Trump’s Rosy GDP Projection Masks Larger Economic Growth Concerns

Trump’s Rosy GDP Projection Masks Larger Economic Growth Concerns

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President Trump’s fiscal 2018 budget plan calling for a major defense buildup, a huge tax cut and the gradual elimination of the deficit is all premised on a projected economic growth of three percent or more a year that Republicans and Democrats alike dismiss as a “rosy scenario” or a con job.

White House Budget Director Mick Mulvaney testified last week that three-percent growth in the Gross Domestic Product (GDP) is the “foundation” for the Trump plan and is readily achievable –-  even while the Congressional Budget Office and others say a 1.9 percent growth rate is far more realistic.

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The U.S. has gone eleven consecutive years without 3 percent growth in real GDP, according to the Bureau of Economic Analysis. That is part of the collateral damage from the worst recession of modern times that began at the tail end of Republican George Bush’s administration and was finally brought under control during Democratic President Barack Obama’s first term.

Trump blames Obama for what describes as persistent “economic stagnation” – although Obama left office having reduced the unemployment rate by half to 4.7 percent and creating millions of new jobs. The former New York real estate businessman promised in his budget message to Congress last week that he would return the economy to “robust growth” through a combination of tax cuts, deregulation, and better trade deals. 

“We will champion the hardworking taxpayers who have been ignored for too long,” Trump wrote. “Once we end our economic stagnation and return to a robust growth, so many of our aspirations will be within reach.”

The debate over Trump’s three-percent economic growth target is likely to pick up steam in the coming weeks, as the White House, congressional leaders, budget experts and special interest groups vigorously debate the legitimacy of the projection and what it may portend for the deficit and the overall economy. 

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The GDP is one of a handful of closely watched economic benchmarks –- along with the consumer price index and the unemployment rate –- that dominate the debate over current and future government fiscal policy and are considered the most reliable economic indicators.

But some economists and budget analysts caution that while politicians in Washington are obsessing over Trump’s dubious GDP projections, they are paying scant attention to other crucially important indicators of the nation’s economic health that should be raising red flags.

Last week, a DC-based, bipartisan think tank called the Economic Innovation Group published a state-by-state analysis of what it described as a troubling decline in innovation and “economic dynamism” throughout the country that has seriously weakened the economy dating back to the start of the Great Recession in late 2007.

Instead of focusing on the GDP and unemployment rate, the  public-private research organization tracked the rate of new business formations and related job creation, the number of companies that have gone out of business and killed off jobs, the frequency of turnover in the labor market,  labor force participation,  the geographic mobility of the workforce and other factors.

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"Our findings reveal a troubling departure from the traits that defined the U.S. economy during its strongest periods of economic expansion,” John Lettieri, co-founder and senior director for policy and strategy of the group, said in an email. “A return to stronger growth will require a revival of economic dynamism, including higher startup rates, a more flexible labor market, and a more mobile and faster-growing workforce." 

These are ominous trends that have largely unfolded under the radar and generated little debate in Congress or among political leaders.

The study found, among other things, a break in a historic pattern of economic ebbs and flows in employment and job creation, as well as sharp regional differences in how well states were able to make a comeback after the Great Recession that lasted officially from December 2007 to June 2009.

 States like Nevada and Utah that fared the best were largely located west of the Mississippi River and had younger populations, newer housing stock, more immigrant diversity and extraordinary resiliency in bouncing back. States east of the Mississippi, including West Virginia, Ohio and Pennsylvania, did worse, especially in areas around the Great Lakes that are economically tied to manufacturing.

Related: Nearly a Dozen States Are Suffering From ‘Chronic Budget Stress’

Practically all states – regardless of their location – struggled to bounce back from the recession, with varying degrees of success.  Despite a steady drop in the rate of new businesses that were opened, about 117,300 more companies opened than closed on average annually from 1977 to 2007, according to the report. Yet since 2008, business closings have outpaced the creation of new firms on average.

As the dynamism began to peter out, the report added, the U.S. economy became steadily more dependent on a narrowing geographic base. Remarkably, between 2010 and 2014, five metropolitan areas “produced as big an increase in firms as the rest of the nation combined,” according to the study. 

The report noted that while signs of declining dynamism can be traced back several decades, one could nevertheless “take for granted the multiplying of businesses in every sector and region.”

“That changed with the Great Recession, which touched off a true collapse in new firm starts—one so severe it marked the first time on record that companies were actually dying faster than they were being born in the United States,” the report said. “Suddenly, creative destruction was thrown out of balance.”

“Even as other aspects of the economy stabilized, that historic balance has yet to be restored,” the report added.