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posted on 03 December 2016

Sustained 3 To 4% GDP Growth Is A Huge Stretch

from Lakshman Achuthan, Co-Founder and Chief Operations Officer of ECRI

Some of Mr. Mnuchin’s proposals are good things and probably will help, but if you look at the foundational math it doesn’t add up. Mr. Mnuchin promised “sustained 3 to 4% GDP" growth. Let’s split the difference and call it 3½%. That’s a huge stretch because the building blocks of potential GDP growth add up to only around 1%:

Potential labor force growth is projected to be less than ½%, plus productivity growth of about ½% for the past six years equals only 1% longer-term GDP growth.

Demographics are set in stone, so to get to 3½% GDP growth promised, productivity growth would have to be 3%, which is six times last six years’ average.

So, while Mr. Mnuchin promised “the largest tax change since Reagan," we’d need to roughly double the productivity growth of the Reagan years. You’ll forgive me for being a bit skeptical.

The Litmus Test for any policy: will it boost long-term productivity growth?

Why has productivity slumped? Essentially, capital investment has plunged, relative to hours worked, as never before. That is what needs to be reversed. For more details, please see “Low Labor Productivity Growth The Main Culprit."

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