How fast can the American economy grow with better policy from Washington? Investor Scott Bessent, President Trump’s Treasury pick, proposes an ambitious “3-3-3 plan” targeting three percent GDP growth through deregulation, three percent deficit reduction, and three million additional oil barrels daily.
While this three percent growth target matches post-WWII averages, today’s economy faces fundamentally different challenges. In the 1970s, labor force growth contributed nearly three percentage points to GDP, driven by favorable demographics and high birth rates. Now, it’s projected at just 0.5 percent through 2025 due to an aging population and declining birth rates. Recent productivity gains from post-pandemic business restructuring are fading (big gains from artificial intelligence aren’t a thing yet), and proposed immigration policy changes could reduce labor force growth by about 100,000 workers monthly. Projections from Washington and Wall Street forecast less than two percent medium-term growth—combining 0.5 percent labor force growth and 1.4 percent productivity growth.
So that’s the challenge. A solution is offered by Columbia University economist Glenn Hubbard, a former chairman of the US Council of Economic Advisers under President George W. Bush and a nonresident senior fellow here at AEI.
As Hubbard argues in a recent essay, Bessent is right to emphasize faster economic growth as a key priority for Trump’s potential second presidency, arguing it would increase living standards and help reduce the federal deficit while balancing various spending needs. “By setting an ambitious 3% target for annual growth, he has provided the new administration a North Star to follow in devising its economic policies,” he writes, offering a mini-agenda for growth.
- Government support for research stands as Hubbard’s first “pillar of growth,” encompassing both basic research in science, as well as applied research centers around the country that help disseminate new technologies. This support is crucial since private firms often lack incentive to fully invest in basic research, despite its significant spillover benefits.
- The second pillar involves investment-friendly tax provisions, including extending the 2017 Tax Cuts and Jobs Act’s pro-investment measures and potentially shifting to a cashflow tax system that allows immediate investment expensing while removing tax incentives favoring debt over equity.
- The third pillar focuses on efficient regulation, emphasizing smart regulatory approaches rather than simply more or less regulation. From the piece:
Fortunately, financial regulation under the new administration is likely to improve capital allocation and the prospects for growth, given the leadership appointments already announced at the Securities and Exchange Commission and the Federal Reserve. But policymakers also will need to improve the climate for building infrastructure and enhancing the country’s electricity grids to support the data centers needed for generative artificial intelligence. This will require a sharper focus on cost-benefit analysis at the federal level, as well as better coordination with state and local authorities on permitting. Using federal financial support programs as carrots or sticks can be part of such a strategy.
James Pethokoukis
January 23, 2025
aei.org