Trade Deficit, 'Fiscal Cliff' Threaten Economy

NEW YORK (TheStreet) -- The Commerce Department reported the deficit on international trade in goods and services was $41.5 billion in September, up from $24.9 billion prior to the economic recovery.

Imported oil and subsidized imports from China account for nearly all of the $500 billion annual trade gap. Dollars spent abroad that do not return to buy U.S. exports reduce demand for U.S. goods and services, and slack demand is the principal reason for slow growth and jobs creation in the U.S.

In 2009, stimulus spending and additional tax cuts increased domestic spending by $1 trillion and jump-started growth, but those tripled the federal deficit.

In 2010, consumer spending accelerated -- deleveraging, as measured by new consumer credit ended -- and the recovery had its best year with GDP growing 2.4%.

However, too many stimulus and consumer dollars went abroad to purchase more oil and other imports, principally from China, and too many stimulus dollars were squandered on dead-end projects like failed solar panel manufacturer Solyndra or electric vehicle technologies that failed. Those kept the initial recovery from accelerating hiring and boosting wages, and in turn, from becoming self-sustaining.

Ultimately, the recovery remained dependent on huge federal deficits, which have averaged $1.3 trillion over the last four years -- three times the last Bush administration deficit in 2008.

The economic recovery began five months after Barack Obama took office, and GDP growth has averaged 2.2%. In October 2009, unemployment peaked at 10%, and has since fallen to 7.9; however, a lower percentage of adults working or seeking work accounts for about 80 percent of that reduction.

Ronald Reagan inherited a similarly troubled economy with unemployment cresting at 10.8 early in his presidency. When he sought reelection, the economy was growing at 6.3%, unemployment was 7.3% with adult labor force participation rising.

Reagan encouraged the development of natural resources and endured much criticism from environmentalists and academics. Obama on the other hand has talked repeatedly about developing alternative energy resources and has imposed limits on oil production in the Gulf, off the Pacific and Atlantic Coasts, and Alaska. Merely, replacing domestic oil with imports does little to improve air quality or curb CO2 emissions.

To boost sales of Chinese products in the U.S., Beijing undervalues the yuan through intervention in currency markets and subsidizes exports. It pirates U.S. technology and imposes high tariffs on imports. Diplomatic efforts pursued by both Presidents Bush and Obama have failed to yield much relief for competing U.S. businesses and workers.

Eliminating the trade deficit by developing U.S. energy and taking aggressive steps to counter Chinese protectionism would boost GDP by $1 trillion and create 10 million jobs.

However, in coming months the president and Congress will be preoccupied with averting the "fiscal cliff" and with deficit reduction -- without action by Jan. 1, taxes will increase by $136 billion and spending will be cut by $532 billion.

The likely outcome is higher taxes on the wealthy and spending reductions that will slice the deficit by some about $300 billion. This reduction in demand could throw the economy into a deep recession without offsetting policy actions to jump start additional oil and gas production, curb the growing trade deficit with China or offer businesses relief from new regulations and health care mandates.

Other items on President Obama's second-term agenda -- tax reform, immigration reform and alternative energy projects will take many months to affect and few immediate effects on growth.

In the end, the president and Congress will not be able to raise taxes -- on the wealthiest of the wealthy or anyone else -- and cut spending without risking a second recession, deeper and more painful than the Great Recession.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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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