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Suggesting Trump’s economic plans can spark growth closer to 3% is ‘wishful thinking,’ Obama adviser says

Aging workforce and declining productivity are driving slower growth, Furman says

CHICAGO (MarketWatch) — Republican economists were upbeat Saturday that President-elect Donald Trump’s economic policies could get the economy growing closer to a sustainable 3% annual rate, but the suggestion was greeted with skepticism by a senior member President Obama’s economic team.

At the moment, the Congressional Budget Office estimates the economy’s sustainable growth rate is 1.8%, down from a historical rate above 3%.

During a bipartisan panel discussion at the American Economic Association meeting, Glenn Hubbard, dean of the Columbia University Business School, said Trump’s plans could get GDP growth “up to 2.75% or so.”

While the details of Trump’s policies remain unknown, the combination of broad-based tax reform, regulatory reform, infrastructure and military spending could boost the economy, Hubbard said.

However, Jason Furman, Obama’s chief economist, shot back that Republicans were ignoring the “massive” depressing impact on growth from an aging workforce.

“This is going to matter a lot. If you forecast something like 2%-2.2% [growth], it is going to take your budget in one direction, if you forecast 2.75% or higher, it is going to take your budget in a different direction, he said.

Furman said of growth rates of 2.75% or higher would be further away from the forecast of mainstream economists “than any budget… in the last 24 years.”

“Part of how you get higher is wishful thinking,” Furman said. Details of any tax cut will matter, he said.

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However, Hubbard and John Taylor, a Stanford University professor, argued that new policies could make a difference.

Sluggish growth “is due to policy,” Taylor said. “What you need is a whole set of policies” to address the problem, he added.

“Where we are now in this economy...is that some structural reforms have the potential for not only a long-term benefit which as economists we emphasize but also short-run,” Taylor said.

Taylor said poor U.S. economic policies “had a huge influence” on productivity growth, which has been weakening since 2005.

“There is an opportunity for reversal,” he said.

But Furman noted that productivity is declining all around the world, which suggests that Obamacare and other U.S. regulations might not be the cause of the decline.

Former Obama chief economist Alan Krueger told the panel that the administration might have accepted a lower growth rate in order to foster a “no-drama” economy so that the financial sector could heal from the financial crisis.

“Part of that was by design, part of that was...an attempt to make the financial system safer to ensure that banks raised more capital as a buffer against shocks. It probably has come at the cost of some growth,” Krueger said.

“Going forward...I think we may go from a no-drama economy to something very different,” he added.

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