President Trump has been nothing if not bold in his promises to generate supercharged economic growth.
When a report showed a strong 3.3 percent growth rate last fall, he said, “I see no reason why we don’t go to 4 percent, 5 percent, and even 6 percent,” and he has spoken wistfully of emerging economies where growth can reach higher than that.
Even if you treat those musings as presidential bombast, his administration is making detailed projections that the economy will expand much faster in the decade ahead than it has in recent years — a forecast that underpins the Trump policy agenda.
The administration forecasts growth in the neighborhood of 3 percent through the next decade, compared with around 2 percent projected by private forecasters and the economists at the Congressional Budget Office and the Federal Reserve. If the administration’s forecast comes true, it will imply an economy 12 percent bigger in 2028 than that projected by the more cautious forecasts — an extra $2.8 trillion in economic activity that year, in today’s dollars.
But when you look closely at the details of the forecast, not all of it quite adds up. To come true, it would require some of the strongest improvements in productivity seen in decades, yet also require that interest rates not react the way they have historically when growth strengthens.
To understand some of the Trump administration’s buoyant assumptions and the apparent contradictions buried within them, it helps to go step by step on where economic growth comes from and how it relates to interest rates, employment and inflation.
Capital spending can fuel higher growth, but not forever
Think of the simplest arithmetic on how a single company can produce more goods and services. There are three ways:
Workers can put in more hours of labor. If the company hires more people, or has current workers do longer shifts, it can increase production.
The business can invest in more capital to make workers more effective. The…