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Eric L. Davis: Economy doesn’t match expectations

On Friday, the Commerce Department’s Bureau of Economic Analysis will release its initial estimate of U.S. economic growth in the second quarter of 2017. The consensus among economists is that the April-to-June growth number will come in at somewhere between 2.4 and 2.6 percent. While this would represent a substantial improvement from the 1.4 percent growth in the first three months of the year, it is well below the 3 percent-plus target for GDP growth that is part of the Trump Administration’s economic forecasts.
Looking back at GDP growth numbers for the last five years, the best economic performance during that period was in 2014, when growth was 4 percent or better in both the second and third quarters. Since 2014, quarterly growth figures have tended to run slightly below or slightly above 2 percent, with the exception of the third quarter of 2016, the only period since 2014 when the 3 percent target has been exceeded.
Many economists believe that it is unrealistic to expect sustained growth of more than 3 percent a year. Participation in the labor force is at its lowest level in close to 40 years. Productivity in the American economy, over the last five years, is at the lowest level ever outside of a recession. Both the Federal Reserve and the Congressional Budget Office assume that GDP growth will average between 1.8 and 2.2 percent over the next several years.
One approach to increasing labor force participation — expanding the working-age population through legal immigration — is off the table because of both the Trump Administration’s nativist policies and Congress’ inability to act on major policy issues facing the nation. Technology could improve productivity, but perhaps at the expense of labor force participation. Changes in the retail industry, for example, allow large online merchants to substantially increase sales, but often at the expense of smaller brick-and-mortar establishments and their employees.
Well-designed tax reform could significantly improve economic growth, by, among other things, encouraging corporations to repatriate earnings now held abroad, or by providing incentives for individuals and firms to make their investment decisions on the basis of economic merit rather than tax advantages. However, the likelihood of Congress’ enacting comprehensive tax reform that improves economic growth may be no greater than its passing comprehensive immigration reform. An infrastructure program, which has yet to materialize in spite of Trump’s repeated references to it, could also help GDP growth.
The Administration has not yet engaged Congress on the details of tax legislation, while lobbyists are already lined up outside committee rooms to protect their clients’ deductions, subsidies and other tax preferences. Many Congressional Republicans seem more interested in tax cuts for the upper brackets than in tax reform that could improve economic performance by encouraging a more equitable distribution of income. The Republicans’ insistence on one-party solutions to major policy problems also means that some useful ideas from Democrats, on and off Capitol Hill, will not be incorporated into whatever tax legislation may end up passing.
Closer to home, the economists who provide revenue estimates for the Vermont Legislature and administration have once again lowered their revenue forecast for the current fiscal year, by a projected $29 million. These revenue downgrades have become an annual event.
In their meeting with Gov. Scott and legislative leaders last week, the economists noted the main reason they lowered the revenue target was that Vermont’s economy was not performing as well as they estimated when the budget was prepared. In December 2016, the economists assumed that Vermont’s GDP would grow at 2.4 percent in 2017, about the same as the national rate. That estimate has now been lowered to 1.1 percent, with 2018 and 2019, at 1.3 and 0.8 percent respectively, not showing any significant improvement.
Eric L. Davis is professor emeritus of political science at Middlebury College.

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