One Thing Missing From the Biden Budget: Booming Growth

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, G.D.P. 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 forecast 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).

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 Biden administration projections 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. In other words, 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.”

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.

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.

Be the first to comment

Leave a Reply

Your email address will not be published.