Former chairman of President George W. Bush’s Council of Economic Advisors, from 2006 to 2009, Ed Lazear, has written an op/ed in today’s Wall Street Journal opining on what it would take for the U.S. economy to run at a 3.0% GDP pace. Not surprisingly, Mr. Lazear states that productivity and population growth must equal 3.0% for the U.S. economy to grow at a sustained pace of 3.0% (never mind the lofty 4.0% to 5.0% pace set forth by the Trump Administration).
Although Mr. Lazear’s analysis of what is required for the U.S. economy to run at a sustained pace of 3.0% GDP is not surprising, demographic trends gave us pause. Mr. Lazear states:
The Social Security Administration projects no increase in the U.S. population age 20 to 64 between 2020 and 2030. Without more labor hours, it will be difficult to achieve overall growth above 3%.
The proportion of working-age Americans who are employed, has fallen during this recession and recovery to 59.9% from 63.4%. Most alarming is the decline of two percentage points among Americans between 25 and 54. At least some of this is driven by government policies that subsidize leisure over work. One is the Affordable Care Act. The CBO estimated that ObamaCare “will reduce the total number of hours worked [annually], on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor.”
This is why healthcare reform is considered necessary for improved economic growth, by many economists. Mr. Lazear suggests keeping people in the workforce to a later age, stating:
The number of Americans 65 and over is expected to increase by 15 million between 2020 and 2030. Given longer life expectancies, it is important to encourage them to stay in the workforce. Changing the structure of Social Security benefits to reward later retirement could help.
This sounds good, but while modern medicine and better living habits can extend life, the deleterious and debilitating effects of aging on the human body reduce human productivity.
Mr. Lazear cites tax policies, such as expensing, could also help push the U.S. economy to a 3.0% annual growth rate, but concedes:
It’s unlikely, but possible with some luck on the technology front and if augmented by investment-friendly tax policy. These are big ifs.
In my opinion: Shoot for 3.0%, but be happy if GDP gets to 2.50% to 2.75%. I would be happy with that, but will the capital markets express the same joy.