President Biden’s proposed budget would represent a sea change in American fiscal policy. If enacted, outlays over the next decade would increase by about $8 trillion and revenues by $6 trillion, bringing the deficit to $14.5 trillion from $12.3 trillion projected under current policy. The share of the economy flowing to the federal government would rise to about one-quarter, up from one-fifth, and the budget deficit would average about 5% of gross domestic product. By 2031 national debt held by the public would stand at $39 trillion, a record 117% of GDP.
Despite soaring spending and debt, the Biden administration predicts that interest rates and inflation won’t increase more than current projections. This forecast may be rosy to the point of implausibility. Is it believable that a decade of Mr. Biden’s fiscal policies will leave the interest rate on 10-year Treasury notes at a mere 2.8%, compared with the Congressional Budget Office’s baseline forecast of 3.4%?
The administration is betting the farm on its theory of the case. If the latest inflationary surge lasts longer than Mr. Biden’s economists (and the Federal Reserve) predict, monetary policy would have to tighten, threatening to slow economic growth. If inflation rises, so would interest payments on the rapidly expanding federal debt, forcing tough fiscal choices.
But commentators have mostly overlooked the biggest surprise, and core conundrum, of the president’s proposal: Despite trillions of dollars of additional expenditures—some of which are investments, others not—the projected rate of economic growth increases only modestly, and most of the bump comes in the early years before tapering off.
During the next two years, Mr. Biden’s spending surge would help return the economy to full employment faster than staying at the status quo. This is a good thing. But between the beginning of fiscal 2024 and the end of fiscal 2031, the administration’s projections show GDP rising by $8.9 trillion, barely distinguishable from the $8.8 trillion in CBO’s baseline.
The bottom line: The economy will stay stuck at 2% growth, extending the period of slow growth that began early in the 21st century. Even during the first three years of the Trump administration, large spending increases and an enormous tax cut yielded growth averaging 2.5%, well below the 3.5% level of the 1990s.
Does this mean that government is powerless to influence economic growth? Not exactly. But it does require an understanding of why the growth rate has been so disappointing during the past two decades, particularly compared with the last half of the 20th century.
According to a recent CBO report, the principal driver of slow growth since 2008 has been a sharp slowdown in the growth of the labor supply. As baby boomers joined the workforce, the annual increase in labor supply averaged more than 2%, peaking at 2.5% between 1974 and 1981. As late as the 1990s, annual labor-force expansion averaged 1.2%. But as the population aged and baby boomers began to retire, annual increases fell to 0.5% between 2008 and 2020, a figure that the CBO expects to fall to 0.4% in 2021-25 and 0.3% in 2026-31.
The distant future looks no brighter. The total fertility rate needed to maintain a stable population is about 2.1 children for every woman. In 2020 the U.S. rate dropped to 1.64, the latest in a long decline. The workforce of the 2030s and 2040s could be smaller than today’s, a prospect that other advanced economies are also facing, including China.
The other main driver of economic growth—output per worker—has been less predictable. Annual increases averaged 2.3% between 1950 and 1973, fell to 0.7% between 1974 and 1981, then surged to 2% in the 1990s before falling back to about 1.3% in 2001-20.
Measures to boost productivity are a subject for another column, and international experience suggests that there is little government can do to increase birthrates. But there is much that can be done to improve labor-force participation. Government can make it easier for women to remain in the workforce, for those formerly incarcerated to re-enter it, for young adults not bound for college to find technical training and for aging Americans to work part time if they choose, among other things.
Another strategy is more immigration. We have gone in the other direction in recent years, but immigration policy reforms keyed to the needs of the economy may be easier to sell to a skeptical public than an expanded version of the status quo.
Getting America back to faster growth will take resources and focus. But if growth remains slow, Mr. Biden’s honorable effort to improve the lives of working- and middle-class families may end up hobbled by the well-known difficulties of zero-sum politics.
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