron of the Urban/Brookings Tax Policy Center argues that reaching that level of growth and sustaining it over […]

  5. jonathan  ::  11:12 am on June 16th, 2011:

    But if you’re talking about Pawlenty’s “plan” as opposed to pulling some number out of a hat, then he makes no points at all. Taking Taylor’s post as given, as true, there is no reason at all to believe that Pawlenty’s “plan” would do anything of the sort. There is no reason to believe it will generate growth at all.

    This is a case of misdirection. I could argue we should have 10% growth and look here’s my policies to do that. I could also tell you that if you give me your money, I’ll give you a 35% return in 5 weeks and see here’s why. The first is a lie – like Pawlenty’s “plan” – and the second is the same lie in the context of a Ponzi scheme. If you fall the misdirection, you talk about the return you’ll get and not on the overall fact that it’s a lie.

    So I can see the case being made: a 5% growth rate is achievable and Pawlenty has policies he says will generate 5% so let’s elect him. Wow. I have a card in mind. Can you guess it?