One Simple Way Trump Can Get the Economic Growth He Wants

He isn’t going to like it: It’s more immigration.

President Donald Trump speaking into a microphone
Kevin Lamarque / Reuters

The Trump administration’s latest budget, which was released in mid-February, projects 3 percent annual GDP growth for much of the next decade. Most economists consider that forecast to be somewhere between wildly optimistic and historically absurd.

Why? Because consistent 3 percent growth, while the norm for countries like China and India, is exquisitely rare among developed economies. The average annual growth of America’s GDP since the Great Recession has been about 2 percent. Achieving Trump’s dream of growth would require some heroic supercharging of the economy.

There are several ways that economic growth can take off in a country like the U.S. First, the federal government has a wide arsenal of policies to combat recessions. When the economy slips into a funk, the feds can cut taxes and increase spending, thus running a large short-term deficit to combat slow growth. The Federal Reserve can slash interest rates to encourage corporations to borrow and spend more money than they otherwise would.

The most obvious problem with deploying any recession-busting policies now is, well, the U.S. isn’t in a recession. Quite the opposite: The economy is nearly at full employment. Interest rates are already low and most economists expect them to do nothing but rise in the next few years, which should discourage investment and growth. The Republican tax cut, combined with increased spending, will increase the deficit for the next few years—a rarity this deep into a recovery. It’s conceivable that those deficits might provide a bit of a boost. But sustained 3 percent growth isn’t likely.

So, how can a growing economy accelerate? Imagine a factory owner who wants to expand his shoe-manufacturing capacity. The owner can invest in shoelace machines and employee training to increase the per-worker productivity of the factory. He could also simply hire more workers. Just like that hypothetical factory owner, the economy’s growth fundamentally comes from just two things—productivity growth and labor-force growth.

The trouble with rapid productivity growth is that it’s a bit like permanent happiness—much easier to obsess over than to achieve. Indeed, economists obsess over productivity quite a bit, but they often disagree about what increases it, and, as some of them sheepishly admit, they’re not even all that great at measuring it. So far this century, productivity growth in the U.S. has been consistently low—even negative—since the end of the dot-com bubble. Several studies suggest that as rich countries like the U.S. get older, their productivity-growth rates naturally decline. (Since there’s a lot about productivity that puzzles economists, they aren’t entirely sure why this happens, either.) Designing a budget projection around a sudden surge in productivity is a bit like betting one’s life savings on the discovery of alien life on the moon. Not utterly hopeless. But certainly not advisable.

So, what’s the trick to raising GDP if productivity levels are subdued? More workers.

In the second half of the 20th century, economic growth in the U.S. rode a labor-force boom, after the Greatest Generation gave birth to the Boomers, then the largest generation in history. But in the last decade, that demographic wind has turned against the U.S.—and most advanced economies. As the Obama White House said in its 2013 economic report, “real GDP in the United States is likely to be permanently slower than it was in earlier eras because of a slowdown in labor force growth.” It’s not just that population growth is slowing down. What’s more, the share of Americans between 25 and 54 who are working—a statistic known as the “prime age labor participation rate”—has been generally declining since the late 1990s.

There are two simple ways to add more people to the U.S. population: more babies and more immigrants. The trouble with increasing fertility is that no advanced economy seems to have figured out how to do it. The U.S. is in the middle of a protracted lull in baby-making—but so is Scandinavia, and Western Europe, and Japan, and Russia. Low birth rates may simply be a consequence of gender equality and overall prosperity: As a nation’s share of educated women grows, its fertility rate tends to decline, perhaps because working women don’t have the time, money, or interest in raising the sort of large families that were so common (and necessary) in agrarian economies.

Productivity growth is unpredictable, and fertility growth is elusive. What’s left? Well, there’s immigration. Achieving higher growth without another baby boom or accelerating productivity isn’t difficult—if the country simply let in more immigrants each year, GDP growth would almost surely accelerate. More able-bodied workers means more work; more work means more production; and product is, after all, the final noun in GDP.

But Republicans are, quite publicly, pursuing the opposite strategy. The immigration legislation from Senators Tom Cotton of Arkansas and David Perdue of Georgia proposes a 50 percent cut to the nation’s immigration levels. The Trump administration, which has endorsed the plan, said it wants to reduce legal immigration to the United States by half within the decade.

This puts the Trump administration’s economic policies in conflict with its economic projections. Other countries looking to jump-start economic growth in a period of low fertility are liberalizing their immigration policies. Japan, which is further along the aging curve than the U.S., has revamped its immigration laws this century, doubling its share of foreign-born workers (from an admittedly measly 1 percent in the late 1990s to about 2 percent today). Along with strong monetary stimulus, that doubling of the foreign-born population has contributed to stronger growth than Japan would have had otherwise. As I’ve written, the economic case for maintaining and even increasing immigration levels in the U.S. is extremely strong.

The White House is discouraging talented people from immigrating during a period of low productivity and falling fertility while predicting a growth miracle. All budgets are fantasies. But there is a greater sin here than fantastical forecasting. And that is using magical growth projections to cover up for a small-minded immigration policy.