Home >> United States & Canada >> Economics & Trade

     Email   Print 

American Review: GOP, Trade Deficit and Jobs

Prof. Peter Morici - 2/10/2012

I. GOP May Not Deserve to Win

Rick Santorum’s victories in Colorado, Missouri and Minnesota laid bare Mitt Romney’s weaknesses and the GOP’s fading prospects for defeating Barack Obama.

Romney’s advantages are money and organization. His well financed machine overwhelmed opponents in Florida, but he chose not to devote many resources to those beauty contests, and without the advantages of money—and massive attack ads—Mr. Santorum bested him by an average margin of 20 percent.

Mr. Santorum’s principal appeal is social issues and adherence to Republican economic fundamentalism. That plays well among Republican primary voters, who are dominated by rock-jawed conservatives, even in ideologically diverse states like Colorado, Missouri, and Minnesota. If Santorum had Romney’s money, he could win the nomination but get trounced by Barack Obama.

Nationally, Mr. Santorum’s hard-right positions on social issues would not serve him with more moderate voters—even those who might privately lean toward his agenda.

Consider Catholics, who are a quarter of registered voters and went with the winner in 9 of the last 10 presidential elections, including President Obama. They are accustomed to weighing church edicts on abortion, contraception and gay marriage against more practical concerns. For example in New York, they support moderate Republicans like Rudolph Giuliani and Michael Bloomberg who pitch making the transit system work and New York attractive to businesses.

Moderate voters generally don’t expect rigid adherence in public policy to their private views. Instead, they like tolerance. That’s why, although most Americans want women to have choices about contraception and abortion, Mr. Obama is in hot water for requiring hospitals and other social service organizations, sponsored by churches, to pay for those through health care insurance.

However, voters want politicians to deliver on the things all Americans want—safe streets, decent schools and the like. In 2012, that will be all about fixing an economy that is simply not delivering enough high quality jobs, and on that issue Mr. Santorum is lacking.

Mr. Santorum chants the hard right dogma--less taxes and deregulation—quite well, but after that, gets pretty thin.

With the federal deficit exceeding $1 trillion, hardly anyone believes the federal government can afford to deliver any substantial tax relief to most Americans. And with Wall Street banks gobbling up their regional brethren, and taking Main Street deposits to Manhattan’s gambling casinos, instead of lending to would be homebuyers and small businesses, hardly anyone believes banks need to be deregulated.

Dodd-Frank was a cruel rouse—it permitted President Obama to further slant the playing field in favor of the Democratic Party’s big Gotham City financiers and contributors—but the Republican field, Mr. Santorum included, is clueless on what should replace that failed law.

Republicans and the President do agree on much of what else needs fixing—trade with China, energy and health care—but differ on methods. And on those, Mr. Romney is the only candidate with a sensible diagnosis and detailed prescription for putting things right.

After a broad victory in Florida, Mr. Romney had the opportunity to take the campaign away from attack ads with simple and compelling statements to the nation about what’s broken and how he intends to fix it, but instead he keeps emphasizing s he’s got the experience Mr. Obama lacks to create jobs.

Bragging about experience at Bain Capital is self defeating. Private equity companies buy underperforming companies, downsize payrolls and replace ossified management, then sell the revamped entities to new investors.

Simply, Mr. Romney was in the business of firing people. Though some of Bain Capital’s progeny did go on to create thousands of jobs—Domino Pizza, Steel Dynamics and Epoch Senior Living are notable—but it is hard to argue across all his investments Mr. Romney was a jobs creator.

Massachusetts, during Mr. Romney’s tenure as governor, ranked 47th in jobs creation.

Mr. Obama will be able to hammer him on his “sins” as a financier and failed record as governor—and it’s Mr. Romney’s fault for making his experience, not what’s broken in the national economy and his solutions, the focus.

Coupled with Mr. Romney’s occasional well publicized gaffs—like not caring about the poor because the social safety net takes of them—he simply doesn’t appear to have the wits to be president.

Republicans could still rally around Mr. Santorum, nominate him and relive the Goldwater defeat. But if they ultimately pick Mr. Romney, his campaign may end like that of another Bay State Champion—John Kerry.

II. Curb Trade Deficit, Rev Up Oil to Engineer More Growth and Jobs

The trade deficit is the most significant barrier to more robust economic growth and jobs creation—even more formidable than the federal budget deficit—because its effects are more enduring.

The pace of economic recovery has disappointed, because the U.S. economy suffers from too little demand for what Americans make. Consumers 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 consumer goods from China account for virtually the entire trade gap. The failure of the Bush and Obama Administrations to develop and better use abundant domestic petroleum resources, and address subsidized Chinese imports are major barriers to reducing unemployment.

The economy added 243,000 jobs in January; whereas, 361,000 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 380,000 per month to accomplish this goal. Growth in the range of 4 to 5 percent a year is needed to accomplish that.

Unemployment has fallen, largely because working aged adults are dropping out of the labor—they are neither employed, nor seeking work. Since October 2009, the jobless rate as fallen from 10 to 8.3 percent, despite the fact that the percentage of working aged adults employed stayed constant at 58.5 percent. The percentage of adults participating in the labor force—the employed and those unemployed but making some effort to find work—fell from 65.0 to 63.7 percent.

Simply, during this recovery, the most effective jobs creation program has been to convince more adults that they don’t want a job or it is futile to look for a decent position, and simply quit looking—that phenomenon has accounted for 75 percent of the reduction in the unemployment rate over the past 27 months.

Just to keep up with productivity growth, which averages at about 2 percent a year, and natural increase in the adult population, which is about 1 percent, the economy must grow at about 3 percent a year—unless more adults quit looking for work altogether. As stronger growth attracts immigration and encourages idle adults to reenter the labor force, growth in the range of 3.5 percent is needed to sustain a full employment economy.

Economic Growth

The economic recovery began five months after Mr. Obama assumed the presidency, and GDP growth has averaged a disappointing 2.4 a year.

This is in sharp contrast to Ronald Reagan’s economic recovery. Like Mr. Obama, he inherited a deeply troubled economy, implemented radical measures to reorient the private sector, and accepted large budget deficits to get their plans in place. As Mr. Reagan campaigned for reelection, his post-Carter malaise economy grew at a 7.5 rate. That expansion set the stage for the Great Moderation—two decades of stable, non- inflationary growth.

Most economists agree, growth is inadequate because demand is too weak—and the trade deficit is the culprit.

Consumers are spending and taking on debt again, but 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 many U.S. businesses with too little demand to justify new investments and more hiring, too many Americans jobless and wages stagnant, and state and municipal governments with chronic budget woes.

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 a recession in Europe, slower growth in Asia, and consumer debt will curb demand at least into the spring and summer.

Administration imposed regulatory limits on conventional petroleum 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 $525 billion a year and create at least 5 million jobs.