As part of the inauguration of President Donald Trump, the new White House rolled out a number of policy promises on its new website.
The position page on jobs and the economy makes a promise for the US economy that Trump may find pretty hard to keep.
“To get the economy back on track, President Trump has outlined a bold plan to create 25 million new American jobs in the next decade and return to 4 per cent annual economic growth,” reads the White House site.
The 4% GDP promise is one that Trump has made before, but now it is the official promise of the White House and the president.
The only problem is delivering on this promise will be incredibly difficult.
Currently, the US is stuck in a slow growth pattern since the financial crisis and has been unable to escape the 1.5% to 2.5% annual growth corridor over the past seven years. This is lower than the 3.1% per cent average annual GDP growth we’ve been experiencing since 1950.
While there are a number of reasons for this — sluggish corporate investment, Americans saving more of their income, low wage growth, and more — it would take a monumental task to return the US to nearly double its current annual growth rate.
Reversing the course of this will be difficult, especially in just four years, as other problems are large-scale issues like declining productivity that have persisted for decades and will require more than quick policy fixes.
Additionally, the president’s policies can have a limited impact of the economy given the global nature of the inputs of the US economy. Currently, the IMF projects world GDP growth to be 3.1% for 2016 and 3.4% for 2017, it is unlikely given the US economy’s global nature for it to outperform this by much.
The rest of Trump’s proposal outlines how 4% growth will be achieved by cutting the corporate tax rate and through deregulation.
According to the world bank, the proposed cut in corporate taxes would add just 0.3% to GDP growth this year and 0.8% next year.
On the flip side, Trump’s hard-line rhetoric on international trade and desire for companies to make products in the US has been projected by most economists to be a net drag on GDP growth. According to reports, Trump’s team is considering a 5% tariff across the board.
Citi chief economist Willem Buiter projected these policies could lead to a 1% annual decrease in US GDP growth.
An additional issue for Trump may be the Federal Reserve. Fed Chair Janet Yellen has changed her tone since Trump’s election, anticipating additional rate increases and saying that the Fed will not allow the economy to run hot as some had believed.
By increasing rates, this would mitigate some of the inflationary aspects of Trump’s agenda but also stifle growth for some time. In fact, the Fed’s own projection for GDP (which, sure, is just a projection) has it remaining well below 4% growth. This could imply that in order to keep inflation controlled, they expect to dampen economic growth.
All in all, it would be great if the US hit 4% GDP growth, but the balance of Trump’s agenda may make that promise difficult to deliver on.
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