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The Hot Debate Over 4% Growth In The Economy

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
June 23, 2015

IN THIS ISSUE:

1.  Jeb Bush Promises 4% Economic Growth if Elected President

2.  Argument #1: America’s 4% Growth Days Are Over

3.  Argument #2: How America Can Return to 4% Growth

4.  Larry Kudlow: Jeb Bush Is Right About 4% Growth

5. Conclusions – Will Voters Respond in 2016?

Jeb Bush Promises 4% Economic Growth if Elected President

Former Florida governor and GOP presidential hopeful Jeb Bush formally announced his campaign on June 15 with a promise that, if elected president, he would return the nation to 4% economic growth. Here’s what he said:

“So many challenges could be overcome if we just get this economy growing at full strength. There is not a reason in the world why we cannot grow at a rate of four percent a year. And that will be my goal as president - four percent growth, and the 19 million new jobs that come with it.

Economic growth that makes a difference for hard-working men and women – who don’t need reminding that the economy is more than the stock market. Growth that lifts up the middle class – all the families who haven't gotten a raise in 15 years. Growth that makes a difference for everyone.

It's possible. It can be done.”

That’s a huge promise, especially with the economy stuck at around 2% growth, and one he may regret if he indeed becomes our next president (which I doubt). In any event, Bush’s 4% promise has sparked a spirited debate on the right and the left.

Pundits on the left almost unanimously agree that 4% growth is a pipe dream and believe we should be satisfied with 2-2½% GDP growth. Some on the right believe that 4% growth is indeed possible and some even offered specific steps to get there. Today, I will try to summarize both positions and draw some conclusions.

Before we get into the arguments, I should point out that Jeb Bush was a two-term governor of the state of Florida from 1999 to 2007. During that time, he claims to have done the following:

"We made Florida number one in job creation and number one in small business creation. 1.3 million new jobs, 4.4 percent growth, higher family income, eight balanced budgets, and tax cuts eight years in a row that saved our people and businesses 19 billion dollars. All this plus a bond upgrade to Triple-A compared to the sorry downgrade of America's credit in these years.”

I obviously can’t vouch for any of those claims but they don’t seem to be challenged in the media. The question is, just because he apparently did those things in Florida, does that mean he could do them for the country at large? Here are the arguments.

Argument #1: America’s 4% Growth Days Are Over

Jeb Bush promised to get the US economy back to 4% annual GDP growth and create 19 million new jobs over the next decade, if elected president. The problem is, the economy hasn’t consistently averaged 4% growth since the late 1990s and 2000. In fact, since 1981 the American economy has grown on average just 2.7% per year, according to the Commerce Department. As those who doubt Bush’s promise point out, getting to 4% now is much harder than it was back then.

Prior to 2000, 4% growth in real Gross Domestic Product (adjusted for inflation) was common. In the half century from 1950 to 2000, growth was above 4% almost exactly half the time. But since 2000, the economy’s annual growth climbed above 4% only once, for a very brief period in 2004 (see chart below).

What Happened to 4% Growth?

The economy’s ability to grow ultimately depends on its inputs – the number of workers and how much work they’re able to get done. One reason that growth has been slower over the past 15 years is simply that the number of people in their prime working years has slumped. Put differently, we’re getting older.

From the 1970s to the 1990s, the number of people ages 25 to 54 grew rapidly as the massive Baby-Boom generation entered the workforce. Plus, the number of workers grew even faster as women increasingly entered the labor force. But those trends have since lost their momentum.

Population Slowdown

Over the next decade, the Census Bureau projects that the population ages 25 to 54 will grow from about 127.8 million to 134.1 million, or about 6.3 million people. Currently, 77% of people in those ages have jobs. If that percentage holds, it works out to about 4.9 million people in that age range who will join the workforce by 2025.

If we add in working teenagers and people in the twilight of their careers, that boosts the number, but leaves the economy well shy of Mr. Bush’s 19 million new jobs. The Labor Department projects that from 2015 to 2025, the total labor force – including teenagers and working seniors – will grow by about 9.0 million workers. That’s still 10 million shy of Mr. Bush’s promise of 19 million.

As I make a point to frequently remind us all, the US labor force participation rate has plunged since the late 1990s. The participation rate includes all of those Americans who are working and those who have actively looked for work in the past four reporting weeks. The rate has sunk from above 67% in 1999 to below 63% this year. That is huge!

Civilian Labor Force Participation Rate

Labor force participation was gradually dwindling even before the Great Recession hit, which makes most economists think it will be particularly difficult to reverse. If the participation rate returned to its pre-recession level of 67+%, due to some wise new policy measures or other forces, that would add another 4.0 million jobs or so. This only gets jobs growth to about 13 million jobs – still about six million short of Mr. Bush’s goal of 19 million.

Getting to 19 million new jobs over the next decade would require some combination of three things. First, we would have to dramatically reverse the decline of prime-age (25-54) participation in the workforce that has occurred since 2008. Second, we would have to significantly boost the employment levels of teenagers and seniors (the latter of which is already climbing because most seniors didn’t save nearly enough).

The third possibility for raising the participation rate meaningfully would be to significantly increase the numbers of immigrants allowed into this country each year, preferably those who are highly educated and could score higher paying jobs. That is a politically-charged issue of its own, and I won’t address it further today.

The point is, in order to add 19 million people to the workforce over the next decade, as Bush promised to do, we would need all three things – lots more teen jobs, lots more participation of prime-age workers and lots more immigrants. For a variety of reasons, that is not likely to happen anytime soon.

That pretty much sums up the argument of those who chided Jeb Bush over his promise to get the economy growing by 4% a year if he is elected president. Now let’s look at the other side of the coin – how we could get to 4% economic growth, if we really wanted to.

Argument #2: How America Can Return to 4% Growth

As the debate over Jeb Bush’s promise of a return to 4% growth has intensified, I have read several articles where conservatives have laid out plans for true economic recovery. Most include a combination of tax cuts, regulation rollbacks and incentives for businesses to hire more people.

Perhaps the most concise piece of advice came in an editorial last Saturday from CNBC’s Larry Kudlow. While I don’t always agree with everything Mr. Kudlow says, his column last week gets to the heart of the conservative response to those on the left who say that 4% economic growth is a thing of the past. Here is most of it:

Jeb Is Right About 4% Growth

By Larry Kudlow

…We have experienced relatively long periods of 4 percent or more economic growth. Following the Kennedy tax cuts, the economy averaged 5.2 percent yearly growth between 1963 and 1969. After the Reagan tax rates fully went into effect, alongside Paul Volcker's conquering of inflation, the economy grew at 4.5 percent annually between 1982 and 1989. These were the "seven fat years," so named by former Wall Street Journal editor Robert Bartley. And between 1994 and 1999, the Bill Clinton/Newt Gingrich economy increased 4.3 percent annually, after welfare reform, NAFTA trade, and cap-gains tax relief.

So we've got six-year, seven-year, and five-year periods - all in recent memory - when the American economy beat 4 percent. And for nearly all the post-World War II period, dating from 1947 to 2007 (before the meltdown), the U.S. economy actually grew at 3.4 percent annually. And 3.4 percent is not so far from 4 percent. It's maybe only a few pro-growth policy changes away. Why wouldn't we try?

So Jeb Bush's 4 percent target is both aspirational and doable. It sets an important policy marker for the coming election. The whole GOP should adopt the target. Let the skeptics scoff. Positive solutions are grounds for optimism. And Americans will respond favorably to this kind of optimistic leadership - which is sorely lacking today.

Now, the back story to the Jeb Bush 4 percent target starts in Dallas in 2010 at the George W. Bush Institute. Executive director James Glassman, a former undersecretary of state, was casting about for an economic agenda. And one of his board members, Jeb Bush, tossed out a centerpiece goal of 4 percent growth. It stuck.

Columnist and author Amity Shlaes (author of Coolidge and The Forgotten Man) was brought in by the institute to oversee a book called, naturally, The 4% Solution: Unleashing the Economic Growth America Needs. It was published in 2012.

"That term unleash is very important," Jim Glassman told me, "because it simply means unleash the economy from government constraints." Ironically, this past spring, a group of supply-siders - including Art Laffer, Steve Forbes, Steve Moore, and myself - founded the Committee to Unleash Prosperity. (I don't think we remembered the original book title. Leave it as a coincidence.)

But the key theme here is our desperate need of a new batch of economic-growth policies. For nearly two decades we have grown at 2 percent yearly. That's unacceptable.

Put supply-side tax reform at the center of a new growth agenda. Start with slashing the corporate tax, which falls most heavily on middle-class wage earners. Go to full cash expensing and a territorial system that would repatriate overseas profits. On the personal side, flatten the rates, broaden the base, and simplify the code. Make sure it pays more after-tax to work, invest, and take risks. Instead of raising taxes on capital, reduce or abolish investment taxes (which would contribute to a rebound in the soft productivity numbers).

But tax reform is not enough. We need pro-growth immigration reform to boost the lagging growth of the labor force. We need entitlement reform for welfare, food stamps, and disability, so that instead of paying people not to work, we incentivize people to rejoin the labor force.

Trade tariff reduction, now front and center in Washington, would also be important to a pro-growth agenda. Tariff cuts are tax cuts. They make businesses more competitive and provide more export markets. Meanwhile, consumers get the best-quality goods at the lowest prices anywhere.

Improving education with choice, charters, and vouchers is another much-needed pro-growth reform. So is ending Obamacare and replacing it with a privately driven, free-choice health-care system.

Finally, a better, more consistent, and more transparent monetary policy from the Fed that creates a reliable dollar would be a huge pro-growth reform.

Is 4 percent growth really possible? Sure it is. And it would help solve a lot of problems, including poverty, middle-class take-home pay, jobs, budget deficits, and on and on.

I'm not endorsing Mr. Bush at this point. But I am endorsing his 4 percent solution. If decisive policies can unleash innovation and entrepreneurship, get the economy out from under the government's shackles, and provide a spirit of optimism, then all things are possible.

The whole history of America tells me so. Don't tell me it can't be done.

END QUOTE

Conclusions – Will Voters Respond in 2016?

I was a little surprised that the left pounced on Jeb Bush’s promise of 4% economic growth and 19 million new jobs if he is elected president. What surprised me even more was the fact that Mr. Bush offered very little in specific policy changes to revive growth to that level. After reading more, it seems that Bush’s policy advisers just pulled that 4% number out of thin air.

Given the lack of specifics in Bush’s speech, I’m not sure why the left reacted so negatively. And why were they so adamant that the days of 4% growth in the US economy are gone? Kudlow certainly doesn’t believe that, and neither do I.

I suppose the negative feedback was because many on the left still consider Jeb Bush to be the GOP frontrunner for the presidential nomination, even though his performance to this point has been disappointing.

I hope that today’s discussion is not considered political in nature. It was only to make the point of how each side reacted to Bush’s promise of 4% economic growth and 19 million new jobs, if he is elected president.

The bottom line is that I agree with Larry Kudlow that we could get back to 4% economic growth if we are willing to elect more politicians who would enact his suggestions. That remains to be seen, of course.

Very best regards,

Gary D. Halbert

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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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