Analysis/Comment
Dr Peter Morici: Curb US trade deficit; Rev up oil to engineer more growth and jobs
By Professor Peter Morici
Feb 10, 2012 - 5:51 AM

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President Barack Obama demos Joey Hudy's Extreme Marshmallow Cannon at the Science Fair in the White House, Feb 07, 2012

Dr Peter Morici: Today, the US Commerce Department is expected to report the deficit on international trade in goods and services was $47.8bn in December, unchanged from November.

This trade deficit is the most significant barrier to more robust economic growth and jobs creation—even more formidable than the federal budget deficit—because its effects are more enduring. 

The pace of economic recovery has disappointed, because the US economy suffers from too little demand for what Americans make. Consumers are spending again—the process of winding down consumer debt that followed the Great Recession ended in April; however, every dollar that goes abroad to purchase oil or Chinese consumer goods, and does not return to purchase US exports, is lost domestic demand that could be creating American jobs.

Jobs Creation

Oil and consumer goods from China account for virtually the entire trade gap. The failure of the Bush and Obama Administrations to develop and better use abundant domestic petroleum resources, and address subsidized Chinese imports are major barriers to reducing unemployment.
 
The economy added 243,000 jobs in January; whereas, 361,000 jobs must be added each month for the next 36 months to bring unemployment down to 6%. With federal and state government cutting payrolls, the private sector must add about 380,000 per month to accomplish this goal. Growth in the range of 4 to 5% a year is needed to accomplish that.

Unemployment has fallen, largely because working aged adults are dropping out of the labor—they are neither employed, nor seeking work. Since October 2009, the jobless rate as fallen from 10 to 8.3%, despite the fact that the%age of working aged adults employed stayed constant at 58.5%. The%age of adults participating in the labor force—the employed and those unemployed but making some effort to find work—fell from 65.0 to 63.7%. 

Simply, during this recovery, the most effective jobs creation program has been to convince more adults that they don’t want a job or it is futile to look for a decent position, and simply quit looking—that phenomenon has accounted for 75% of the reduction in the unemployment rate over the past 27 months.

Just to keep up with productivity growth, which averages at about 2% a year, and natural increase in the adult population, which is about 1%, the economy must grow at about 3% a year—unless more adults quit looking for work altogether. As stronger growth attracts immigration and encourages idle adults to reenter the labor force, growth in the range of 3.5% is needed to sustain a full employment economy.

Economic Growth

The economic recovery began five months after Mr. Obama assumed the presidency, and GDP growth has averaged a disappointing 2.4% a year. 

This is in sharp contrast to Ronald Reagan’s economic recovery.  Like Mr. Obama, he inherited a deeply troubled economy, implemented radical measures to reorient the private sector, and accepted large budget deficits to get their plans in place. As Mr. Reagan campaigned for reelection, his post-Carter malaise economy grew at a 7.5% rate. That expansion set the stage for the Great Moderation—two decades of stable, non- inflationary growth. 

Most economists agree, growth is inadequate because demand is too weak—and the trade deficit is the culprit. 

Consumers are spending and taking on debt again, but too many dollars spent by Americans go abroad to purchase Middle East oil and Chinese consumer goods that do not return to buy US exports. This leaves many US businesses with too little demand to justify new investments and more hiring, too many Americans jobless and wages stagnant, and state and municipal governments with chronic budget woes.

In 2011, consumer spending, business investment and auto sales added significantly to demand and growth, and exports did better too; however, higher prices for oil and subsidized Chinese manufactures into US markets pushed up the trade deficit and substantially offset those positive trends.  Now a recession in Europe, slower growth in Asia, and consumer debt will curb demand at least into the spring and summer.

Administration imposed regulatory limits on conventional petroleum development are premised on false assumptions about the immediate potential of electric cars and alternative energy sources, such as solar panels and windmills. In combination, Administration energy policies are pushing up the cost of driving, making the United States even more dependent on imported oil and overseas creditors to pay for it, and impeding growth and jobs creation.

Oil imports could be cut in half by boosting US petroleum production by 4m barrels a day, and cutting gasoline consumption by 10% through better use of conventional internal combustion engines and fleet use of natural gas in major cities.

To keep Chinese products artificially inexpensive on US store shelves, Beijing undervalues the yuan by 40%. It accomplishes this by printing yuan and selling those for dollars and other currencies in foreign exchange markets.  In addition, faced with difficulties in its housing and equity markets, and troubled banks, it is boosting tariffs and putting up new barriers to the sale of US goods in the Middle Kingdom.

Presidents Bush and Obama have sought to alter Chinese policies through negotiations, but Beijing offers only token gestures and cultivates political support among US multinationals producing in China and large banks seeking business there. 

The United States should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention. That would neutralize China’s currency subsidies that steal US factories and jobs. That amount of the tax would be in Beijing’s hands—if it reduced or eliminated currency market intervention, the tax would go down or disappear. The tax would not be protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it would be self defense.

Cutting the trade deficit in half, through domestic energy development and conservation, and offsetting Chinese exchange rate subsidies would increase GDP by about $525bn a year and create at least 5m jobs.

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

pmorici@rhsmith.umd.edu

http://www.smith.umd.edu/lbpp/faculty/morici.html

http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm

Greece Crisis Talks Continue in Athens: Peter Morici, economics professor at the University of Maryland, told CNBC on Monday Feb 06: "certainly no one wants chaos and an uncontrolled default but there are alternatives to what is being worked out here, my feeling is that the ultimate package we get will not be a solution to Greece's problems":

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