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By Ronald Fink
The domestic economy will expand by an average of 1.9 percent a year over the next decade, roughly the same amount as in the previous one but less than in other decades, a prominent Reagan administration economist predicted in a column published on Monday.
Martin Feldstein, a Harvard professor who was President Reagan's chief economic advisor and chairman of the National Bureau of Economic Research, wrote that a combination of trends in U.S. demographics, productivity, and trade and fiscal conditions will produce relatively weak GDP growth even after the economy bounces back from recession. As a result, he recommended that the government reduce its budget deficit and develop incentives for growth.
"The rise of GDP over the next ten years will reflect the very positive effect of the eventual recovery from the current deep downturn, combined with a below-trend rise in the economy's potential output at full employment," Feldstein wrote in the column, which was posted on Project Syndicate and is entitled "America's Growth in the Decade Ahead."
The economist said his forecast was based on the "optimistic but plausible" assumption that the economy will recover fully over the next decade, cutting unemployment in half, from 10 percent at present to 5 percent. And he calculated this would produce 1.2 percent average annual growth in GDP going forward, thanks to increased consumer demand.
But Feldstein saw relatively little additional GDP arising from growth in the labor force, productivity, finance or trade.
He said the labor force would expand very little, as a result of slower population growth and increased aging, and this would limit its addition to demand and with it, its contribution to GDP to only 0.5 percent a year.
Meanwhile, Feldstein said, gains from improved capital stock, thanks to higher household savings rates, would be entirely offset by "dissaving" from high government budget deficits, which he contended will discourage foreign investment in U.S. securities.
And he predicted that gains to GDP from so-called "multi-factor" productivity improvement-advances in technology and business processes-would likely be limited to 0.75 percent a year, the average rate produced from 1985 to 2000, instead of the 1.4 percent seen during the past decade.
"Although there are uncertainties about each of these components of growth, their performance in the coming years is unlikely to be as good as it was in recent decades," Feldstein wrote.
While the growth he sees in the labor force and productivity would bring total GDP to significantly more than 2 percent, Feldstein said an increase in exports and a reduction in imports, fueled by a weaker dollar, would reduce U.S. consumption and hence GDP. And that, he said, would bring total average annual growth for the next 10 years down to 1.9 percent.
He also noted that there were considerable "downside risks" to his forecast, "especially if the fiscal deficit remains high or adverse tax policies depress the rise in productivity." For that reason, Feldstein concluded, "the government should take the weak ten-year projection as a warning and a reason to devote policies to reducing fiscal deficits and strengthening incentives for growth."
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