Growth below 2% is difficult to sustain -- any disruption could set off a cycle of layoffs, falling consumer spending and ultimately a recession that pushes unemployment into double digits.
Imported oil and subsidized imports from China account for the entire trade gap. President Obama has talked repeatedly about developing the full range of energy resources, but has toughened counterproductive limits on oil production in the Gulf, off the Pacific and Atlantic Coasts, and Alaska.
Development of new onshore reserves in the Lower 48 has not delivered enough new oil. A full push on U.S. reserves would cut U.S. imports in half. Shifting federal subsidies from cost ineffective electric cars, wind and solar to more fuel efficient internal combustion engines and plug-in hybrids could further cut U.S. petroleum imports.
To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan through intervention in currency markets. It pirates U.S. technology, subsidizes exports and imposes high tariffs on imports. Other Asia governments, most recently Japan, have adopted similar policies to stay competitive with the Middle Kingdom.
Economists across the ideological and political spectrum have offered strategies to offset the deleterious consequences of currency strategies on the U.S. economy and force China and others to abandon mercantilist policies. However, Beijing offers token gestures, knowing President Obama will not take the strong actions.
Cutting the trade deficit by $300 billion, through domestic energy development and conservation, and forcing China's hand on protectionism would increase GDP by about $500 billion a year and create at least 5 million jobs.
Longer term, large trade deficits shift resources from manufacturing and service activities that compete in global markets to domestically focused industries. The former undertake much more R&D and investments in human capital.
Cutting the trade deficit in half would raise long-term U.S. economic growth by one to two percentage points a year. But for the trade deficits of the Bush and Obama years, U.S. GDP would be 10% to 20% greater than it is today, and unemployment and budget deficits not much of a problem.