Trump's Easy Path To 4% GDP Growth

During the presidential campaign and its aftermath, Donald Trump has made numerous promises about restoring economic growth. As usual with Trump, there is no consistency in his promises, but at various times he has pledged to raise GDP growth anywhere from 3.5% to 7%. In his hearings, Treasury Secretary Steve Mnuchin reduced the expectations slightly to "3 to 4 percent". Considering the economy has barely nudged above 2% growth since the Great Recession, pushing the economy to nearly double that would certainly be a major accomplishment.

An article in today's New York Times provides a clear roadmap for how the Trump administration could reach that 4% target. It is deceptively easy and it is certainly an approach that will absolutely appeal to the grifter that Trump is. And it even has the backing of the GOP's favorite economist Martin Feldstein.

According to Feldstein, "I think the official data on real growth substantially underestimates the rate of growth". Feldstein and some of his fellow economists doubt that the current method for measuring GDP is accurately reflecting the true state of growth as the country has moved from a manufacturing economy that produced tangible goods to more of a consumer economy that relies on services and information, items that are much more difficult to evaluate and measure. Feldstein takes it one step further and says that real incomes for most Americans, which traditional measurements show as being stagnant for nearly three decades, are actually rising and that this inaccuracy "creates pessimism and a distrust of government,” leading Americans to worry that “their children are going to be stuck and won’t be able to enjoy upward mobility." Feldstein believes, admittedly without evidence, the GDP growth is currently underestimated by around 2% per year.

This dispute has actually been around for a very long time. The GDP measurement primarily looks at prices but prices don't always capture improvements in quality. Smart phones didn't exist 30 years ago but they are probably worth far more to the economy today than simply the cost of producing and purchasing them. Technological advances are difficult to capture in the GDP stats and improvements like free anti-virus software don't even show up at all. Feldstein's favorite example is the widespread use of statins that substantially reduced the risk of heart attacks. In the early 2000s, the death rate from heart disease for those over 65 fell by about one third. Surely that should count for something in GDP, but it doesn't. The dispute over the proper measurement of GDP primarily revolves around these kind of improvements in health care and technology.

On the other hand, Jason Furman, Obama's head of the Council of Economic Advisers, points out, "Growth statistics have always missed some important quality improvements, and it’s not obvious that we’re missing more today than in the past". In other words, GDP has always undervalued improvements in quality and there's no reason to think that it's any worse today, certainly not enough to dramatically change how GDP is calculated. Additionally, putting a value on a qualitative change becomes much more subjective and is easily manipulated. That is also why it might be especially appealing to Trump.

The thing to watch out for with the Trump administration is, however, exactly that, an attempt to change the way GDP is measured. Trump has already questioned the "true" unemployment rate many times. And he will probably soon begin to question the "true" rate of GDP growth. If you take Feldstein's guesstimate that GDP is being under-reported by around 2% and you add it to the existing growth rate of around 2%, voila!, you get your 4% growth without having done a thing. For Trump, the temptation to do this will be hard to resist. So keep your eye on any Treasury Department announcements about "tweaking" GDP calculations down the road.