God, I can’t wait for the primary to be over, one way or the other. But it does seem to me that I should talk a bit about what a progressive reasonably can say about prospects for economic growth under a better policy regime.
There are, I would argue, three numbers that are relevant. First, there’s the rate of growth of the economy’s supply-side potential — the rate it can grow at a constant rate of unemployment. Second, there’s the size of the output gap — the amount of extra output we could gain by getting up to full employment. Third, there’s the extent to which we can accelerate the rate of growth of potential.
On the first number, look at the chart: over the past five years US growth has fluctuated around 2 percent, while unemployment — both the conventional number and the broader U6 number — has gradually declined. This strongly suggests potential growth under 2 percent. Why so slow? Productivity has been sluggish, and the working-age population is growing much more slowly than it used to as baby boomers hit retirement age.
What about the output gap? Wage growth is still weak and inflation fairly low, suggesting that unemployment can go significantly lower from here — maybe down to the 4 percent of the late 1990s, possibly even lower. The standard Okun’s Law relationship would say that bringing unemployment down another percentage point would add 2 percent to real GDP. Maybe, maybe we could argue for an extra-large pool of discouraged workers that raises this to 3. That’s a lot of foregone output in an absolute sense.
However, it doesn’t make a huge difference when we’re talking about longer-term growth prospects. Closing a 3-point output gap over 10 years raises the 10-year growth rate by only 0.3 percent. 2016 isn’t like 1933, when the output gap was probably around 30 percent, making a huge growth rate over the next decade possible when wartime mobilization finally brought full employment and then some.
Finally, how much can we reasonably project for a rise in potential growth? A big increase in infrastructure investment would certainly help. Other progressive priorities — while good things! — would be at best a mixed bag in terms of their effect on measured GDP. For example, guaranteed pr-K and childcare might free more parents to stay in the paid workforce; on the other hand, better benefits would (and should) free some people to cut hours to focus on their families.
And nobody knows the secret of raising productivity growth. In general, any economist talking about potential growth should start from a position of modesty: nothing in what we know or have experienced in the past justifies making big promises. By all means we should try everything we can think of — but our policies should make sense even if it turns out that the effects on long-run growth are modest.
What I would say is that it’s unreasonable to assume growth over the next 10 years more than a fraction of a percentage point above 2 percent — say 2.5 percent at the upper end. Maybe we can do better, but we shouldn’t count on it.
And let me say that the great thing about a progressive agenda is that it doesn’t require big growth promises to make it work, because the elements of that agenda are good things in their own right. Conservatives need to promise miracles to justify policies whose direct effect is to comfort the comfortable (cutting taxes on the rich) and afflict the afflicted (slashing social insurance); progressives only need to defend themselves against the charge that doing good will somehow kill economic growth. It won’t, and that should be enough.