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How fast will the US economy grow? When mainstream forecasters consult their crystal balls, they typically see real economic growth around 2 percent annually over the next decade. The Congressional Budget Office (CBO) and midpoint estimates of Federal Reserve officials and private forecasters cluster in that neighborhood.

When President Trump looks in his glowing orb, he sees a happier answer: 3 percent.

That percentage point difference is a big deal. Office of Management and Budget director Mick Mulvaney recently estimated the extra growth could add $16 trillion in economic activity over the next decade and almost $3 trillion in federal revenues.

But could our economy really grow that fast? Maybe, but we’d need to be both lucky and good. We’ve grown that fast before. But it’s harder now because of slower population growth and an aging workforce. And there are signs that productivity growth has slowed in recent years.

To illustrate the challenge, I’ve divvied up past and projected economic growth (measured as the annual growth rate in real gross domestic product) into three components: the growth rates of population, average working hours, and productivity.

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The link between population and growth is simple: more people means more workers generating output and more consumers buying it. Increased working hours have a similar effect: more hours mean more output and larger incomes. Hours go up when more people enter the labor force, when more workers find jobs, and when folks with jobs work more.

Productivity measures how much a worker produces in an hour. Productivity depends on worker skills, the amount and quality of capital they use, managerial and organizational capability, technology, regulatory policy, and other factors.

As the first column illustrates, the US economy averaged 3 percent annual growth over more than six decades. Healthy growth in population and productivity offset a slight decline in average hours. Of course, that six-decade average includes many ups and downs. The Great Recession and its aftermath dragged growth down to only 1.4 percent over the past decade. In the half century before, the United States grew faster than 3 percent.

Mainstream forecasters like the CBO and the Federal Reserve expect slower future growth along all three dimensions. People are having fewer children, and more adults are moving beyond their child-rearing years, so population growth has slowed. Our workforce is aging. Baby boomers are cutting back hours and retiring, and younger workers aren’t fully replacing them, so average working hours will decline. Productivity growth has slowed sharply in recent years, for reasons that are not completely clear. Productivity is notoriously difficult to forecast, but recent weakness has inspired many forecasters to expect only moderate growth in the years to come.

Proponents of President Trump’s economic agenda offer a rosier view. Four prominent Republican economic advisers—John F. Cogan, Glenn Hubbard, John B. Taylor, and Kevin Warsh—recently argued that policy, not just demographic forces, has brought down recent growth. They claim supply-side policy reforms—cutting tax rates, trimming regulation, and reducing unproductive spending—can bring it back up. They argue that encouraging investment, reinvigorating productivity growth, and drawing enough people into the labor force to offset the demographic drag would generate persistent 3 percent growth.

Many analysts doubt such supply-side efforts can get us to 3 percent growth (e.g., here, here, here, and here). Encouraging investment and bringing more people into the labor force could certainly help, but finding a full percentage point of extra growth from supply-side reforms seems like a stretch. Especially if you plan to do it without boosting population growth.

The most direct supply-side policy would be expanding immigration, especially among working-age adults (reducing our exceptional rates of incarceration could also boost the noninstitutional population). But the Trump administration’s antipathy to immigration, and that of some Republicans in Congress, pushes the other way. Cutting legal immigration in half over the next decade could easily take 0.2 percentage points off future growth (see this nifty interactive tool from ProPublica and Moody’s Analytics). Three percent growth would then be even more of a stretch.

Another group of economists believes that demand-side policies—higher spending and supportive monetary policy—could lift growth above mainstream forecasts.

One trio of economists took a critical look at past efforts to forecast potential GDP growth, a key driver of long-run growth forecasts. They conclude that forecasters, including those at the Federal Reserve and the CBO, have overreacted to temporary economic shocks, overstating potential growth when times are good and understating it when times are bad. We’ve recently had bad times, so forecasters might be underestimating potential GDP almost 10 percent. If so, policies that boost demand could push up growth substantially in coming years. (For a related argument, see here.)

So where does that leave us?

Well, every crystal ball (and glowing orb) is cloudy. We should all be humble about our ability to forecast the economy over the next decade. Scarred by the Great Recession and its aftermath, forecasters may be inadvertently lowballing potential growth. Good luck and good supply- and demand-side policies might deliver more robust growth than they anticipate. But those scars remind us we can’t always count on good policy, and luck sometimes runs bad.

We can hope that luck and good policy lift growth to 3 percent. But it’s prudent to plan for 2 percent, and pray we don’t fall to 1 percent.

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Mexico won’t willingly write the check for Donald Trump’s wall. So the president is hunting for a way to make Mexico pay.

That search isn’t going well.

Last week, press secretary Sean Spicer floated one idea: the destination-based cash flow tax. The DBCFT taxes imports and exempts exports. We import about $50 billion more from Mexico each year than we export. So the DBCFT could raise substantial revenue from trade with Mexico. Maybe Trump could earmark that money to pay for the wall?

Such earmarking sounds superficially plausible. But it has fundamental budget and logic flaws.

The budget problem is that Congress has other plans for that money. The DBCFT is the centerpiece of the House proposal for tax reform. House leaders insist reform will be revenue neutral. Any new money from the DBCFT will offset money lost from cutting business taxes. That leaves nothing for Trump’s wall.

Broader point: You can’t pay for anything with revenue-neutral tax reform (or, for that matter, with revenue-losing “tax relief”).

Trump may be more concerned with messaging than with these budget niceties. So he could still try to rhetorically link the DBCFT to paying for the wall.

But that leads to the logic problem. We run trade deficits with many countries. If the DBCFT makes Mexico pay for the wall, what does it make China pay for? Germany? Japan? Vietnam? And what about countries like Hong Kong, where America has a trade surplus? Are we paying them for something? And what happens when the wall has been paid for? Does Mexico become exempt from the DBCFT? Or does it start paying for something else?

These questions have no sensible answers. The DBCFT treats Mexico like every other nation, so it can’t make Mexico pay for the wall.

Some observers initially thought Spicer was suggesting a new tariff on Mexican imports. Most economists rightly hate that idea and fear it could spark retaliation against American products. And it seems clear that Spicer really meant the DBCFT. But let’s give that interpretation some credit. A tariff, unlike the DBCFT, could raise new revenue specifically from trade with Mexico.

But a tariff still faces a fundamental economics problem. A tariff doesn’t work like Las Vegas. Just because it targets Mexican products doesn’t mean the tax stays there. Instead, businesses will raise prices, passing some tax on to American customers. Consumers would pay more for cars, TVs, and avocados. Businesses would pay more for auto parts, trucks, and telecommunications equipment. Some burdens would decline over time as businesses shift to suppliers outside Mexico. But some shift of the burden to Americans is inevitable. A tariff would thus make American consumers and businesses, not just Mexicans, pay for Trump’s wall. And that’s without any retaliation.

If President Trump wants to target Mexico alone, he needs another strategy. Neither the DBCFT nor a tariff can make Mexico pay for the wall.

 

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