The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- The economy picked up in the first quarter. Economists expect the Labor Department to report Friday that the economy added 188,000 jobs in March, after 175,000 jobs were created in February.
However, events in Japan, Libya and the wider Middle East, and the European sovereign debt crisis threaten to reverse these gains and thrust the economy into a second recession.
Longer term, job gains in the range of 200,000 a month are not enough to push unemployment down to acceptable levels. Dysfunctional energy, trade and tax policies are holding back U.S. growth, adding to unemployment and lowering wages.
Private Sector Jobs
Until February, the private sector was creating few permanent jobs. Most jobs were either in health care and social services, which enjoy heavy government subsidies, or temporary business services. Excluding those activities, the "core" private sector gained 170,000 jobs in February. During the prior 13 months, the average gain was only 45,000.
Core private sector jobs have the potential to set off a virtuous cycle of hiring, consumer spending and more hiring, but after such a deep recession, 170,000 jobs per month is simply not enough.
The economy must add 13 million private sector jobs over the next three years -- 360,000 each month -- to bring unemployment down to 6%. Core private sector jobs must increase at least 300,000 a month to accomplish that goal.
Growth at 3% will only keep unemployment steady, because the working age population increases 1% a year, and productivity advances about 2%. Growth in the range of 4% to 5% percent is needed to get unemployment down to 6% over the next several years.
Before the turmoil in the Middle East, economists were forecasting 3.5% percent growth for 2011, but the surge in oil prices and $3.60-a-gallon gasoline will likely shave half a point -- perhaps more -- from this less-than-rosy outlook. Similarly, should the nuclear crisis keep Japanese manufacturing shut down for more than a month, U.S. GDP could be slashed as much as another half a point -- to something in the range of 2.5%.
Also, the festering European sovereign debt crisis and new weakness in the housing market threaten to further dampen exports and domestic consumption, and slow growth further.
Wrap all those together and a perfect storm may be brewing.
Growth of less than 2.5% would result in waves of new layoffs, a further tumble in housing prices, retreat in the equities market, and rising interest rates as the federal deficit soars. That combination would kill the recovery and send the economy into a second recession from which it might not recover for many years.
Structural Impediments to Growth
The U.S. economy and the durability of American prosperity are too vulnerable, because temporary tax cuts, stimulus spending and large federal deficits do not address structural problems holding back GDP growth and jobs creation. The huge trade deficit, dysfunctional energy and tax policies, and rising health care costs are the culprits.
At 3.3% of GDP, the $500 billion trade deficit is a tax on domestic demand that erases the benefits of tax cuts. Consequently, the U.S. economy is expanding at about 3% a year instead of the 5% pace that is possible after emerging from a deep recession and with such high unemployment.
Oil and trade with China account for nearly the entire U.S. trade deficit.
The administration is banking on electric cars and alternative technologies, such as wind and solar, to replace imported oil, but those won't pull down gasoline consumption enough to significantly reduce the oil import bill for a least a decade. Failure to produce more domestic oil and gas, by sending dollars abroad that do not sufficiently return to purchase U.S. exports, is a jobs killer.
China maintains an undervalued currency by spending 10% of GDP to purchase dollars -- this reduces domestic Chinese consumption and subsidizes Chinese exports by about 35%. Failure act to offset Chinese currency subsidies -- for example, by taxing dollar-yuan conversions -- is the single most significant flaw in the administration's policy to create jobs.
More broadly, major trading partners in Europe and Asia rely on value-added taxes to finance government and health care, whereas Americans pay higher corporate taxes and directly for health care. Under WTO rules, VATs are rebateable on exports from Europe and Asia and are applied on imports from the U.S. into those markets, creating huge pricing disadvantages. American products essentially are taxed twice. A neutral change in U.S. tax policy toward a VAT -- swapping a VAT for reductions in corporate and personal income taxes -- would help remove a major competitive disadvantage on U.S. exporting and import-competing industries.
Lastly, the 2010 health care law is pushing up health care costs, rather than reducing them as promised, making insurance unaffordable for many small and medium-sized businesses. Although manufacturing has enjoyed a stronger recovery than the rest of the economy, it has been significantly focused on activities that use very little labor, illustrating the burden that health care imposes on U.S. employers.
Unless we fix energy policies, address Chinese currency subsidies, modify the tax structure and truly reform health care, high unemployment will be a permanent feature of the U.S. economy and real wages will decline. Neither the Obama administration nor Republican leadership in the Congress appears inclined to do what needs to be done.
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Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.