The incoming Trump administration has set a goal of growing the economy by 3% per year, similar to promises made during Donald Trump’s first term in office. In a sense, it’s an easy goal to achieve quickly because we already have. Real gross domestic product has expanded by more than 2.5% on an annualized basis in eight of the past nine quarters through Sept. 30, and the average among those eight quarters has been … wait for it … 3.1%! We won’t get official numbers for the fourth quarter for a few weeks, but the latest tracking estimates are around 2.45%.
The real question is whether the US can achieve sustainable 3% growth over the long haul. That’s much harder, but the benefits of strong economic growth are enough that it’s worth indulging in the idea.
Most economists peg our “potential” real GDP growth at roughly 2% a year. Potential growth is affected by several things, including the labor force (which in turn reflects aging, fertility and immigration), productivity, educational and skills attainment, and technological change. While the consensus around 2% is strong, potential growth is unobservable and based entirely on models. So, the consensus could be wrong, especially if the economy is undergoing structural changes that are hard to measure in real time.
Boosting potential growth by an extra percentage point to 3% for a decade may sound trivial, but economic superpowers are built on such differences over time. In 1896, Argentina was one of the world’s richest nations. Its GDP per capita was 83% of the US’s, higher than France and Germany at the time, according to Maddison Project data. Since then, growth in real Argentine GDP per capita has averaged 0.9% annually, versus 1.7% in the US. After more than a century of that seemingly small wedge, Argentine GDP per capita is less than a third of the US.
Three percent growth in the US has been the norm going back to the country’s founding in the late 1700s. But the past often saw faster population growth than now, from both higher sustained fertility and immigration. In the chart below, the orange line shows what historical GDP growth would have looked like with 2023’s population growth. As you see, 3% growth becomes a rarity, and would be even rarer with slower population growth than 2023, say from aging or lower immigration.
Even if 3% isn’t feasible, stronger growth is a worthy goal. One extra percentage point of economic growth sustained for a decade would mean average GDP per household would be higher by more than $30,000 in 2024 dollars. It would also shave 21 points off the US debt-to-GDP ratio by 2034, addressing a substantial part — though not all — of the country’s deteriorating fiscal trajectory. Of course, growth alone doesn’t make for a successful society or even a successful economy. We want shared growth and prosperity too.
Boosting growth through policy can be challenging. Some worthwhile policies that tangibly benefit people — simplifying tax forms, for example — may not move the needle much on measured GDP in the long run, which illustrates the limits of GDP growth as the only goal for public policy. Moreover, some effective policies lay largely outside federal purview, such as easing local housing restrictions, which could give a substantial boost to productivity by allowing more people to live in highly productive metropolitan areas.
Here are six federal policies that would help achieve 3% sustained growth. You’ll notice that none of these are silver bullets by themselves, as sustainable growth will require a mix of different approaches.
Incentivize new business investment. Business tax cuts are at their most pro-growth when they spur new investment. Rather than broad-based business tax cuts, we should focus relief on provisions that touch investment specifically, such as allowing businesses to fully expense new investment, expanding the types of investment eligible for expensing, and expanding the tax credit for research and development. Recent analysis of a similar, revenue-neutral proposal by economist Jason Furman suggests this could raise annual GDP growth by around 0.2 percentage point.
Comprehensive immigration reform. A bipartisan approach to immigration along the lines of the 2013 Senate bill that beefed up border security, created pathways to citizenship for those already here, and expanded legal immigration for high-skilled and student immigrants, would increase annual GDP growth by 0.3 percentage point, according to estimates from the Congressional Budget Office.
Public and private investments to slow climate change. CBO recently estimated a 75% chance that climate change would shrink the economy by 2100, and a 20% chance that the damage would be enough to shave at least 0.1 percentage point from growth on average. Investments to mitigate the fallout would both boost growth directly and make it less likely climate change is a drag on prosperity in the future.
Increase labor force participation. Although the labor force participation rate for prime-age adults (25- to 54-year-olds) recently returned to 2001 levels, it has room to improve. The labor force participation among men has fallen for decades, and has lagged behind peer economies for women since the early 2000s, due in large part to weak family policies. Several policies could help reverse this, such as increasing the childless Earned Income Tax Credit, reforming the disability system, and expanding family-friendly policies like paid leave and flexible work arrangements like part-time and remote work.
Avoid tariffs. Tariffs are a particularly damaging way to raise revenue, not only because they increase costs on investment, but because they spark retaliation, which exacerbates the initial harm. Recent estimates from the non-partisan Budget Lab at Yale suggest a 10% broad tariff with a 60% tariff on Chinese imports reduces the level of real GDP by 0.6% in the medium term when there’s retaliation, in line with what CBO found. Double the broad tariff to 20%, and GDP is lower by 1%.
Reduce the budget deficit. Over the long run, an unsustainable debt trajectory crowds out private investment. So, while deficit-financed policies can boost growth a bit in the near term, their added debt burden can be a drag in the long term.
Even with these policies there’s no guarantee the US can return to sustained 3% GDP growth. But in the last four years the US has shown that it’s still full of surprises. With smart policy and a good dose of luck, we just might succeed.
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