The following article was written by Peter Morici, a professor at the Smith School of Business, University of Maryland School.
Press Advisory: Wednesday’s Trade Deficit Report
Tuesday, analysts expect the Commerce Department to report the deficit on international trade in goods and services was $47.7 billion in March, up from $45.8 billion in February.
This trade deficit subtracts from demand for U.S.-made goods and services, just as a large federal budget deficit adds to it. Consequently, a rising deficit slows economic recovery and jobs creation and limits how much Congress and the President may cut the deficit without sinking the economic recovery.
Rising oil prices and imports from China are driving the trade deficit up, and these are major barriers to creating enough jobs to pull unemployment down to acceptable levels over the next several years.
Jobs Creation
The economy added 244,000 jobs in April; however, 360,000 jobs must be added per month to bring unemployment down to 6 percent over the next 36 months. With federal and state governments trimming civil servants, private sector jobs growth must exceed 360,000 per month to accomplish this goal.
Americans have returned to the malls and new car showrooms but too many dollars go abroad to purchase Middle East oil and Chinese consumer goods that do not return to buy U.S. exports. This leaves too many Americans jobless and wages stagnant, and state and municipal governments with chronic budget woes.
Simply, policies regarding energy and trade with China are not creating conditions for 5 percent GDP growth that is needed and easily could be achieved to bring unemployment down to acceptable levels.
In April, the private sector has added 268,000 jobs per month, but many were in government subsidized health care and social services. Netting those out, core private sector jobs have increased only 229,000 in April—that comes to 73 non-government subsidized jobs per county for more than 5000 job seekers per county.
Early in a recovery, temporary jobs appear first, but 22 months into the expansion, permanent, non-government subsidized jobs creation should be much stronger.
Economic Growth
Since the recovery began in mid 2009, GDP growth has averaged 2.8 percent, disappointing Administration economists who have consistently assumed 4 percent growth in budget projections and forecasts for the job creating effects of stimulus spending.
Consumer spending, business technology and auto sales have added strongly to demand and growth, and exports have done quite well. However, soaring oil prices and the continued push of subsidized Chinese manufactures in U.S. markets have offset those positive trends.
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 and making the United States even more dependent on imported oil and indebted to China and other overseas creditors to pay for it.
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 additional business in China.
The United States should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports—about 35 percent. That would neutralize China’s currency subsidies that steal U.S. factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it’s self defense.
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The De-coupling of Free Trade and U.S. Competitiveness
In Chapter 19 of the 1817 classic On the Principles of Political Economy, and Taxation, David Ricardo mentions , in addition to war, removal of capital and a new tax as destroyers of the comparative advantage which a country before possessed in manufacturing. Administrations/Congresses of both parties have been unable and/or unwilling to connect-the-dots, between the declines in U. S. Global Competitiveness and the following changes since the 1990’s:
- That has the effect of a new tax on U.S Exports, namely China’s manipulation of the U.S. Dollar.
- A Change in U.S. Corporate Tax Regulations that led to the flight of capital from the United States.
- Enactment of Value Added Taxes (VAT), which tax U.S. exports, by an increasing number of our trading partners.
The first change, which dates back to 1995, is China’s pegging its currency to the U.S. Dollar, in form this is not a tax, but in substance acts as a tax on all U.S. exports to all U.S. Trading partners, not just exports to China. Since China’s economy has been growing multiple times faster the U.S economy, without China’s manipulation of the Dollar, there would downward pressure on the Dollar and upward pressure on China’s currency. The peg keeps the Dollars from declining as much as market forces would warrant and therefore results in an overvaluation of the Dollar. This overvaluation has the same effect as a tax on U.S. exports.
The second is a change in U.S. Corporate Tax Regulations, dating back to 1997, which began allowing U.S. Corporation the deferral of payment of tax for foreign earnings, as long as those earnings were not returned to the United State. The result is not only the loss of U.S. tax revenue but also an incentive for the remove of capital and with capital the related jobs.
The third change is the significant increase in the number of U.S. Trading partners that have enacted Value-added taxes and dramatic increase in the dollar volume of U.S. exports subject to VATs. In 1990 U.S. exports were subject to consumption taxes levied by about 45 U.S. Trading partners but by 2010 by all but about 20 U.S. trading partners levied their consumption taxes, averaging 17%, on over $ 1.280 trillion of U.S. exports. The United States Government levies no Federal consumption tax on the over $ 1.948 trillion of exports into the U.S.
The unresponsiveness of U.S. Political leaders to these changes that David Ricardo, the father of classical political economics, warned; has subject U.S. businesses and workers to a similar plight as the frog in the boiling water parable. Other relevant warnings follow:
“It is not the strongest species that survives, or the most intelligent but the most responsive to change”
- Charles Darwin
“It is not necessary to change…survival is not mandatory”
- W. Edwards Deming
“The U.S. trade deficit is a bigger threat to the domestic economy than either the federal budget deficit or consumer debt and could lead to ‘political turmoil.’ Pretty soon, I think there will be a big adjustment.”
- Warren Buffett, January 2006
A commonality possessed by Ricardo, Darwin, Deming and Buffett is their ability to be system thinkers and therefore dots-connectors. Our political leaders’ lack of system thinking is the learning disability that must be overcome to restore the United States to its former greatness.
Great article! Common sense wisdom!