Mature economies do not grow at a fast rate. Fed chair Janet Yellen testified before a Senate panel that 3 percent growth target set by Trump might not be achieved. Yellen was part of a hearing targeting slumping productivity and regulatory reforms in the US.
Trump plans to make the economy grow at 3 percent during his tenure through early tax schemes. Though the US economy has maintained a 3 percent average growth rate for the past seven decades, this number still seems unfeasible. Here are the reasons why the golden number could never be reached.
An Aging Population
Productivity is falling worldwide, and the US is not an exception. An aging population has made the productivity of the economy fall. The Federal Reserve and the Congressional Budget Office believe that the growth rate of the US economy should fall to 2 percent. The slumping growth rate will compound over time to hamper national wealth too.
To make the economy grow at 3 percent, the productivity will have to be doubled to reach at least 2 percent. This is not an easy task. Yellen believes that this is a monumental task and changes in the education system are needed to bring productivity back on track. Moreover, productivity growth has suffered due to slump in growth for some workers. This means that an aging population is taking a toll on the economy.
What Could the Tax Plan Bring?
Yellen noted in her comments that the corporate tax plan. She said, “There are general agreements that there are distortions in the corporate tax code.” Yellen believes that simply changing the tax rules in the country would not be enough. The Federal Reserve is patiently watching inflation figures in the economy and thinking about tightening policy. They have also been lenient on the Volcker Rule, per the suggestion of Republicans in the administration.
“I would focus on training, on education… I would focus on investment both public and private and I would focus on policies that affect the pace of technological change (along with reform in taxes)”, said Yellen.
Following comments by the Fed chair, technology and banking stocks drove the stock market towards modest gains. The Dow Jones industrial average reached its second record close in two consecutive days. Consumer companies and large-scale retail chains also helped the market go higher on Thursday. Inflation numbers due on Thursday and Friday could affect the movement further.