The debate over the nation’s economic growth rate took a curious turn Wednesday when Donald Trump compared relatively slow U.S. growth to faster rates in major developing economies such as India and China.
“I just left some high representatives of India. They’re growing at 8 percent,” Trump said at Wednesday night’s presidential debate. “China is growing at 7 percent. And that, for them, is a catastrophically low number.”
Economists with varying views agree that the U.S. can’t be expected to grow as fast as developing countries, but they differ on how much growth is possible.
To provide a contrast to India and China, Trump said the U.S. growth rate is hovering at around 1 percent on an annual basis and falling. He was lowballing the actual number somewhat, since the Commerce Department most recently estimated a 1.4 percent annual rate of growth in gross domestic product during the second quarter of 2016.
The U.S. and developing economies such as China and India have major structural differences that lead to the differences in GDP growth that Trump mentioned. Economists with viewpoints as diverse as Trump’s adviser Peter Navarro, Heritage Foundation fellow Salim Furth and left-leaning researcher Josh Bivens of the Economic Policy Institute all agree on this core point.
There are numerous reasons why productivity, a key input to determining GDP, grows faster in emerging markets. Experts often cite the younger and growing workforces in countries such as India and China, where urbanization is growing because of internal migration to manufacturing opportunities. Emerging economies also invest in technologies that have already been developed in high-income countries, which increases their output potential.
As China in particular transitions into a more consumer-focused economy, its growth rate has slowed. But because of the existing structural differences, an uptick in U.S. growth and downturn for China still wouldn’t be enough to make each economy’s growth rates equal.
Experts differ on the question of whether the U.S. can achieve significantly faster growth than what has been the norm since the 2008 financial crisis.
Bivens said the U.S. economy is unlikely to grow at a faster annual rate than 2.5 percent over the long run, given existing trends. This would still be faster than growth projections in other major economies such as Germany and Japan, he noted.
Navarro and Furth do not share this view.
Furth agreed that it’s unrealistic to expect growth rates ranging from 7 percent to 10 percent in the U.S., but he said that fact shouldn’t discourage policymakers from seeking higher growth rates than what the U.S. has experienced under the Obama administration.
“Politicians can overstate what they think they can accomplish, but it doesn’t mean that we should give up on growth,” Furth said.
The problem with the Obama’s management of the economy, he said, is that the policy reaction to the 2008 financial crisis has been to disincentivize risk-taking and keep GDP growth slow. He pointed to the 2010 Dodd-Frank Act, which put strict rules on Wall Street speculation, as a key example of the type of regulations that have hamstrung GDP growth.
However, he said, this shouldn’t be seen as an excuse not to implement major reforms that he and Trump believe could bring annual GDP growth to 3.5 or 4 percent.
“Our growth engine in this country is just totally out of whack,” Navarro said. “It’s structurally misaligned.”
Elements of Trump’s plan have come under fire — including from his rival Hillary Clinton at the debate — for not including offsets that would limit the negative impact on the U.S. national debt. Navarro and Trump believe their plan will pay for itself if its effects lead to their growth projections.
Navarro said that before the North American Free Trade Agreement and China’s entry into the World Trade Organization, the U.S. enjoyed some quarters with annual growth rates as high as 7 percent during non-recession periods.
There isn’t unanimous agreement that Trump’s plan would lead to the type of long-term, sustained growth that Navarro has predicted. Bivens said any reform to tax or trade policy could precipitate a small spike in growth, but the uptick would not be long-lasting.
“If we did some policy maneuver to reduce our trade deficit, we’d get a year or two of a percentage point faster growth, and then we’d converge again onto our long-run trend,” Bivens said.