Trump needs GDP growth, but one of his favorite policies works directly against him

Donald Trump's proposed budget only works if the United States hits — and maintains — 3 percent growth. But simple economics may get in the way.

"The foundation for the plan is 3 percent growth. In fact, that is Trumponomics," budget director Mick Mulvaney told the House Budget Committee on Wednesday.

Trump's agenda includes balancing the federal budget, but without that relatively rosy growth number, Mulvaney said, the government won't collect enough in tax revenue to make its numbers work.

"I have news for you, both parties: If we do not get to 3 percent growth, it is unlikely we will ever balance the budget again," he said.

A core problem for the administration is that labor force growth is one of two major drivers of gross domestic product, which measures the output of goods and services produced. More people produce more output; as the growth of the labor force slows, so does economic growth.

The growth in the labor force will slow further if the Trump administration pursues aggressive policies to limit immigration or expel undocumented workers already working in the U.S. — as he has promised to do.

The other major driver of GDP growth is labor productivity — the average amount of output for each worker. Trump's GDP goal also would require a major shift in long-term productivity, which few economists see happening.

The White House did not respond to a CNBC request for comment.

3 percent was already a reach

The administration's 62-page budget proposal relies heavily on a single assumption that the growth of the U.S. economy will gradually accelerate to about 3 percent a year.

Administration officials point to long-term historical averages, along with the beneficial impact of proposed tax cuts and regulatory rollbacks, to justify that forecast.


But the 3 percent forecast faces widespread skepticism, and has since then-candidate Trump first floated it during last year's campaign.

"This budget presumes a Goldilocks economy," South Carolina GOP Rep. Mark Sanford said Wednesday. "It assumes that the stars perfectly align with regard to economic drivers."

"This budget relies on absurd economic projections and pretend revenues that no credible economist would validate," Rep. Pramila Jayapal, D-Wash., said at the House budget hearing.

That view is widely shared by private economists, along with former budget officials like Jim Nussle, director of the Office of Management and Budget in the George W. Bush administration.

From the Congressional Budget Office to the International Monetary Fund to the Paris-based Organization for Economic Cooperation and Development, no one is forecasting U.S. economic growth approaching the Trump administration's core assumption.

Longer trends in the labor force matter

Like many economists, Sanford cited the long-term decline in the growth in the labor force as a major headwind to economic growth.

In the 1970s, women entered the workforce in large numbers, boosting the size of the labor force. Immigration also contributed to the American labor pool. But the growth of the workforce remains far lower than that in past decades, in part because aging baby boomers are retiring for good.

"Even (the CBO forecast of 2.3 percent GDP) would require a marked rebound in productivity growth, which is very unlikely, even if the corporate tax rate is slashed," said Paul Ashworth, an economist at Capital Economics.

Falling productivity growth

Over the last two decades, productivity growth has slowed for reasons that economists are still debating. Some have credited the technology boom for the 1990s surge in output per worker.

Since then, productivity has fallen steadily — with a brief spurt during the Great Recession. That jump was largely due to the wave of layoffs that swept through the economy in 2007, which were much deeper than the drop in output.

One way to boost productivity is to increase the level of workers' skills and training, which allows each one to produce higher-value products and services.

Trump's budget offers little support for that approach, with heavy cuts proposed for federal student loan subsidies and training programs.

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