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Is 4% Growth Realistic?

leadRepublican Presidential candidate Jeb Bush, speaking at the Detroit Economic Club on Wednesday, laid out his platform for his presidential run. One aspect of this foundation was growth. “I don’t think the US should settle for anything less than 4 percent growth a year, which is about twice our current average. At that rate, the middle class will thrive again”, he stated. Only 4 of the last 16 presidents have seen growth at or above 4% during their terms: Truman, Kennedy, Johnson, and Clinton in his second term. President Obama, on the other hand, has presided over a period of weak growth, with a rate of 2.06 during his first term. Jeb Bush may be expecting a boom by the time he reaches office, as perhaps Obama and his administration has borne the brunt of the recovery and paved the way. In any case, a 4% growth rate is certainly an ambitious platform to run on.


  1. oliver2 oliver2

    He probably plans to get to 4% growth with tax cuts and by balancing the budget.

  2. Uh, if fiscal policy matters — we look at this during much of the remainder of the term — then tax cuts and balancing the budget work in opposite directions, and because we have a deficit that is a significant fraction of GDP, the next must be to slow growth. (In practical terms, the only way to balance the budget is through tax increases, but that’s another matter; we’re arguing economic theory, not campaign trail arithmetic under which 1+1 = 5.)

    Now, what do we need for 4% real growth? With (real) gdp growth = productivity plus the weighted average of capital growth plus labor force growth, then with productivity at 2% we need a combination of the others to add up to another 2%. With a labor force of 147 million, 1.6% growth on that front requires we add nearly 2.4 million jobs a year (1.6 x alpha of 0.6 gives a 1.0 percentage point contribution). Now an average of 200,000 a month is a little high, we’ve added 4 million jobs over the past year, but it’s not inconceivable. More realistically, we’ll get 1.3% growth or 0.8 points contribution. Now the capital stock has grown at 1.6% pa on average over the past 4 years; with alpha of 0.4 that gives us 0.7 points of growth. So my sense is that we’ll be lucky to see 3.5% growth.

    But remember Robert Gordon! Over the past 10 years US productivity growth averaged a mere 0.6%. If we assume we do a bit better, 1.5% then we can get 1.5% + 0.8% + 0.7% = 3.0%. This assumes the demand side cooperates, that the decrease in energy prices offsets the headwinds from Europe, China and Brazil and that nothing else happens (such as a continuation of the recent slowdown in housing markets). So I think 4% growth is (unfortunately) highly unlikely, and instead 2.5% is more realistic. Even that may be optimistic: we’ve averaged only 2.3% growth since the end of the period of negative growth during our Great Recession. Historically there’s been a rebound effect, but not this time. The American people are free to dream, and we want leaders who have “stretch” goals. We are not well served, however, if the goals are unrealistic.

    On Monday I’ll show how to find such data; it only takes a few minutes to do this sort of robustness check.

  3. HeeJu HeeJu

    Even with tax cuts and budget balance, I think there is limitation on boosting the growth rate to 4%. As we have been discussing in class, the current job market outlook is not so optimistic. This means that resource necessary for unemployment insurance will continue to increase. Additionally, increasing life expectancy and the retirement of baby boomers thus further straining the government revenue. I agree with Professor Smitka that 4% growth rate is highly unlikely.

  4. deplautt deplautt

    Jeb Bush seems to be sticking to his 4% story as he spoke at the Conservative Political Action Conference (CPAC) this past weekend looking to channel the growth “more like the ’80s in America”. His focus on economic growth is a good direction to be going in but most likely overly ambitious which may end up hurting his campaign in the long run.

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