Dr. Peter Morici: On Thursday, the US Commerce Department is expected to report the deficit on international trade in goods and services was $49.0bn in April, up from $48.2bn in March. Oil and trade with China account for virtually the entire shortfall, and are a major drag on economic recovery and threat to President Obama’s re-election.

This trade deficit subtracts from demand for US-made goods and services, just as a large federal budget deficit adds to it. Consequently, a rising trade deficit slows growth and jobs creation, and limits how much the Congress and the President may reduce the budget deficit without sinking the economic recovery.

Jobs Creation

The failures to develop domestic petroleum resources and address subsidized Chinese imports are major barriers to creating enough jobs to pull unemployment down to acceptable levels over the next several years.

The economy added only 54,000 jobs in May; however, 365,000 jobs must be added each month for the next 36 months to bring unemployment down to 6%. With federal and state governments trimming civil servants, private sector jobs growth must be about 390,000 per month to accomplish this goal.

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

In May, the private sector has added only 83,000 jobs, and many were in government subsidized health care and social services. Netting those out, core private sector jobs have increased only 57,000 in May - - that comes to 18 non-government subsidized jobs per city and county.

Early in a recovery, temporary jobs appear first, but 23 months into the expansion, permanent, non-government subsidized jobs creation should be much stronger.

Economic Growth

Since the recovery began in mid 2009, GDP growth has averaged 2.8%, disappointing Administration economists who have consistently assumed 4% growth in budget projections and forecasts for the job creating effects of stimulus spending. And now economists are concerned that growth is slowing further—to well below the 3% needed just to keep pace with labor force growth and keep unemployment from rising.

Through the beginning of this year, consumer spending, business technology and auto sales have added strongly to demand and growth, and exports have done quite well. However, soaring oil prices and the continued push of subsidized Chinese manufactures into US markets offset those positive trends. Now consumer pessimism is pushing down home prices and sales again, and car sales have dipped in recent weeks.

Administration imposed regulatory limits on conventional oil and gas 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 and making the United States even more dependent on imported oil and indebted to China and other overseas creditors to pay for it.

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.

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 additional business in China.

The United States 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