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Trade Deficit, Jobs, and Insourcing

Prof. Peter Morici - 1/13/2012

I. Trade Deficit Slows Growth and Blocks Jobs Creation


Friday, the Commerce Department is expected to report the deficit on international trade in goods and services was $45.0 billion in November, up slightly from $43.5 billion in October.

This trade deficit is the most significant barrier to jobs creation and growth in the U.S. economy—even more formidable than the federal budget deficit, because its effects are more enduring.

Economic recovery is slow, because the U.S. economy suffers from too little demand for what Americans make. Americans are spending again—the process of winding down consumer debt that followed the Great Recession ended in April; however, every dollar that goes abroad to purchase oil or Chinese consumer goods, and does not return to purchase U.S. exports, is lost domestic demand that could be creating American jobs.

Jobs Creation

Oil and Chinese imports account for virtually the entire trade gap. The failure of the Bush and Obama Administrations to develop abundant domestic oil and gas resources, and address subsidized Chinese imports are major barriers to reducing unemployment.

The economy added only 200,000 jobs in December; whereas, 360,000 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 3800,000 per month to accomplish this goal.

Too many dollars spent by Americans 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.

Economic Growth

For 2011, GDP growth averaged about 2 percent, but 3 percent is needed just to keep up with productivity and labor force growth and keep unemployment from rising. Fourth quarter growth was about 3 percent—compensating for more sluggish progress earlier in the year—but overall economists expect the pace to again slow to 2 to 2.5 percent in 2012.

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 subsidized Chinese manufactures into U.S. markets pushed up the trade deficit and substantially offset those positive trends. Now conditions in Europe and rising consumer debt will curb demand at least through the spring and summer.

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. 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 U.S. 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 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. That would neutralize China’s currency subsidies that steal U.S. 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 defense.

Cutting the trade deficit in half, through domestic energy development and conservation, and offsetting Chinese exchange rate subsidies would increase GDP by about $550 billion and create at least 5 million jobs.

II. Insourcing American Jobs


President Obama is initiating an “Insourcing American Jobs” dialogue with top business leaders. The latter are always looking for tax breaks and special benefits, and this could quickly degenerate into pleas for special treatment, whereas creating the best overall environment for all private investment would best foster growth and jobs.

Huge losses in Washington’s equity stake in GM illustrate government financed jobs are too expensive. Fiascos like Solyndra and other ill-fated energy projects prove yet again businesses not bureaucrats have the fine grain information and financial acumen to make the right bets—investments that create new products, advance established industries and multiply jobs, not merely pay politicians’ debts to campaign supporters.

Globalization makes abundant U.S. technology, energy and capital, if correctly deployed, much more valuable. China and Germany—so often are cited for their effective manufacturing and technology strategies—ensure their businesses compete in an advantaged environment. The policymaking challenge to Washington is defined by the necessity of leveling the playing field for U.S. businesses.

Washington must ensure U.S.-based innovation and production has the same market access in Asia and the Eurozone foreign businesses now enjoy in U.S. markets, and American firms are not disadvantaged by undervalued yuan or euro. As things currently stand, the math for locating manufacturing—be it textiles or turbines, auto parts or automation equipment—tilts heavily in favor of Chinese and German locations.

Both the Bush and Obama Administrations have relied too much on endless and unproductive diplomacy and commissions, and have failed to take the concrete actions advocated by the likely GOP nominee, Mitt Romney, this author and other economists. The President’s Insourcing American Jobs forum and his new Trade Enforcement Task Force are just more talk and study without the muscle of the U.S. government action to rebalance a tilted playing field.

Federal support for R&D is generous and essential, but too often, government-assisted research results in patents worked abroad—consider how little Apple and Microsoft technology results in U.S.-based manufacturing. Federal policy should require that patents accomplished with federal support be worked in the United States to be honored by the courts. Otherwise competing firms should be permitted to manufacture those products here.

Innovations in solar power and other alternative energy will dramatically reduce petroleum use in 20 or 30 years; however, for now, the global economy will run on oil, and the United States continues to import 10 million barrels a day, greatly taxing jobs creation and growth.

At $100 a barrel, prudent development of U.S. reserves could cut imports in half, and coupled with better use of abundant natural gas and wiser application of now available internal combustion technologies, the United States could become an energy exporter.

Discouraging domestic oil and gas development does not hasten the arrival of alternative energy, it only shifts the environmental risks associated with petroleum extraction to developing nations.

Genuinely opening the Gulf and other offshore petroleum reserves, and freeing up onshore natural gas deployment would create 2.5 million jobs in exploration and development, and construction, steel, cement and other industries usually associated with government stimulus spending but with private sector money.

For decades, Wall Street financial houses accelerated growth by directing vast American capital to new and innovative products, and improving the efficiency of established enterprises. In recent years, those creative energies morphed into the buccaneer pursuit of big bonuses and nearly dealt a lethal blow to American capitalism.

The cure has been worse than the disease. Dodd-Frank and big-bank bailouts encourage large Wall Street banks to acquire smaller regional institutions, who are flummoxed by the quagmire of new federal regulations. This concentrates control of most U.S. bank deposits among a handful of the largest financial institutions on Wall Street, and limits lending to small and medium-sized enterprises that create the most new jobs.

Commercial banking should again be separated from the Wall Street casinos, and offered streamlined regulation befitting taking deposits and making loans. The largest banks should be broken up to ensure none controls more than 5 percent of U.S. deposits.

The agenda to accelerate growth and create jobs is clear. It’s not Washington picking winners and engaging in endless talk. Rather, it’s the tough work of creating through assertive international trade and exchange rate policies a level global playing field for American businesses and workers, ensuring technologies developed in America build America, developing domestic conventional energy instead of sending environmental risks abroad, and cutting banks down to size to again serve their communities.