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Dr Peter Morici: US Economy; Self-inflicted wounds threaten jobs market meltdown
By Professor Peter Morici
Jan 10, 2013 - 7:34 AM
|Lawrence Jackson captured this photograph of the president in Feb 2012, holding Arianna Holmes, 3, before taking a departure photo with members of her family in the Oval Office. A portrait of President Lincoln hangs on the wall.
Dr Peter Morici: US Economy;
Friday, the Commerce Department is expected to report the annual deficit on
international trade in goods and services remained about $500bn a year.
Along with higher taxes and other antigrowth policies, this deficit slows
recovery and threatens to thrust the economy into a second recession and push
unemployment to truly painful levels.
Consumer spending continues to expand, though haltingly, and the annual federal
deficit has increased from $161bn before the financial crisis to more than
$1tn, injecting enormous additional demand into the system. However, too
many of those dollars go abroad for Middle East oil and Chinese goods that do
not return to buy US exports, and higher oil prices will up the trade gap in
Businesses, consequently, are pessimistic about future demand for US-made
goods and services, and bearing higher corporate and other business taxes than
foreign competitors, rising employee benefit costs mandated by Obama Care and
more cumbersome business regulations are reluctant to hire in the United States.
Although rising wages in China are making US locations somewhat more
attractive than in recent years, cumbersome business regulations add costs and
slow, and even stifle, Greenfield investments and expansion of existing
facilities. According to the US Chief Executive of Flextronics International,
a world-wide product design, logistics and manufacturing services company, a
manufacturing plant for 5000 employees can be set up in Asia in 90 days but it
takes much longer in the United States.
Those barriers have slowed the manufacturing renaissance and frustrated the
virtuous cycle of temporary tax cuts and additional government spending, new
hiring, and additional household spending the first-term Obama stimulus sought
Now the Fiscal Cliff deal will raise combined federal and state tax rates for
many small businesses on expansion and reinvestment to maintain existing
facilities to more than fifty%. Look for multinational corporations to
shift sourcing and jobs from many US small enterprises to Asia.
Prior to the Fiscal Cliff tax increases, economists predicted growth of about 2% for 2013. However, these new taxes on small business investment and
innovation strike at the heart of this once vibrant American jobs creating
machine—look for growth in the range of 1.5% and a tougher jobs market.
Growth below 2% is difficult to sustain—any disruption could set off a
cycle of layoffs, falling consumer spending and ultimately a recession that
pushes unemployment into double digits.
Imported oil and subsidized imports from China account for the entire trade gap.
President Obama has talked repeatedly about developing the full range of energy
resources, but has toughened counterproductive limits on oil production in the
Gulf, off the Pacific and Atlantic Coasts, and Alaska.
Development of new onshore reserves in the Lower 48 has not delivered enough new
oil, and full push on US reserves would cut US imports in half. Shifting
federal subsidies from cost ineffective electric cars, wind and solar to more
fuel efficient internal combustion engines and plug-in hybrids could further cut
US petroleum imports.
To keep Chinese products artificially inexpensive on US store shelves, Beijing
undervalues the yuan through intervention in currency markets. It pirates US
technology, subsidizes exports and imposes high tariffs on imports. Other Asia
governments, most recently Japan, have adopted similar policies to stay
competitive with the Middle Kingdom.
Economists across the ideological and political spectrum have offered strategies
to offset the deleterious consequences of currency strategies on the US
economy and force China and others to abandon mercantilist policies. However,
Beijing offers token gestures, knowing President Obama will not take the strong
Cutting the trade deficit by $300bn, through domestic energy development
and conservation, and forcing China’s hand on protectionism would increase GDP
by about $500bn a year and create at least 5m jobs.
Longer term, large trade deficits shift resources from manufacturing and service
activities that compete in global markets to domestically focused industries.
The former undertake much more R&D and investments in human capital.
Cutting the trade deficit in half would raise long-term US economic growth by
one to two%age points a year. But for the trade deficits of the Bush and
Obama years, US GDP would be 10 to 20% greater than it is today, and
unemployment and budget deficits not much of a problem.
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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