Economic Analysis
Curb Trade Deficit, Rev Up Oil to Engineer More Growth and Jobs
Feb. 8, 2012 – by Dr. Peter Morici
Friday, the Commerce Department is expected to report the deficit on international trade in goods and services was $47.8 billion in December, unchanged from November. (See Dr. Morici’s comprehensive short-term economic forecast for all indicators.)
This 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.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.
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Unemployment Falls to 8.3 but Continued Gains Uncertain
Feb. 3, 2012 – by Dr. Peter Morici
The economy added 243,000 jobs in January, and unemployment fell to 8.3 percent. Going forward unemployment is not likely to fall much further and could rise again.
Fourth quarter growth was stronger as the global economy recovered from first half disruptions such as the earthquake in Japan, but going forward economists expect growth to slow to about 2 percent. (See Dr. Morici’s short-term economic forecast.)
Job growth in the range of 130,000 should be expected to barely accommodate labor force growth but not much lower the unemployment rate. That is hardly a pace that will restore economic health, or validate President Obama’s heavy intervention in the economy and industrial policies in the upcoming Presidential campaign.
The unemployment rate would be higher but for the fact that many adults have quit looking for work altogether, and the adult labor force participation rate remains depressed. In January, working age adults not participating in the labor force – those neither employed nor looking for work-increased by 88,000.
Also, it appears many unemployed professionals have established home-based businesses that really don’t provide full time employment but do take workers off the unemployment rolls. Many likely have one or two days of paid work each week, and spend the balance of their time looking for business or idle.
Strong gains were notched in retail and wholesale trade, warehousing and transportation, leisure and hospitality, and health care and social services. Information technology and financial services registered substantial losses.
Manufacturing added 50,000 jobs and construction added 21,000.
Gains in manufacturing production are not accompanied by even stronger improvements in employment largely because so much of the growth is focused in high-value activity. Assembly work, outside the auto patch, remains handicapped by the exchange rate situation with the Chinese yuan.
The situation with the yuan is the single largest impediment to more robust growth in manufacturing and its broader multiplier effects for the rest of the economy; the Obama Administration indicated over the holidays it has no intention of challenging China on this issue, and it enjoys the unlikely support of Speaker John Boehner.
Government employment fell by 14,000 as private sector jobs added 257,000. Falling home prices translate into lower assessments and property values with considerable lag in most communities. In 2012, the housing recession will significantly reduce local tax receipts and employment. Coupled with federal budget cutbacks, government employment should fall by about 20,000 a month through the end of 2012.
The private sector less the heavily subsidized health care and social services industries, and temporary businesses services, added 197,000 jobs. In the months ahead, gains in core private sector employment must substantially improve if the economy is to halt the decline in real wages and provide federal, state and local governments with adequate revenues, and that is not happening fast enough.
The economic crisis in Europe and mounting problems in China’s housing sector and banks worries U.S. businesses about a second major recession and discourages new hiring. The U.S. economy continues to expand but is quite vulnerable to shock waves from crises in European and Asia.
Factoring in those discouraged adults and others working part time for lack of full time opportunities, the unemployment rate is about 15.1 percent. Adding college graduates in low skill positions, like counterwork at Starbucks, and the unemployment rate is closer to 20 percent
Prospects for lowering those dreadful statistics remain slim. The economy must add 13 million jobs over the next three years – 361,000 each month – to bring unemployment down to 6 percent. Considering continuing layoffs at state and local governments and federal spending cuts, private sector jobs must increase about 380,000 a month to accomplish that goal.
Growth in the range of 4 to 5 percent is needed to get unemployment down to 6 percent over the next several years. In fourth quarter of 2011, the economy grew at about 3 percent but that is expected to slow to about 2 percent in 2012.
Growth is weak and jobs are in jeopardy, because temporary tax cuts, stimulus spending, large federal deficits, expensive and ineffective business regulations, and costly health care mandates do not address structural problems holding back dynamic growth and jobs creation-the huge trade deficit and dysfunctional energy policies.
Oil and trade with China account for nearly the entire $550 billion trade deficit. This deficit is a tax on domestic demand that erases the benefits of tax cuts and stimulus spending.
Simply, dollars sent abroad to purchase oil and consumer goods from China, that do not return to purchase U.S. exports, are lost purchasing power. Consequently, the U.S. economy is expanding at 2 percent a year instead of the 5 percent pace that is possible after emerging from a deep recession and with such high unemployment.
Industrial policies, like federal bailouts for General Motors and Maryland’s efforts to save an aging steel mill at Sparrows Point won’t fix the jobs market-those just shift employment from more competitive enterprises. Payroll tax holidays are similar band aids-those buy jobs today at the expense of cutbacks in 2013 and the years that follow.
Without prompt efforts to produce more domestic oil, redress the trade imbalance with China, relax burdensome business regulations, and curb health care mandates and costs, the U.S. economy cannot grow and create enough jobs.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.
