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ECONOMY: Trade Deficit Negates Stimulus Spending

Prof. Peter Morici - 7/27/2009

The trade deficit rose to $31.0 billion from $29.2 billion in April. Subsidized manufactures from China and petroleum imports comprise more than 90 percent of the deficit and both will rise as consumer spending and oil prices rebound later in 2009.

At 2.5 percent of GDP, the trade deficit subtracts more from demand for U.S.-made goods and services than President Obama’s stimulus package adds. Moreover, the lift from the Obama stimulus is temporary, whereas the drag from the trade deficit is permanent.

Money spent on Chinese coffee markers and Middle East oil cannot be spent on U.S. made products, unless offset by comparable exports. The resulting shortfall in demand for U.S.-made goods and services is a significant cause of the recession and why the economy needs huge stimulus spending and budget deficits to keep going. The trade deficit could push unemployment above 10 percent for many years.

If President Obama continues to ignore the trade deficit, his policies to fight the recession will result in a moderate recovery in 2010 but the economy will later collapse into a deeper recession when the stimulus money is all spent.

So far, the Obama Administration has failed to challenge Beijing’s more virulent mercantilist practices—its large official purchases of U.S. dollars that suppress the exchange rate for the yuan, subsidize Chinese exports and artificially elevate Chinese savings and suppress U.S. savings. The China-U.S. savings imbalance is hardly entirely a natural phenomenon rooted in consumer behavior.

Cap and trade legislation moving through Congress would make the situation worse by encouraging more manufacturing to move to China, where CO2 emissions would continue unregulated. President Obama’s energy policies will finish what Chinese and Japanese mercantilism began—the wholesale destruction of U.S. manufacturing and the middle-class wages it supported.

In 2009 the trade deficit is slicing $400 billion to $600 billion off GDP, and longer term, it reduces potential annual GDP growth to 3 percent from 4 percent.

Manufacturers are particularly hard hit by these subsidized imports. Through recession and recovery, 5.4 million manufacturing jobs have been lost since 2000. Following the pattern of past economic expansions, the manufacturing sector should have regained about 2.7 million of those jobs, especially given the very strong productivity growth accomplished in recent years.

Thanks to the record trade deficits accumulated over the last 10 years, the U.S. economy is about $1.5 trillion smaller. This comes to about $10000 per worker.

Although, President Obama promised to take such steps to curb the trade deficit during the campaign, those steps have been opposed by Wall Street, which is heavily represented among White House and Treasury political appointees. Politics and patronage seem to be getting in the way of sound economic and prudent budget policies.