Obama's broken promise stifles growth and punishes workers
By Peter Morici
web posted March 16, 2009
Last week, the Commerce Department reported the January trade deficit was $36.0 billion. This was down from $39.9 billion in December, largely because oil prices fell and the recession is slowing demand for imported Chinese consumer goods.
To the extent stimulus spending gives the economy a temporary lift, oil prices and Chinese imports will rise again and pull the economy back down into recession.
The huge trade deficit indicates Americans spend much more abroad than foreigners spend in the United States, consume too much more than they produce, and borrow too much from the rest of the world, especially China and the Middle East oil exporters.
At 3.6 percent of GDP, the trade deficit imposes a much larger drag on the economy than the lift provided by President Obama's stimulus package.
Simply, money spent on Middle East oil, Chinese televisions and coffee markers, and Japanese and Korean cars can't be spent on U.S. made goods and services, unless offset by a comparable amount of exports. This creates an enormous shortage in demand for U.S.-made goods and services and is the primary reason the economy needs huge stimulus spending and huge budget deficits to keep it going. Along with the banking crisis, the trade deficit could push unemployment above 10 percent for a long time
As stimulus packages in the United States, China and elsewhere lift the global economy, the U.S. oil import bill will increase as oil prices and demand rise, and the undervalued Chinese yuan and beefed up subsidies on exports will push Chinese consumer goods and unemployment into the U.S. market. More American workers will be pushed out of good paying jobs with benefits into poorly paying positions and left to charity to obtain health care.
Another stimulus package and even larger budget deficits will be required. That will require more borrowing from China and Middle East royals and further indenture our children.
If Congress enacts further stimulus spending to lower and keep unemployment below 8 percent, the trade deficit will exceed 5 percent of GDP and foreign borrowing could spin out of control. Deficit driven prosperity can only continue as long as foreign investors are willing to add, each year, hundreds of billions to their huge holdings of dollar denominated securities, and there is no guarantee that financing will be forthcoming.
Ultimately, if President Obama continues to ignore the trade deficit and paint those who see this threat as protectionist, his policies to pull America out of recession and avert economic decline will fail. The economy's most fundamental structural problems are the destructive consequences of Chinese protectionism and the President's failure either to see this threat or his lack of will to address it.
Together, the trade deficit with China and on oil and automotive products account for virtually the entire deficit on trade in goods and services and are simply bankrupting the country. The trade deficit with China is largely caused by an artificially undervalued yuan and Chinese protectionism. Excessive oil imports are caused by dysfunctional energy policies. The automotive deficit is exacerbated by past management's missteps, a labor agreement with the UAW more suited to Chaplin's Modern Times than the global competitive landscape, and Japan's undervalued yen.
The centerpiece of President Obama's energy policy, a tax on CO2 emissions, would make the situation much worse by encouraging more manufacturing to move to China and increasing U.S. dependence on the Middle Kingdom for both goods and to finance U.S. trade and budget deficits. President Obama's energy policies will finish what Chinese and Japanese mercantilism began -- the wholesale destruction of U.S. manufacturing and the middle-class wages it supported.
Correcting the trade deficit would lift the economy much more effectively and permanently than budget busting stimulus spending. Sadly, President Obama, after promising to address trade during his campaign, has ignored the issue since his inauguration and instead offers policies that will make the situation worse. By failing to confront Chinese protectionism and the broader problems creating the huge trade deficit, President Obama has broken trust with America's workers.
To finance the trade deficit, Americans are borrowing and selling assets at a pace of about $400 billion a year. U.S. foreign debt exceeds $6.5 trillion, and the debt service comes to nearly $2,000 a year for every working American.
Soon foreign holdings of U.S. debt and securities could exceed the value of all the publically traded stock in the United States -- those lines may have already been crossed -- and foreign investors, such the Chinese central bank and Saudi Royals, can buy up GE and other icons from the passing age of American prosperity.
The trade deficit imposes a significant tax on GDP growth by moving workers from export and import-competing industries to other sectors of the economy. This reduces labor productivity, research and development (R&D) spending, and important investments in human capital.
In 2009 the trade deficit is slicing $400 billion to $600 billion off GDP, and longer term, it reduces potential annual GDP growth to 3 percent from 4 percent.
U.S. import-competing and export industries spend three-times the national average on industrial R&D. Productivity is at least 50 percent higher in industries that export and compete with imports, and reducing the trade deficit and moving workers into these industries would increase GDP.
Manufacturers are particularly hard hit by this subsidized competition. Through recession and recovery, the manufacturing sector has lost more than 4 million jobs since 2000. Following the pattern of past economic expansions, the manufacturing sector should have regained at least 2 million of those jobs, especially given the very strong productivity growth accomplished in durable goods and throughout manufacturing during the expansion.
Lost growth is cumulative. Thanks to the record trade deficits accumulated over the last 10 years, the U.S. economy is about $1.5 trillion smaller. This comes to about $10000 per worker.
Had the Administration and the Congress acted responsibly to reduce the deficit, American workers would be much better off, tax revenues would be much larger, and the federal deficit could be eliminated without cutting spending.
Although, President Obama promised to take such steps to curb the trade deficit during the campaign, those steps have been opposed by Wall Street, represented by protégés of Robert Rubin in the Obama White House and at Treasury. Politics and patronage seem to be getting in the way of sound economic and prudent budget policies.
The damage grows larger each month the President ignores the corrosive consequences of the trade deficit.
President Obama's broken campaign promises are punishing the economy and American workers.
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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