The Three Percent Solution?

How to boost Pentagon and infrastructure spending, leave Medicare and Social Security alone and not increase the budget deficit or add to the nearly $20 trillion in national debt? That’s the dilemma facing both the Trump White House and, later in the year, congressional Republicans.

One answer: be more optimistic about how fast the economy can grow. How far those assumptions can go, and at what point they begin to lose credibility, may end up being at the center of budget battles later this year.

That dichotomy was on display in recent days in comments from the new Treasury Secretary Steven Mnuchin and House Budget Committee Chairman Diane Black (R-Tenn.). Mnuchin in a CNBC interview and a Wall Street Journal interview said the White House will be aiming for “sustainable growth of 3 percent or more” in its budget submission to Congress.

Secretary Mnuchin

Discussing a tax overhaul plan and how it would be scored by the Joint Committee on Taxation, Mnuchin said, “My guess is that our growth assumptions will be higher than what they use to score the plan.”

But Black, who’s responsible for shepherding a Republican budget through the House, was more wary about going to the growth well too often during an interview on radio station News Talk 98.7 in Knoxville, Tenn., Feb. 22.

“We’re wanting to see if you put people back to work, you get this economy working, you could see a 4 or 5 percent growth,” Black said. “But we’re not going to do that right now, we’re not going to take that as a for-sure to say, ‘We’re going to start all this spending over here’ before we actually have revenue coming in.”

Rep. Black

Given slow growth in labor force—thanks to the retirement of Baby Boomers—and sluggish productivity, most economists are skeptical that U.S. economy’s long-term maximum growth rate can be increased much from around 2 percent. 

In recent testimony before the Senate Budget Committee, Keith Hall, director of the Congressional Budget Office, noted the agency’s estimate annual economic growth between 2016 and 2026 was just 1.9 percent under current law. 

The Federal Reserve’s central tendency estimate of long-run growth issued Feb. 14 was 1.8 to 2 percent. The range of long-run projections went from a low of 1.6 percent, the Fed said, to a high of 2.2 percent.