Skip to main content
  • Experts
  • Events
  • Briefing Book
  • Resources
  • About
  • Contact
  • Support
  • Fiscal Facts
Twitter
Facebook
Logo Site
  • Topics
    • Individual Taxes
    • Business Taxes
    • Federal Budget and Economy
    • State and Local Issues
    • Campaigns, Proposals, and Reforms
  • TaxVox Blog
  • Research & Commentary
  • Laws & Proposals
  • Model Estimates
  • Statistics
  • Features
TaxVox: 
Federal Budget and Economy
RSS

The voices of Tax Policy Center's researchers and staff

Donald Marron
June 15, 2011

What Would We Need for Persistent 5% Growth?

Last week, I argued that Governor Tim Pawlenty’s aspiration for 5% economic growth over a full decade, is implausible since the United States has achieved such steady growth only once since World War II.

Over at Economics One, Stanford economics professor John Taylor offers a more positive take, defending the goal and offering a recipe for achieving it: 1% from population growth, 1% from employment growing faster than the population, and 2.7% from productivity growth.

Add it all up and you get 4.7% growth, a bit short of Pawlenty’s target but close enough for government work.

That sounds great, and I hope it happens, regardless of who is president. But let’s take a moment to kick the tires on Taylor’s assumptions.

Two seem fine:

  • His population growth assumption is perfectly reasonable. Indeed, it matches the estimate used by the President’s Council of Economic Advisers in its most recent Economic Report of the President (Table 2-2).
  • His productivity growth assumption is optimistic, but realistically so. Nonfarm productivity has grown at a 2.7% pace, on average, since 1996. Few analysts see that persisting. CEA forecasts assume 2.3%, for example. But the U.S. economy has demonstrated that 2.7% productivity growth is possible for a decade or more.

Three other assumptions are problematic.

  • Taylor uses a very optimistic assumption about how much employment growth can exceed population growth. Today, about 58% of the working age population has a job. That woefully low level ought to rise as the Great Recession recedes. Taylor assumes that we can boost that ratio back to its 2000 level of almost 65%. But 2000 was the tail end of a technology boom that lifted America’s employment-to-population ratio to record heights. Since then, the working population has aged, so the employment-to-population ratio will be persistently lower even in good times. CEA thus forecasts that labor force changes will trim about 0.3% annually from potential growth in coming years. Getting the employment-to-population ratio back up to 65% thus won’t happen unless we have an even bigger boom than the late 1990s delivered.
  • Taylor assumes that workers will keep working the same number of hours that they do today. That sounds innocuous except for one thing: average hours have been declining. CEA estimates that trimmed 0.3% per year from potential economic growth from 1958 to 2007 and will trim another 0.1% per year from 2010 through 2021.
  • Taylor assumes that the rest of the economy will enjoy the same productivity growth as the nonfarm business sector. In reality, the other parts of the economy – most notably government – are lagging behind. CEA estimates that slower productivity growth outside the nonfarm business sector trimmed 0.2% from potential economic growth from 1958 to 2007 and sees an even bigger bite, 0.4% annually, in the coming decade.

Taylor’s scenario thus assumes that everything breaks right for the U.S. economy for a full decade, with remarkable job growth and remarkable productivity growth in the economy as a whole. Not impossible but, unfortunately, not likely either.

Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.

Topics

Federal Budget and Economy

Tags

Economy

Share this page

https://tpc.io/1VEK6s3Share
  • ‹Read Previous The GOP, Ethanol, and the No-Tax Pledge
  • Read Next› How Tariff Policy Undermines Other Tax Policy Goals
  • Donate Today
  • Topics
  • TaxVox Blog
  • Research & Commentary
  • Laws & Proposals
  • Model Estimates
  • Statistics
  • Privacy Policy
  • Newsletters
Twitter
Facebook
  • © Urban Institute, Brookings Institution, and individual authors, 2022.