Analysis/Comment 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
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
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
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
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
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:
Professor, Robert H. Smith School of Business, University of Maryland,