Dr Peter Morici: Solutions to Slow US Growth: Develop domestic petroleum and address Chinese mercantilism
By Professor Peter Morici
Jul 13, 2011 - 1:03 AM

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President Barack Obama hugs Bertha Petry, the grandmother of Sergeant First Class Leroy Arthur Petry, US Army, in the Blue Room of the White House, July 12, 2011. The President later awarded SFC Petry, left, the Medal of Honor for his courageous actions during combat operations against an armed enemy in Paktya, Afghanistan, in May 2008. Petry is the second live recipient of the Medal of Honor since the Vietnam War.

Following the issue on Tuesday of US trade data for May, which showed a sharp rise in the trade deficit, Peter Morici outlined proposals on how the US could respond to slow growth by developing domestic petroleum resources and addressing what he terms Chinese mercantilism.

The New York Times reports that also on Tuesday,  the Senate Republican leader Mitch McConnell of Kentucky, said a bipartisan budget-cutting deal is probably out of reach, making it unlikely that Republicans would approve an increase in the government’s debt limit by Aug. 2. To prevent default, he proposed that Congress in effect empower President Obama to raise the government’s borrowing limit without its prior approval of offsetting cuts in spending.

However, McConnell was sharply criticised by conservative activists while the Times said: "McConnell’s plan would shift both substantive and political responsibility onto Mr. Obama, forcing him to take almost sole ownership of a debt-limit increase and any consequences from not doing more to address the budget deficit."

Dr Peter Morici: The Commerce Department reported the May deficit on international trade in goods and services increased to $50.2bn up from $43.6bn in when the economic recovery began.

The trade deficit, along with the credit and housing bubbles, were the principal causes of the Great Recession. A rising trade deficit again threatens to sink the recovery and push unemployment above 10%.

Most fundamentally, US economic growth and jobs creation has slowed, because the demand for US made goods and services is expanding too slowly. Supplying what Americans and global consumers buy is not the issue, but rather US and export customers don’t want enough of what Americans make. America needs to play its strengths—abundant domestic energy—and confront Chinese mercantilism that arbitrarily overprices US goods at home and abroad.

Globalization does not have to mean a “new normal” of slow growth, high unemployment and dead end careers for young people. Globalization does not have mean and end to American prosperity unless US policy compels it.

At 4.0% of GDP, the trade deficit subtracts more from the demand for US-made goods and services than President Obama’s stimulus package added. The Obama stimulus was temporary and now dissipating, whereas the trade deficit is permanent and swollen again.

The high cost of imported oil and gasoline and subsidized manufactures from China account for nearly the entire deficit. During the recovery, both the cost of imported oil and Chinese imports have risen with consumer spending, and now these threaten to sink the recovery by year end.

Money spent on Middle East oil and Chinese coffee makers cannot be spent on US-made goods and services, unless offset by exports.

When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services, or the demand for what they make is inadequate to clear the shelves, inventories pile up, layoffs result, and the economy goes into recession.

To keep Chinese products artificially inexpensive on US store shelves and discourage US exports into the Middle Kingdom, China undervalues the yuan by 40%.

Beijing accomplishes this by printing yuan and selling those for dollars to augment the private supply of yuan and private demand for dollars. Annually, those purchases come to about $450bn, or about a 35% subsidy on China’s exports of goods and services. That would surely cut the trade deficit with China by half and perhaps more.

Similarly the failure to develop US oil and gas resources—and speed the deployment of natural gas use and more fuel efficient vehicles and home heating purposes—sends abroad dollars that do not return to purchase US exports. Greater domestic production and conservation might not much lower the price of gasoline or heating oil, but it would keep more of the dollars spent on energy in the United States, creating jobs.

Excessive environmental regulation does not reduce risks to the oceans and atmosphere—lower US production results in more imports and not less domestic consumption, it merely shifts production to developing countries where the risks can be managed less effectively. US petroleum production could be easily raised by fourm barrels a day, and better use of internal combustion engines, urban natural gas fleets, and substitution of domestic natural gas for heating oil could easily save another one or twom barrels a day. In combination that would cut US oil imports in half.

Cutting the trade deficit in half over three years would increase US GDP by about $500bn dollars and create up to 5m additional jobs. This would increase growth to 3.6% from the expected 2.5%, and lower the unemployment rate by three percentage points.

Absent some correction in the trade deficit, growth at 2.5% may prove too slow to be sustainable. Many companies will find they can boost productivity and slash payrolls to keep up with such slow growth, and undermine consumer confidence and send the economy into a negative spiral and recession.

Longer term, the combination of expensive oil imports and China’s currency policies reduce US growth by one percentage point a year. The US economy would likely be $1.5 trillion larger today, but for the trade deficits on oil and with Asia over the last 10 years.

Addressing the trade deficit will permit the United States to grow at 3.5% a year, instead of the 2.5% expected as the “new normal.”

China has indicated it will not significantly revalue its currency. Gradual revaluation of the yuan helps little, because modernization and accompanying productivity improvements raise the intrinsic value of the currency at about the same pace. This is evidenced by the continuing pace of Beijing’s purchases of dollars and other currency to keep the yuan at its target exchange rate.

China views its exchange rate policy as a tool of domestic development strategy but its policy has broad, aggressive and negative international consequences—it is choking growth and imposing high unemployment on the United States and other western countries.

Diplomacy has failed, and President Obama should impose a tax on dollar yuan conversions in an amount equal to the amount of China currency market intervention divided by its exports—about 35%. For imports, at least, that would offset China’s subsidies that harm US businesses and workers.

After diplomacy has failed for both Presidents Bush and Obama, failure to act amounts to no more than appeasement and wholesale neglect of the Administration’s obligations to create a level playing field for US workers.

How to Grow the US Economy: Economists are marking down the Q2 GDP to 1.5%, with Robert Reich, former labor secretary, and Casey Mulligan, University of Chicago:

Peter Morici,

Professor, Robert H. Smith School of Business, University of Maryland,

College Park, MD 20742-1815,

703 549 4338 Phone

703 618 4338 Cell Phone

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