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TRADE WARS
Outside View: Trade deficit drag
by Peter Morici
College Park, Md. (UPI) Jun 7, 2012


disclaimer: image is for illustration purposes only

The U.S. Commerce Department is expected to report Friday that the U.S. deficit on international trade in goods and services was $49.3 billion in April, down from $51.8 billion in March.

The $600 billion annual deficit is the most significant barrier to achieving a robust economic recovery and adequate jobs creation and oil and consumer goods from China account for virtually the entire problem.

Economists agree the pace of economic recovery has disappointed, because of weak demand for what Americans make. Consumers are spending; however, every dollar that goes abroad to purchase oil or Chinese consumer goods, and doesn't return to purchase U.S. exports, is lost demand that could be creating American jobs.

Jobs creation

In the first quarter, the U.S. economy added only 226,000 jobs per month but the pace slowed to 77,000 in April and only 69,000 in May; whereas, 362,000 jobs must be created each month for three years to bring unemployment down to 6 percent. Growth of at least 4-5 percent a year is needed to accomplish that.

Budget deficits after a major crisis, like the 2008 financial collapse, can be like an opiate. Initially, those boost employment and make most folks feel better but if underlying structural problems go resolved deficits become addictive -- the economy collapses without them.

Nearly all the reduction in unemployment from 10 percent in October 2009 to 8.2 percent in May 2012 resulted from adults deciding to quit the labor force altogether. The percentage of adults participating in the labor force has fallen from 65.0 to 63.8 percent -- representing 2.9 million more Americans neither working nor looking for a job.

It appears the most effective jobs program has to been to convince adults they don't need or want a job and offer access to cheap or free healthcare for their children if they sit on the sidelines.

Economic growth

The economic recovery began five months after Barack Obama assumed the presidency and gross domestic product growth has averaged a disappointing 2.4 percent a year.

This is in sharp contrast to Ronald Reagan's economic recovery. Like Obama, he inherited a deeply troubled economy, implemented radical measures to reorient the private sector and accepted large budget deficits to get his plans in place. As Reagan campaigned for re-election, his post-Carter malaise economy grew at a 6 percent rate. That expansion set the stage for the Great Moderation -- two decades of stable, non-inflationary growth, which in time, erased the Reagan deficits.

Obama's deficits seem to only beget slow growth, more deficits and economic decline.

Consumers are spending and taking on debt again but too many of those dollars go abroad to purchase Middle East oil and Chinese consumer goods that don't return to buy U.S. exports. This leaves many U.S. 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 manufactured goods into U.S. markets pushed the trade deficit up and substantially offset those positive trends. Now a recession in Europe, slower growth in Asia and mounting consumer debt will curb demand at least into the spring and summer. Growth was less than 2 percent in the second quarter and will stay too slow to appreciably dent joblessness through the fall.

Obama 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, 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 U.S. petroleum production by 4 million barrels a day and cutting gasoline consumption by 10 percent through better use of conventional internal combustion engines and fleet use of natural gas in major cities.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40 percent. 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 U.S. goods in the Middle Kingdom.

Presidents George W. Bush and Obama have sought to alter Chinese policies through negotiations but Beijing offers only token gestures and cultivates political support among U.S. 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 U.S. 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 wouldn't 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 $525 billion a year and create at least 5 million jobs.

(Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.)

(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)

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