Nice 3% Target, Mr. Trump. How Will You Get There?

By Greg Ip Features Dow Jones Newswires

Great leaders, whether of sports teams, companies or countries, set audacious goals to spur followers on to great accomplishments. But the goal isn't enough: A leader also needs a credible path to achieve it.

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That's the problem with President Donald Trump's first budget. It sets a worthy objective of sustained 3% economic growth, but offers no rigorous plan, at least in what was released Monday, to back it up.

To listen to budget director Mick Mulvaney, the main thing holding the U.S. economy back is a bad attitude. Projections by the previous administration and the Congressional Budget Office of 1.9% long-term growth were "sad," he told reporters Monday.

"That assumes a pessimism about America, about the economy, about its culture, that we're simply refusing to accept. We believe that we can get to 3% growth and we don't believe that's fanciful."

Mr. Trump -- moving in the opposite direction of President Barack Obama -- promises lower taxes and less regulation, which should increase business investment and thus worker productivity. Moreover, a less-generous social safety net could prod some people back to work. More workers who are more productive are the ingredients of faster growth.

Yet there are good reasons independent economists think the U.S. can't return to its historic growth of 3%. The U.S. working-age population grew 1.2% a year from 1950 through 2000. With the baby boomers retiring and families shrinking, it will grow less than 0.3% a year over the next decade. To make a credible case for 3% growth, Mr. Trump has to identify some wellspring of workers or productivity, that is output per worker, that his predecessors have missed.

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Mr. Mulvaney thinks prodding many people off social safety-net programs and back to work will be good for them, and for growth.

In principle, that's true, but the magnitudes are doubtful. About half of household heads on food stamps and three quarters of those on Medicaid already work, says Robert Moffitt, an economist at Johns Hopkins University. At most, 13 million recipients of Medicaid and 6.5 million recipients of food stamps don't work (and the two groups overlap). The growth of people on disability insurance can be slowed with tougher eligibility, but experience suggests getting existing recipients off is almost impossible.

When welfare was cut off in the 1990s for single mothers able to work, it raised their employment rate by between 5% and 10%. That kind of effect on 13 million Medicaid recipients or 6.5 million food stamp participants would barely dent a labor force of 160 million. The effect on gross domestic product would be even more muted because, Mr. Moffitt notes, these workers have extremely low skills and thus productivity.

Nor would repealing the Affordable Care Act do the trick. The CBO estimates its health-insurance subsidies, which become less generous as wages rise, discourage work and would eventually reduce employment by 2 million. But little of that has been felt yet, and in any case, the Republican replacement plan maintains some of those subsidies.

One safety-net reform that would meaningfully expand the labor force would be a higher retirement age for Social Security and Medicare. But Mr. Trump promised not to touch either and his budget, it declares, "does not." He is also deporting more illegal immigrants, another restraint on labor force.

Lowering corporate tax rates in theory would make many more capital projects profitable, bolstering productivity meaningfully. But the budget doesn't include a tax reform plan. It merely assumes reform will be "deficit neutral."

Mr. Trump has proposed steep cuts to personal and corporate tax rates that even optimists think will add trillions to the deficit. The Tax Foundation, a pro tax-cut think tank, reckons lowering the corporate rate to 15% as Mr. Trump wants would only raise growth to 2.3% from 1.9%, and that boost would peter out once all the newly profitable capital projects had been undertaken.

Even that is probably high. Most large U.S. trading partners have slashed their own corporate rates but none has enjoyed a noticeable growth dividend as a result. Businesses generally report that tax rates are unimportant in deciding whether to invest; customer demand is paramount.

Mr. Trump is intent on limiting regulation. As with taxes, this goes in the right direction, but the benefits are potentially slim.

Sam Batkins of the American Action Forum, a conservative think tank, says the administration has already slowed the production of new rules, but actually repealing significant rules is hard because it requires Congress.

Marcus Peacock, a regulatory expert at George Washington University who advised Mr. Trump's incoming administration, recently told a conference, "They're looking for opportunities that are going to make existing regulations more efficient," such as through less paperwork.

Presidents are supposed to be optimists, and Mr. Trump would hardly be the first to fall short of his target. But a great deal is at stake with this one. Many of his other promises rely heavily on the 3% growth goal. For example, the budget is supposed to balance by 2027, with the help of a $600 billion a year in added revenue attributable solely to a more aggressive growth forecast. Until Mr. Trump presents a credible vision for achieving that growth, the rest of his promises are best viewed with deep skepticism.

(END) Dow Jones Newswires

May 23, 2017 10:57 ET (14:57 GMT)