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President Biden’s budget proposal includes billions of dollars for clean energy, education and child care — ideas being sold for their potential to increase America’s economic potential. One thing it does not include: an outright economic boom.
In the assumptions that underpin the administration’s budget, economic growth is strong in 2021 and 2022 — but strong enough only to return the economy to its prepandemic trend line, not to surge above the trajectory it was on throughout the 2010s.
In 2023, G.D.P. growth falls to 2 percent in the budget assumptions, then to 1.8 percent a year through the mid-2020s. That is lower than the 2.3 percent average annual growth rate experienced from 2010 to 2019.
The administration’s restrained outlook is consistent with projections by other forecasters, including at the Congressional Budget Office and in the private sector. But it means that the Biden White House is not — at least not formally — forecasting the kind of rip-roaring growth that characterized periods like 1983 to 1989 (with an average annual G.D.P. growth of 4.4 percent) and 1994 to 2000 (4 percent).
Those surges, among other things, helped propel two presidents to comfortable re-elections.
If the new projections were to prove accurate, it would imply two years of strong growth paired with moderate inflation as the nation recovers from the pandemic heading into the 2022 midterm elections, but then comparatively low growth in the run-up to the 2024 election.
The sober estimate contrasts with the approach Mr. Biden has taken to selling his agenda publicly. The framing of his signature plans for infrastructure and family support has been that they will enable the economy to become more vibrant and productive.
“There’s a broad consensus of economists left, right and center, and they agree what I’m proposing will help create millions of jobs and generate historic economic growth,” Mr. Biden said in an address to Congress in April.
It is a striking contrast with the approach taken by the Trump administration — a gap between presidential styles buried on Table S-9 of the two presidents’ budgets. The Trump administration’s final prepandemic budget proposal, published in February 2020, forecast that the economy would grow around 3 percent per year throughout the 2020s.
If the Trump projections materialized, by 2030 the economy would be more than 11 percent bigger than what the Biden projections envision. However, the Trump administration persistently underdelivered on growth. G.D.P. rose an average of 2.5 percent in the three nonpandemic years of his presidency. The results are weaker still if you include the contraction of the economy in 2020.
The Biden administration has been inclined more broadly to a strategy of underpromising and overdelivering, most notably with the rollout of vaccines.
Even before the budget’s official release, its growth projections became a subject of Republican attacks. “The Obama-Biden administration famously accepted slow growth as America’s ‘new normal’ while pursuing policies that sent jobs overseas,” House Republicans on the Ways and Means Committee said in a blog post. “President Biden appears to be lowering the bar even further.”
Political volleys aside, it can be easy both to overestimate the ability of government policy to move the dial on overall growth — and to underestimate how much even small gains in productivity can mean when they compound over many years.
In the 1980s boom, for example, the labor force was growing much more rapidly than it is now, helped by demographic trends and a rise in women entering work. In the 1990s boom, a surge in productivity resulted in large part from innovations in information technology, unconnected to government spending.
“We are a really big economy where really big forces are shaping what happens to G.D.P. growth,” said Wendy Edelberg, director of the Hamilton Project at the Brookings Institution and a former C.B.O. chief economist.
Even these moderate projections by the Biden administration imply that its policies will lift growth in economic activity by a few tenths of a percent each year over a decade. This is significant when comparing it with the growth that would be expected by simply looking at demographic factors and historical averages of productivity growth. The forecast is more inherently optimistic about Mr. Biden’s policies — and their potential to increase productivity and the size of the work force — than it might seem at first glance.
“Making the claim that your fiscal policies will boost growth by four-tenths of a point seems optimistic, but I can see how they could get there,” she said.
Jason Furman, the Obama administration’s former top economist, said: “I think there’s a problem that people have in their head — more extravagant ideas about what economic policy can do and how quickly it can do it. When you’re talking about productivity enhancement, you’re talking about compounding that becomes a big deal for a long time.”
In other words, the difference of a few tenths of a percent of G.D.P. growth might not mean much for a single year, but a gap of that size that persists for many years has a big impact on living standards.
Some of the administration’s policies, by design, would be focused on the very long-term impact on the nation’s economic potential. For example, additional money for community colleges might actually depress the size of the labor force, and thus G.D.P., in the short run if more adults go back to school. But it would then increase those workers’ productive potential, and thus contribution to growth, for the decades that follow.
There is also the potential that the sheer volume of spending coursing its way through the economy in the next few years, assuming President Biden’s proposed infrastructure and family support legislation bills pass, could create at least a temporary growth boost above what the administration’s economists project.
In the forecast, “growth is too slow in the near-term given the spending bump and too high in the long run given higher taxes and the size of government,” said Douglas Holtz-Eakin, president of the American Action Forum and a former C.B.O. director who has advised leading Republicans.
The Biden White House is more optimistic about what is possible for American workers. After the post-pandemic recovery, it projects a 3.8 percent unemployment rate from 2023 on, which is a bit lower than the levels forecast by the C.B.O. (an average of 4.2 percent from 2023 to 2031) or the Fed (4 percent is the median longer-run unemployment forecast of its leaders). It’s also lower than the 4 percent post-2023 jobless rate included in the Trump budget.
This reflects the lessons of 2019, when the jobless rate was consistently below 4 percent without causing excessive inflation or other problems. It’s a welcome sign for anyone who thinks that running a tight labor market — a high-pressure economy, as Treasury Secretary Janet Yellen calls it — is a good thing.
Forecasts, on their own, aren’t worth more than the paper on which they are printed. A bold prediction of the boom that’s coming wouldn’t mean much if it didn’t materialize. And the world described in the Biden team’s forecasts is hardly a gloomy one: Low unemployment, low inflation and steady growth is a nice combination, and one that could describe much of the period from 2016 to 2019.
The question for Mr. Biden is whether that will be enough to qualify as building back better.
Source: The NY Times
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