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Analysis/Comment Last Updated: Jan 10, 2013 - 8:42 AM


Dr Peter Morici: US Economy; Self-inflicted wounds threaten jobs market meltdown
By Professor Peter Morici
Jan 10, 2013 - 7:34 AM

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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; On 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 2013.

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 to beget.

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 actions.

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.

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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