James Pethokoukis examines whether Tim Pawlenty’s 5 percent growth target is achievable:
Overall, U.S. GDP growth has averaged 3.3 percent over the past 50 years, with roughly half coming from a growing labor force (1.6 percent) and half coming from higher productivity (1.7 percent). But with America aging, annual labor force growth is expected to slow dramatically to just 0.5 percent. The McKinsey Global Institute thinks a higher retirement age and smarter immigration policy could boost that rate to 1 percent or so. But even then, productivity growth would have to increase to 2.3 percent long term just to maintain that historic growth rate.
The good news is that McKinsey thinks that’s possible, too. One move it recommends is enhancing the U.S regulatory environment. Another is reducing marginal tax rates. Both actions are in line with the Pawlenty agenda. Pawlenty’s proposal to eliminate capital gains taxes would create a de facto consumption tax, which many economist think good for growth. He would also lower the top individual tax rate to 25 percent and the top corporate rate to 15 percent.
This would still require the economy to grow faster than during either the 1980s or ’90s booms.