December 01, 2017
One of the issues that has been raised in the debate over tax cuts is how fast the economy can grow. The Congressional Budget Office (CBO) is projecting growth averaging just 1.9 percent annually over the next decade. This is based on the assumption that the labor force will grow on average by 0.5 percent annually and productivity will grow by 1.4 percent.
By contrast, the Trump administration is arguing that with its tax plan the economy can grow 3.0–4.0 percent annually. It appears that the consulting firm McKinsey Global Institute agrees with the Trump administration’s projections on growth, but not due to its tax plan.
The Washington Post reported on a new study from McKinsey which projects that one third of all jobs in the United States will be lost due to robots and artificial intelligence by 2030. This rate of job loss translates into an annual rate of productivity growth of 3.1 percent, roughly the same pace of growth seen during the 1947 to 1973 Golden Age and the period from 1995 to 2005.
If the economy actually sees the productivity growth predicted by McKinsey and the CBO labor market projections prove accurate, then growth should average a bit more than 3.5 percent over the next decade. If this is the case, workers should receive much larger wage increases than they have had in recent decades. Also, the more rapid growth should mean much smaller budget deficits.
It is important to note that the McKinsey report is effectively a baseline projection. It is saying that growth will be considerably faster than is now projected by CBO assuming no change in policy, including no large tax cuts. In fact, if the McKinsey report is correct, it is difficult to see the rationale for tax cuts that predominantly benefit the richest people in the country.
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