Trade Deficit Remains Barrier to Recovery

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 ( TheStreet) -- Friday, the Commerce Department is expected to report the deficit on international trade in goods and services was $48.4 billion in January, only slightly changed from December.

The $580 billion annual trade deficit is the most significant barrier to jobs creation and lowering unemployment, and oil and consumer goods from China account for virtually the entire problem.

Economists agree, the pace of economic recovery has disappointed, because of too little demand for what Americans make. Consumers are spending again -- the process of winding down consumer debt that followed the Great Recession ended last 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.

Unemployment

Jobs Creation

Also on Friday, the Labor Department is expected to report the economy created 204,000 jobs in February; 367,000 jobs must be added each month for the next 36 months to bring unemployment down to 6%. With federal and state governments cutting payrolls, the private sector must add about 390,000 jobs per month to accomplish this goal. Growth of at least 4% to 5% a year is needed to accomplish that.

>>Also see: Jobs Report Likely To Be a Disappointment

Unemployment has fallen from 10% in October 2009 largely because working aged adults are dropping out of the labor force -- they are neither employed nor seeking work. The jobless rate has fallen to 8.3% because the percentage of adults participating in the labor force -- the employed and those unemployed but making some effort to find work -- fell from 65% to 63.7% percent. The percentage of adults employed has not changed -- it's stuck at 58.5%.

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% of the reduction in the unemployment rate over the past 27 months.

Just to keep up with productivity growth, which averages at about 2% a year, and natural increase in the adult population, which is about 1%, the economy must grow at about 3% 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% is needed to sustain a full employment economy.

Economic Growth

The economic recovery began five months after President Obama took office, and GDP growth has averaged a disappointing 2.4% a year.

This is in sharp contrast to Presdent Ronald Reagan's economic recovery. Like 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 Reagan campaigned for reelection, his post-Carter malaise economy grew at a 7.1%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. 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 U.S. 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% 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%. 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 U.S. 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.

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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.

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