It’s a sure thing that Donald Trump will spend much of his State of the Union boasting about the economy. So this seems like a good time for a refresher on some basic macroeconomics – and the reasons why the expansion of 2017, which continued the long expansion that began in 2010, is in no sense a justification for wildly optimistic growth projections looking forward.
As a reminder, the Trump Treasury department claims that tax cuts will pay for themselves because the economy will grow at almost 3 percent a year for the next decade. This growth projection didn’t come from any model; it was just pulled out of … well, you fill in the rest. But every time there’s a good quarter of growth, the usual suspects take time off from talking about deep state conspiracies to claim that the forecast is coming true. Why is this nonsense?
. . .
The thing is, however, that we’re currently close to full employment. The unemployment rate is historically low. Other indicators, like the rate at which workers are quitting jobs (a sign of how confident they are of finding new jobs) also point to a more or less full employment economy. Wage growth and inflation are still subdued, but it’s still unlikely that unemployment can fall a lot from here. This means that growth over the next decade will have to come from rising capacity, meaning growth in potential output.
So is there any sign that potential output growth is anywhere near 3 percent, or in fact that it has accelerated? No. Here’s Okun’s Law for the past decade:
