President Trump’s first budget, released Tuesday, is not going to become law. First, because presidents’ budgets never become law, not the way they’re initially proposed. And second, because the specifics of Trump’s fiscal 2018 budget — enormous cuts to nearly every significant government program other than defense, Social Security and Medicare in order to pay for huge tax cuts that would go disproportionately to the wealthy — seem designed to alienate not just Democrats (at least a few of whom Trump needs to get his budget through the Senate) but also moderate Republicans and the public at large. Trump likely knows this; the White House released the budget while he is thousands of miles away on his first foreign trip as president.
Leave aside, then, the details of what Trump is proposing and focus instead on how he is proposing it: via economic projections that have little basis in reality.
Trump’s budget would preserve Social Security1 and Medicare, boost military spending, cut taxes and still somehow balance the budget within 10 years. How would he accomplish that feat? Not through spending cuts elsewhere in the budget; those cuts, though dramatic, don’t come close to making up the gap. Rather, Trump gets the budget to balance (at least on paper) by assuming that economic growth will accelerate dramatically to 3 percent per year by 2021; it was 1.6 percent last year. More economic growth means more tax revenue for the government: In rough figures, each 0.1 percentage point increase in the growth rate of the nation’s gross domestic product brings an additional $300 billion in tax revenue over a decade. So by forecasting faster growth, the administration is able to project trillions of dollars of extra revenue. (The “balanced budget” claim also relies on some fuzzy math: It effectively claims credit for the economic boost delivered by Trump’s tax cuts without accounting for how much those cuts would cost.)
Most media reports on Trump’s budget have dutifully reported that this 3 percent forecast is … aggressive. The Congressional Budget Office estimates that the economy will grow just 1.9 percent per year, on average, over the medium run; the Federal Reserve’s forecast is even more pessimistic, at 1.8 percent. But it’s worth taking a minute to understand just why most economists see 3 percent as so unrealistic. After all, as recently as the late 1990s, the U.S. economy routinely grew at a rate of 4 percent and even 5 percent a year.
The late 1990s, however, were a period in which the U.S. was experiencing both rapid growth in its labor force and rapid gains in the productivity of that labor force. (Productivity, in its simplest form, is just how much value the average worker creates in an hour.) Today, neither of those things is true. The aging of the baby-boom generation, combined with other factors,2 means that the labor force is growing much more slowly. Meanwhile, for reasons that aren’t well-understood, growth in productivity has slowed to a crawl. At the end of the day, there’s pretty much no way to boost economic growth without either getting more people to work (or having them work more hours) or improving their productivity, or both. (Another challenge for Trump: To achieve average growth of 3 percent, the economy must either avoid a recession for the entire 10-year period or grow even faster to make up for lost time. Neither is likely.)
In fairness to Trump, some of his proposals probably would draw more people into the workforce. Lower taxes, all else being equal, encourage people to work more, since they get to keep more of what they earn. Trump’s plans to slash disability benefits might force more people to work, since they wouldn’t be able to rely on payments from the government.3
But other of Trump’s proposals might discourage labor force growth. The most obvious are Trump’s immigration policies: His plans to crack down on illegal immigration, deport more undocumented immigrants and put new restrictions on legal migrants would limit what has been a key source of labor force growth in recent decades. Trump also wants to put new limits on the earned income tax credit, a source of cash for the poor that, unlike other safety net programs, provides a direct incentive for people to work. Trump’s proposal to create a new system of paid family leave, meanwhile, would literally pay new parents not to work immediately after the birth or adoption of a child — which might be a good idea, but would nonetheless make it easier for people to stay out of the labor force.
The effect of all of those policies on the labor force, however, is probably little more than a rounding error compared with the impact of the baby boomers’ retirement. Roughly 10,000 Americans turn 65 every day, and although baby boomers are working longer than past generations, that can only go so far — less than 1 in 5 Americans keep working into their early 70s. The Obama administration, in a report released three years ago, estimated that policies to encourage labor force participation could boost the share of adults in the workforce by about a percentage point. That’s a meaningful amount, but not nearly enough to generate the kind of economic growth Trump is calling for.
The other potential source of economic growth — productivity — is even trickier. The recent slowdown in productivity growth is something of an economic mystery. It seems odd that in an age of on-demand services, 3-D printing and automated factories, the overall economy is making, at best, modest gains in efficiency. Some economists have even suggested that official statistics are simply failing to capture the true extent of technology-driven productivity gains, and although that is not the consensus view, there is little agreement among economists as to whether the productivity slowdown represents a long-term shift or a temporary blip.
[newsletter-politics]The problem for Trump’s budget is that because no one is sure what’s causing the slowdown in productivity, it’s hard to forecast with any certainty when or if it will end. And Trump’s policies probably wouldn’t do much to help boost productivity: His budget proposes cuts to education, workforce training and scientific research, all of which can improve productivity over the long term.
In a briefing with reporters on Monday, White House budget chief Mick Mulvaney called it “sad” that the Obama administration, the CBO and others projected economic growth of less than 2 percent. “That assumes a pessimism about America, about the economy, about its people, about its culture that we’re simply refusing to accept,” Mulvaney said. “We believe that we can get to 3 percent growth.”
History may prove Mulvaney right. It’s possible that new innovations — artificial intelligence, perhaps, or self-driving cars — will act as an economic booster rocket, much as the industrial revolution did two centuries ago. It’s even possible that Trump’s policies will help unlock that potential. But economic projections are meant to be forecasts, not wishes. And based on the evidence we have now, there’s little reason to think the projections at the heart of Trump’s budget are grounded in reality.