Paul Krugman: Trump's Boasts About the Economy Are Beyond Bogus

Donald Trump will read from a teleprompter during the State of the Union speech on Tuesday evening without drooling on himself, and pundits will declare him a master statesman. In the course of this speech, he will also likely declare that the U.S. economy is booming like never before. But as Paul Krugman reminds us in his Monday column, that assessment is over-optimistic at best, and entirely false at worst

After all, this administration has a tenuous relationship with the truth. Remember when the Treasury Department claimed that the GOP tax plan will pay for itself because we can expect an annual growth rate of 3 percent over the next decade? About that number, Krugman writes, "This growth projection didn’t come from any model; it was just pulled out of…well, you fill in the rest." 

Now is as good a time as any for a course in macroeconomics 101, and Professor Krugman is here to deliver. First, he reminds us, "you need to know that quarter-to-quarter and even year-to-year growth rates are very variable." Looking back at previous administrations, "the economy grew at a 5 percent annual rate during much of the Carter administration (how many people know that?); it grew around 4 percent during the second Clinton administration." 

The business cycle is largely behind these changes. Krugman continues:

"Potential output—the economy’s productive capacity—grows fairly smoothly. But recessions leave some of that capacity idle, and the economy can temporarily grow fast as that capacity is put back to use." That's partly what we're dealing with now: "the unemployment rate is an imperfect measure of idle capacity; still, there’s a strong relationship—Okun’s Law—between changes in the unemployment rate—capacity going into or out of use—and short-run economic growth." 

Sure, some signs look good. Unemployment rates are historically low, while "other indicators, like the rate at which workers are quitting jobs (a sign of how confident they are of finding new jobs), also point to a more or less full employment economy. Wage growth and inflation are still subdued, but it’s still unlikely that unemployment can fall a lot from here." 

Why can't we believe the hype? Krugman cites what is known as Okun's Law, a general rule of thumb that the unemployment rate dictates the rate of economic growth. Of course, "the relationship isn’t perfect, because this is economics, but it’s pretty strong. It suggests a potential growth rate—growth consistent with constant unemployment—of maybe 1.5 percent. And 2017 isn’t an outlier."

So why is that 3 percent figure all smoke and mirrors? Krugman thinks demographics is playing a big part: 

"The baby-boomers are getting old (you kids get off my lawn), so the working-age population is barely growing. Oh, and cracking down on immigration is, you know, not likely to help on that front. Productivity growth is also lackluster, despite all the hype about robots and all that. So if you think about it, 2017 offers no evidence to support big talk about future growth. On the contrary, the fact that unemployment declined despite not-so-fast growth is a sign that growth will be a lot slower going forward, now that we don’t have a lot of unemployed Americans to put back to work."

Just don't expect Trump to mention any of this during his address Tuesday.

Read the entire column

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