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Analysis/Comment Last Updated: Jan 12, 2011 - 4:54 AM


Dr. Peter Morici: The US trade deficit and the jobs drought
By Professor Peter Morici
Jan 12, 2011 - 4:49 AM

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US current account shortfall in third quarter of 2010

Dr.  Peter Morici: The US economy added 103,000 jobs in December but that was disappointing after recent surges in retail sales and business spending. Simply too many dollars Americans spend go to imports but don’t return to buy US exports, leaving too many Americans jobless, wages stagnant, and Federal and State governments with budget woes.

Thursday, analysts expect the Commerce Department to report the deficit on international trade in goods and services was $40.7bn in November, up from $27bn when the recovery began. This rising deficit subtracts from demand for US products, just as stimulus spending and tax cuts add to it. The deficit is taxing growth and jobs creation, and the Obama Administration has not offered a credible policy to reduce it.

Jobs Creation

By the end of 2013, about 13m private sector jobs must be added to bring unemployment down to 6%. Current policies are not creating conditions for 5% GDP growth that could be achieved and is necessary for businesses to hire 350,000 workers each month.

Since December 2009, the private sector has added 112,000 jobs per month, but most of those have been in government subsidized health care and social services, and temporary business services. Netting those out, core private sector jobs creation has been a meager 58,000 per month—that comes to 18 new jobs per county for more than 5,000 job seekers per county.

During the early stages of an economic expansion, temporary jobs appear first but 18 months into the recovery, permanent, non-government subsidized jobs creation
should be accelerating. Instead, core private sector jobs were up only 60,000 in December.

Trade Deficit

Imports grew so much more rapidly than exports that the trade gap subtracted 1.7% from demand for US goods and services and third quarter GDP.

But for the growing trade gap, GDP would have increased 4.3% instead of 2.6%. At that pace, unemployment would fall to about 7% by the end of 2013.

Oil and goods from China account for nearly the entire trade deficit, and without a dramatic change in energy and trade policies, the US economy faces unacceptably high unemployment indefinitely.

Limits on offshore drilling and otherwise curtailing conventional energy supplies—premised on false assumptions about the immediate potential of electric cars and alternative energy sources—are making United States even more dependent on imported oil and more indebted to China and other overseas investors.

Detroit could build many more attractive and efficient gasoline-powered vehicles now, and a national policy to accelerate fleet replacement would spur growth and create jobs much more rapidly than investments in battery and electric technologies.

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 other currencies in foreign exchange markets. Annually, those purchases exceed $450bn or about 10% of China’s and GDP 35% of its exports.

President Obama has pleaded with China to stop manipulating its currency, but Beijing shrewdly recognizes President Obama lacks the will to meaningfully counter Chinese mercantilism with strong, effective actions; hence, Beijing offers token gestures and cultivates political support among US businesses like Caterpillar who lead in outsourcing jobs to China and profit from Chinese protectionism at the expense of American workers.

President Obama should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports—about 35%. That would neutralize China’s currency subsidies that steal US factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it’s self defense.

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

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