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Trade Deficit Dampens Recovery and Destroys Jobs

Prof. Peter Morici - 8/19/2009

Wednesday, the Commerce Department will report June international trade in goods and services. The trade deficit is expected to rise to $28.5 billion from $26 billion in May.

The ballooning trade deficit is a principal cause of the Great Recession, threatens to stifle recovery and push unemployment above 10 percent through 2011

At 2.2 percent of GDP, the trade deficit subtracts about more from demand for U.S.-made goods and services than President Obama’s stimulus package adds. Moreover, Obama stimulus is temporary, whereas the trade deficit is permanent.

Subsidized manufactures from China and petroleum account for nearly the entire deficit and both will rise as consumer spending and oil prices rebound later in 2009.

Money spent on Chinese coffee markers and Middle East oil cannot be spent on U.S. products, unless offset by exports.

From 2003 to 2007, Americans borrowed to consume more than they produced but when mortgages failed, the shortfall in demand for domestic products drove up unemployment, choked consumer spending and thrust the economy into recession. Now huge stimulus spending is required to resuscitate business activity.

President Obama ignores the trade deficit; consequently, his policies to fight the recession will deliver only a moderate recovery in 2010. The economy will collapse into a deeper recession when the stimulus money runs out in 2012.

So far, the Obama Administration has not challenged Beijing’s most protectionist policies—large government purchases of U.S. dollars that drive down 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 would make the situation worse by encouraging more manufacturing to move to China, where CO2 emissions continue unregulated. President Obama’s energy policies will finish what Chinese and Japanese mercantilist started—the wholesale destruction of U.S. manufacturing and the middle-class wages it supports.

National health care will further tax the private sector, swell the trade deficit and send more jobs to Asia and Europe.

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 subsidized imports. Through recession and recovery, 5.5 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.

The trade deficit is the single most important reason why the private sector has failed to add a single job since 1999.

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 $10,000 per worker.

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