John Taylor sticks up for Tim Pawlenty’s 5 percent real GDP growth target (which I have criticized). Taylor particularly focuses on the fact that the fraction of working-age adults who actually work is unusually low right now; he argues that increasing that ratio provides low-hanging fruit for economic growth. I’m not sold, for a few reasons.
First of all, the marginal people entering and leaving employment are much less productive than the average worker, so 10 percent more people working does not mean 10 percent more GDP. Taylor notes that “economic growth equals employment growth plus productivity growth“, and sums up labor force and productivity gains to produce a GDP target, but any growth in employment will be partly offset by a reduction in per-hour productivity.
Those are the reasons I suspect the target can’t be hit at all. I also don’t believe Pawlenty’s agenda would be especially effective at increasing employment, even if employment growth is a viable path to 5 percent growth. There is simply not evidence that tax and spending cuts will lead to a sharp increase in employment, or that they will lead to 5 percent expansion by any other path.
Larry Kudlow is also backing the plan, though he’s less specific about why he thinks it would work. Kudlow is calling the plan “Reaganesque,” but the Reagan expansion, starting in 1983, only amounted to 3.5 percent real growth over a 10-year period. And Ronald Reagan had the advantage of starting from tax rates that really probably were on the downslope of the Laffer Curve, and of presiding over significant improvements in monetary policy. Pawlenty is playing a weaker hand, so I wouldn’t expect a stronger outcome.