America must curtail twin cravings

The Obama administration needs to rectify the massive $580 billion trade deficit in order to create jobs. The best way to do it would be do tax Chinese imports and reduce foreign oil dependence.

Tonight, the US Commerce Department is expected to report the deficit on international trade in goods and services was $48.4 billion in January, only slightly changed from December.

The $580 billion annual trade deficit is the most significant barrier to jobs creation and lowering unemployment, and oil and consumer goods from China account for virtually the entire problem.

Economists agree, the pace of economic recovery has disappointed, because of too little demand for what Americans make. Consumers are spending again – the process of winding down consumer debt that followed the Great Recession ended last April; however, every dollar that goes abroad to purchase oil or Chinese consumer goods, and does not return to purchase US exports, is lost domestic demand that could be creating American jobs.

Jobs creation

Also tonight, the Labor Department is expected to report the economy created 204,000 jobs in February; whereas, 367,000 jobs must be added each month for the next 36 months to bring unemployment down to 6 per cent. With federal and state governments cutting payrolls, the private sector must add about 390,000 jobs per month to accomplish this goal. Growth of at least 4 to 5 per cent a year is needed to accomplish that.

Unemployment has fallen from 10 per cent in October 2009 largely because working aged adults are dropping out of the labour force – they are neither employed, nor seeking work. The jobless rate has fallen to 8.3 percent, because the percentage of adults participating in the labour force – the employed and those unemployed but making some effort to find work – fell from 65.0 to 63.7 percent. The percentage of adults employed has not changed – it’s stuck at 58.5 per cent.

Simply, during this recovery, the most effective jobs creation program has been to convince more adults that they don’t want a job or it is futile to look for a decent position, and simply quit looking – that phenomenon has accounted for 75 percent of the reduction in the unemployment rate over the past 27 months.

Just to keep up with productivity growth, which averages at about 2 per cent a year, and natural increase in the adult population, which is about 1 per cent, the economy must grow at about 3 per cent a year – unless more adults quit looking for work altogether. As stronger growth attracts immigration and encourages idle adults to reenter the labour force, growth in the range of 3.5 per cent is needed to sustain a full employment economy.

Economic growth

The economic recovery began five months after Mr Obama assumed the presidency, and GDP growth has averaged a disappointing 2.4 per cent a year.

This is in sharp contrast to Ronald Reagan’s economic recovery. Like Mr Obama, he inherited a deeply troubled economy, implemented radical measures to reorient the private sector, and accepted large budget deficits to get their plans in place. As Mr Reagan campaigned for re-election, his post-Carter malaise economy grew at a 7.1 percent rate. That expansion set the stage for the Great Moderation – two decades of stable, non-inflationary growth.

Most economists agree, growth is inadequate because demand is too weak. The trade deficit is the culprit.

Consumers are spending and taking on debt again, but too many dollars spent by Americans go abroad to purchase Middle East oil and Chinese consumer goods that do not return to buy US exports. This leaves many US 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 subsidised Chinese manufactures into US markets pushed up the trade deficit and substantially offset those positive trends. Now a recession in Europe, slower growth in Asia, and consumer debt will curb demand at least into the spring and summer.

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, administration energy policies are pushing up the cost of driving, 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 US petroleum production by four million barrels a day, and cutting gasoline consumption by 10 per cent through better use of conventional internal combustion engines and fleet use of natural gas in major cities.

To keep Chinese products artificially inexpensive on US store shelves, Beijing undervalues the yuan by 40 per cent. 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 US goods in the Middle Kingdom.

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 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 neutralise China’s currency subsidies that steal US 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 would not be protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it would be self defence.

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 five million jobs.

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


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