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Solutions to Slow Growth and Job Creation

Prof. Peter Morici - 7/21/2011

The Commerce Department reported the May deficit on international trade in goods and services increased to $50.2 billion up from $43.6 billion in when the economic recovery began.

The trade deficit, along with the credit and housing bubbles, were the principal causes of the Great Recession. A rising trade deficit again threatens to sink the recovery and push unemployment above 10 percent.

Most fundamentally, U.S. economic growth and jobs creation has slowed, because the demand for U.S. made goods and services is expanding too slowly. Supplying what Americans and global consumers buy is not the issue, but rather U.S. and export customers don’t want enough of what Americans make. America needs to play its strengths—abundant domestic energy—and confront Chinese mercantilism that arbitrarily overprices U.S. goods at home and abroad.

Globalization does not have to mean a “new normal” of slow growth, high unemployment and dead end careers for young people. Globalization does not have mean and end to American prosperity unless U.S. policy compels it.

At 4.0 percent of GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obama’s stimulus package added. The Obama stimulus was temporary and now dissipating, whereas the trade deficit is permanent and swollen again.

The high cost of imported oil and gasoline and subsidized manufactures from China account for nearly the entire deficit. During the recovery, both the cost of imported oil and Chinese imports have risen with consumer spending, and now these threaten to sink the recovery by year end.

Money spent on Middle East oil and Chinese coffee makers cannot be spent on U.S.-made goods and services, unless offset by exports.

When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services, or the demand for what they make is inadequate to clear the shelves, inventories pile up, layoffs result, and the economy goes into recession.

To keep Chinese products artificially inexpensive on U.S. store shelves and discourage U.S. exports into the Middle Kingdom, China undervalues the yuan by 40 percent.

Beijing accomplishes this by printing yuan and selling those for dollars to augment the private supply of yuan and private demand for dollars. Annually, those purchases come to about $450 billion, or about a 35 percent subsidy on China’s exports of goods and services. That would surely cut the trade deficit with China by half and perhaps more.

Similarly the failure to develop U.S. oil and gas resources—and speed the deployment of natural gas use and more fuel efficient vehicles and home heating purposes—sends abroad dollars that do not return to purchase U.S. exports. Greater domestic production and conservation might not much lower the price of gasoline or heating oil, but it would keep more of the dollars spent on energy in the United States, creating jobs.

Excessive environmental regulation does not reduce risks to the oceans and atmosphere—lower U.S. production results in more imports and not less domestic consumption, it merely shifts production to developing countries where the risks can be managed less effectively. U.S. petroleum production could be easily raised by four million barrels a day, and better use of internal combustion engines, urban natural gas fleets, and substitution of domestic natural gas for heating oil could easily save another one or two million barrels a day. In combination that would cut U.S. oil imports in half.

Cutting the trade deficit in half over three years would increase U.S. GDP by about $500 billion dollars and create up to 5 million additional jobs. This would increase growth to 3.6 percent from the expected 2.5 percent, and lower the unemployment rate by three percentage points.

Absent some correction in the trade deficit, growth at 2.5 percent may prove too slow to be sustainable. Many companies will find they can boost productivity and slash payrolls to keep up with such slow growth, and undermine consumer confidence and send the economy into a negative spiral and recession.

Longer term, the combination of expensive oil imports and China’s currency policies reduce U.S. growth by one percentage point a year. The U.S. economy would likely be $1.5 trillion larger today, but for the trade deficits on oil and with Asia over the last 10 years.

Addressing the trade deficit will permit the United States to grow at 3.5 percent a year, instead of the 2.5 percent expected as the “new normal.”

China has indicated it will not significantly revalue its currency. Gradual revaluation of the yuan helps little, because modernization and accompanying productivity improvements raise the intrinsic value of the currency at about the same pace. This is evidenced by the continuing pace of Beijing’s purchases of dollars and other currency to keep the yuan at its target exchange rate.

China views its exchange rate policy as a tool of domestic development strategy but its policy has broad, aggressive and negative international consequences—it is choking growth and imposing high unemployment on the United States and other western countries.

Diplomacy has failed, and President Obama should impose a tax on dollar yuan conversions in an amount equal to the amount of China currency market intervention divided by its exports—about 35 percent. For imports, at least, that would offset China’s subsidies that harm U.S. businesses and workers.

After diplomacy has failed for both Presidents Bush and Obama, failure to act amounts to no more than appeasement and wholesale neglect of the Administration’s obligations to create a level playing field for U.S. workers.

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The trade deficit is the most significant barrier to jobs creation and growth in the U.S. economy.

Simply, the U.S. economy suffers from too little demand for what Americans make, and every dollar that goes abroad to purchase oil or Chinese consumer goods that does not return to purchase exports is lost purchasing power that could be creating jobs. Halving the $525 billion annual trade deficit would create 5 million jobs.

Jobs Creation

Oil and Chinese imports account for virtually the entire trade deficit. The failure of both the Bush and Obama Administrations to develop abundant domestic oil and gas resources, and address subsidized Chinese imports are major barriers to pulling down unemployment to acceptable levels.

The economy added only 18,000 jobs in June; however, 382,000 jobs must be added each month for the next 36 months to bring unemployment down to 6 percent. With federal and state government cutting payrolls, the private sector must add about 400,000 per month to accomplish this goal.

Americans are spending again, but too many dollars go abroad to purchase Middle East oil and Chinese consumer goods that do not return to buy U.S. exports. This leaves U.S. businesses with too little demand to justify new investments and hiring, too many Americans jobless and wages stagnant, and state and municipal governments with chronic budget woes.

In June, the private sector added only 57,000 jobs, and many were in government subsidized health care and social services. Netting those out, the private sector jobs created only 35,000 in June—that comes to 11 non-government subsidized jobs per city and county.

Economic Growth

The first half of 2011, GDP growth has averaged about 2.2 percent, well below the 3 percent needed just to keep up with productivity and labor force growth and keep unemployment from rising.

In 2010, consumer spending, business technology and auto sales added strongly to demand and growth, and exports have done quite well. However in 2011, the soaring cost of imported oil and subsidized Chinese manufactures into U.S. markets pushed up the trade deficit and offset those positive trends. Now consumer pessimism is pushing down home prices and sales again, and car sales dipped in May and June.

Administration imposed regulatory limits on conventional oil and gas 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 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.

Presidents 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 divided by its exports—about 35 percent. That would neutralize China’s currency subsidies that steal U.S. factories and jobs. It would not 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 $500 billion and create 5 million jobs.