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USA: Trade Deficit, Jobs, and Taxes

Prof. Peter Morici - 10/15/2011

I. August Trade Deficit $45.6 Billion, Huge Jobs Killer


The Commerce Department reported the deficit on international trade in goods and services was $45.6 billion in August. The trade gaps with China and on imported oil account for virtually the entire deficit, and the trade deficit is the most significant barrier to jobs creation and growth in the U.S. economy. Administration policies, by failing to address the underlying structural causes of the trade imbalance, slow economic recovery and risk thrusting the economy into second recession, raising unemployment above 15 percent.

Economists agree, the recovery is weak and second recession threatens, because U.S. economy suffers from too little demand for what Americans make. 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 nearly $550 billion annual trade deficit would create at least 5 million jobs.

Jobs Creation

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

The economy added only 103,000 jobs in September; whereas, 373,000 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.

The China Currency Bill would slap duties on Chinese imports products subsidized by China’s government engineered undervalued currency, raise U.S. production and create jobs in America. If China stopped intervening in currency markets the duties would stop.

Similarly, if the Obama Administration and governors stopped blocking the production of domestic oil and gas, new jobs in construction and building materials industry—such as cement and steel—would open up quickly. The initiative would be better than government stimulus spending, because it would raise revenue rather than require Washington to tax and borrow.


Economic Growth

The first half of 2011, GDP growth has averaged about 0.8 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 retail sales and home prices, and discouraging new home construction and business investment.

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 per 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. American companies like GE, Caterpillar and Goldman Sachs have become dependent on Chinese protectionism and clients of the regime in Beijing. Laughingly, the President’s jobs council, headed by GE Chairman Jeff Immelt, proposes more tax breaks for GE instead of genuine action to foster currency reform.

The House should pass the China Currency Bill that as cleared the Senate, and President Obama should sign it. That would partially 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.

II. Herman Cain’s 9-9-9 Would Be Good for the Economy


Herman Cain’s proposal to replace all federal taxes with a 9 percent income tax, 9 percent national sales tax, and 9 percent corporate tax makes good economic sense.

This plan would impose the least administrative costs for raising the money needed to finance the federal government, better promote growth than the current tax system, and be a darn sight fairer than the current burdensome and complex personal and corporate taxes structures.

Administrative Costs

The current tax code imposes enormous compliance costs on private individuals and businesses. The vast array of complex deductions and credits intended to encourage private citizens to do more of some things and less of others have made accounting and tax law two of the most stable and recession proof professions on the planet.

Simply wiping away all those loopholes, not only permits a much lower and more certain average rate of taxation for all individuals and businesses, but it would also eliminate the costs of millions of hours of private tax professionals time from annual filings, and require fewer employers monitoring and auditing the returns of honest taxpayers. IRS agents could spend more time chasing tax evaders and get along with fewer employees in the bargain.

Economic Growth

The current personal income and corporate tax system—with marginal rates up to 35 percent—is full of incentives that reward individuals and businesses for investing to get the biggest tax write offs instead of pursuing the soundest commercial opportunities. By closing virtually all loopholes and lowering rates, 9-9-9 would make such tax prospecting obsolete and increase after tax profits for growing businesses and creating jobs. It would encourage investing to make products people want to buy rather than engineering balance sheets to avoid the tax collector.

The national sales tax component would essentially be a value added tax. Under WTO rules, those taxes are refunded on exports and levied on imports—an advantage Chinese and European exporters and import competing industries have, but U.S. businesses currently lack. And being a consumption tax, it would encourage saving and investing instead of overspending for immediate gratification—something liberals and conservatives have long advocated.

Equity and Fairness

The present system permits about 40 percent of all taxpayers off without paying income taxes, and most heavily taxes folks earning from $50,000 to $1million. Many richer folks often escape paying much lower rates, because hedge fund managers and manipulators of paper assets have the money to lobby Washington for special treatment.

The unfairness applies to sole proprietorships and small corporations—those can’t avoid the accountants, lawyers and lobbyists to avoid taxes with the ease of a GE or a dedicated Wall Street hedge fund, and they can little exploit low capital gains rates through financial engineering.

At the other end of the spectrum most low income individuals pay no income tax now, and would be required to pay 9 percent income and national sales taxes. If they saved ten percent of their incomes, they would have effective rates of about 17 percent.

Currently, they share with their employers a combined 15.3 percent social security and Medicare tax, and those would be ended by 9-9-9. Implementing legislation could require employers to raise wages by the amount of their saved employer contribution, and the IRS to provide a 2 percent tax credit for individuals earning less than the poverty line. Alternatively, the legislation could exempt basic groceries and a few similar essentials from the sales tax to address those equity concerns.

The additional growth fostered by such a simple and elegant solution to financing the national government would more than compensate for the lost revenue those small concessions to fairness requires.

Herman Cain may be no PhD economist—and he doesn’t appear to be listening to many—but he has stumbled onto something America should embrace. Two other Presidents—Harry Truman and Ronald Reagan—embraced similar simplicity and common sense, and they were arguably two of the most successful Presidents.