President Biden’s budget proposal includes billions of dollars in clean energy, education and childcare – ideas that are being sold to increase America’s economic potential. One thing is not part of it: a real economic boom.
Under the assumptions backing the administration’s budget, GDP growth will be strong in 2021 and 2022 – but strong enough to bring the economy back on its pre-pandemic trendline and not rise above the course it is on the 2010s.
According to budgetary assumptions, GDP growth will drop to 2 percent per year in 2023 and to 1.8 percent per year by the mid-2020s. This is less than the average annual growth rate of 2.3 percent between 2010 and 2019.
The administration’s cautious forecast is in line with the forecasts of other forecasters, including the Congressional Budget Office and the private sector. However, this means that the White House in Biden does not – at least not formally – forecast the kind of rapid growth, the periods like 1983 to 1989 (with an average annual GDP growth of 4.4 percent) and 1994 to 2000 (4 percent ) marked. .
These increases helped, among other things, to move two presidents to comfortable re-elections.
This is in contrast to the approach Mr Biden has taken to publicly sell his agenda. The framework of his signature plans for infrastructure and family support was that they would enable the economy to become more dynamic and productive.
“There’s a broad consensus among economists left, right, and center, and they agree that what I’m proposing will help create millions of jobs and generate historic economic growth,” Biden said in one Address to Congress in April.
This is a remarkable contrast to the Trump administration’s approach – a gap between the presidential styles buried in Table S-9 of the two presidents’ budgets. The Trump administration’s final tentative budget proposal, released in February 2020, forecast the economy will grow around 3 percent a year in the 2020s.
If the Trump projections were to materialize, the economy would be more than 11 percent larger than the Biden projections envisaged by 2030. However, the Trump administration continued to deliver too little growth. During the three years of his presidency, GDP rose an average of 2.5 percent. The results are even weaker when you factor in the contraction of the economy in 2020.
The Biden government generally leaned toward a strategy of under-promising and lore, particularly with the introduction of vaccines.
Even before the budget was officially released, its growth projections were the subject of Republican attack. “The Obama-Biden administration famously accepted slow growth as America’s” new normal “while pursuing policies that sent jobs overseas,” Ways and Means Committee Republicans said in a blog post. “President Biden seems to be lowering the bar even further.”
Political volleys aside, it can be easy to overestimate both the ability of government policy to steer overall growth – and underestimate how much even small productivity gains can mean when put together over many years.
Updated
May 28, 2021, 12:18 p.m. ET
For example, in the 1980s the workforce grew much faster than it does today, aided by demographics and an increase in the number of women entering work. In the boom of the 1990s, a productivity boost resulted in large part from innovations in information technology that were not linked to government spending.
“We’re a really big economy where really big forces are driving GDP growth,” said Wendy Edelberg, director of the Hamilton Project at the Brookings Institution and former CBO chief economist.
Even these modest projections by the Biden government suggest that its policies will increase economic activity growth by a few tenths of a percent each year for a decade. This is important when comparing it to the growth one would expect if one just looked at demographics and historical averages of productivity growth. The forecast is inherently more optimistic about Mr Biden’s policies – and their potential for increasing productivity and the size of the workforce – than it may seem at first glance.
“The claim that your fiscal policies will increase growth by four tenths of a point seems optimistic, but I can see how they can get there,” she said.
Jason Furman, the former top economist in the Obama administration, said, “I think there’s one problem people have on their mind – more extravagant ideas about what economic policy can do and how quickly it can do it. When you talk about increasing productivity, you’re talking about compounding, which is going to be 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 that size, which lasts for many years, has a huge impact on the standard of living.
Some of the administration’s policies would inherently focus on the very long-term effects on the country’s economic potential. For example, additional money for community colleges could in the short term depress the size of the workforce, and therefore GDP, as more adults return to school. But it would then increase the production potential of these workers and thus the contribution to growth for the following decades.
The Biden White House is more optimistic about what is possible for American workers. After the recovery from the pandemic, an unemployment rate of 3.8 percent is forecast from 2023, which is slightly below the values forecast by the CBO (4.2 percent on average from 2023 to 2031) or the Fed (4 percent is the median) longer-term unemployment forecast the heads of state and government). It’s also lower than the 4 percent post-2023 unemployment rate that is included in the Trump budget.
This mirrors the lessons learned in 2019 when the unemployment rate was consistently below 4 percent without causing excessive inflation or other problems. It’s a welcome sign to anyone who thinks it’s a good thing to run a tight labor market – a high pressure economy, as Treasury Secretary Janet Yellen calls it.
Forecasts alone are no more than the paper they are printed on. A bold prediction of the coming boom wouldn’t mean much if it didn’t happen. And the world described in the Biden team’s forecasts is hardly bleak: low unemployment, low inflation, and steady growth are a nice combination that could describe much of the 2016-2019 period.
The question for Mr Biden is whether this is enough to qualify as a better deconstruction.
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