From Berlin to Tokyo to the U.S., deceptions and delusions are undermining the traditional engines of prosperity
June 08, 2010|By Peter Morici
Democratic capitalism is in eclipse.
From Berlin to Tokyo, governments struggle to instigate enough growth to pay their bills and gainfully employ workers. Meanwhile, anti-democratic but increasingly capitalistic China enjoys breakneck progress.
Democratic capitalism is not flawed. Rather, government policymakers, through deceptions, delusions and abuse, are destroying a system that brought mankind from dark, feudal superstitions to cracking the secrets of life.
Politicians from Athens to Sacramento — and yes, most certainly in Baltimore too — have deceived voters by telling them that pension systems can be constructed allowing retirement at ages 55 or 60. Whether funded by savings and investments or taxes, no solvent pension system is possible that permits educated professionals, unionized workers and government employees, who get most of the income and benefits, to work only 30 or 35 years and retire for another 20 or 25 years.
In the United States, President Barack Obama has convinced American families earning less than $250,000 a year that they can have guaranteed health care that costs 50 percent more than what Germans and Canadians pay, and double what the British shell out, without paying a dime in additional health insurance premiums and taxes.
Sadly, after Greece defaults, the dominos won't stop falling in Berlin but, rather, in Washington.
Politicians have deluded themselves into believing an education system that encourages young people to "find themselves" instead of finding something productive will give society enough scientists and engineers to solve the tough problems needed to perpetuate growth. They have deluded themselves into thinking that professors spending six hours a week or less teaching and the rest thinking great thoughts (or verbally pistol whipping the society that supports them) somehow generates wealth.
Finally, it's true that free markets can't be wholly free — but national leaders of the world's capitalist democracies have peculiar notions about who should compete, who should be regulated and how.
Most national leaders, having been educated in squeaky-clean environs like Harvard, Oxford and the University of Tokyo, believe anything created by hand — other than an exquisite meal or the product of a computer keystroke — is somehow unworthy of western post-industrial society.
Hence, they have granted virtually free access to Western markets for manufacturers from China. For its part, China maintains high tariffs and other arcane import barriers on Western products, subsidizes exports through an undervalued currency, and offers other inducements to keep Chinese products artificially cheap on world markets. China grows at 10 percent a year, and the West sheds millions of "unworthy" manufacturing jobs and stagnates.
Meanwhile, in New York, London and elsewhere, 30-year-old MBAs pull down bonuses of $1 million, $10 million, even $20 million a year for trading securities that really don't exist, and creating havoc that has cost U.S. and European governments upwards of $4 trillion to clean up.
Simply, on Harvard Square and at Kings College, where tenured professors supported by the wealth of dead people inbreed and define our values (let's all remember where Barack Obama learned about law and economics), the intelligentsia has decided that IT entrepreneurs, financiers and Hollywood stars should be paid more than God.
The rest of us, suffering this abuse, should be satisfied with low pay, unemployment benefits and subsidized health care, all paid for by borrowing from the Chinese.
From Barack Obama to Angela Merkel, the system is suffering from delusions of grandeur, self deception and good old-fashioned abuse by leaders who address the world as Ivy League intellectuals think it should be, rather than how the facts of physics, demography and economics define it.
Peter Morici is a professor at the University of Maryland's Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission. His e-mail is pmorici@rhsmith.umd.edu.
Google's(GOOG) censorship struggle with Beijing crystallizes the challenge China poses to American global leadership.
Until the Google imbroglio, we heard much about China's undervalued currency and subsidized exports, rough treatment of foreign investors and purchases of U.S. debt, but not enough about Beijing's restrictions on unfettered access to information, expression and self-determination.
Americans believe individuals, free to think, speak and chart their own lives, best guide the progress of nations. Governments draw legitimacy from collective approval, because the people, collectively, are sovereign.
Democracy and markets are as essential to what is America as words and paper are to books. Our political and economic institutions organize competition among individual ideas and enterprise that define our civic and material lives.
Democracy and markets are mutually reinforcing. Markets work best when personal freedoms are protected. Democracy best safeguards those freedoms.
Championing these values, the U.S. has worked tirelessly with allies in Europe and elsewhere to create international institutions that protect human rights and foster free markets.
China is not a democratic nation as, for example, Japan and Taiwan have become, nor is it in transition to becoming one.
China has an authoritarian government with no plans or timetable for relinquishing power. By word and deed, the Communist Party assumes parental authority over Chinese citizens, and asserts sovereignty without their consent.
China embraces market reforms only as necessary and seeks to participate in global markets only on its own terms.
China accomplishes rapid growth by exploiting its working class and by appropriating other people's technology. It openly embraces as a development strategy a hugely undervalued currency that imposes unemployment on Western nations and keeps living standards of ordinary Chinese workers artificially low. China's prosperous middle class is built on the backs of factory labor paid less than the value it creates.
For foreign companies to sell in China, Beijing requires them to produce in China through joint ventures and then transfer prized technologies to local partners. Now, having extracted the know-how it needs, China is tightening the noose on foreign companies, causing them to consider withdrawing and leaving behind formidable new competitors.
During the Cold War, the U.S. engaged the Soviet Union, believing the Russian people would see, through example, the power of individual liberty and compel change from within. Applying that strategy to China is folly.
The Soviet Union collapsed, not because Russians bought into Jeffersonian ideas, but because the Soviet economy failed. China's economy is succeeding. Don't look for its leaders to call for free elections any time soon.
Beijing boasts that China soon will be making the international rules of the game. To sustain the Communist Party's grip, Beijing has a strong interest in selling its brand of authoritarian capitalism to its neighbors and making international institutions much less supportive of human rights and free markets.
To secure oil and other resources and extend influence, China is building a blue-water navy and spending massively to modernize its military. Seen in this context, the present policy of merely engaging China is unwise.
Rather, plainly acknowledging what China is and imposing explicit costs when its actions harm others makes more sense.
For U.S. industries harmed by subsidized imports, countervailing duties can provide redress and better promote trade and jobs creation based on comparative advantages.
It is high time to confront the reality that China is not evolving into a democratic society with a market economy, and it easily could morph into a fascist menace with global reach.
To do otherwise is appeasement, and history has taught us the harsh wages of such a policy.
It's the Trade Deficit, Stupid!
Wednesday, February 03, 2010
by Peter Morici, Ph.D.
Since the Democrat's debacle in Massachusetts, President Obama has been campaigning.
In the State of the Union address, his new budget presentation, and other staged events for the faithful where they gather for hope, the President has the audacity to double down on class warfare and crowd-frenzying envy, and tout as success an economic recovery about as thin as the Chicago Cubs World Series record book.
The economy is growing again but the President, instead of divining new tax-the-rich and spend policies, should recognize the economic recovery simply won't create enough jobs to drive down unemployment -- because his administration has not addressed the trade deficit.
Instead of blaming George Bush and indulging in sparkling oratory, our constitutional law professor turned president should seek a brief tutorial from White House economic advisor Lawrence Summers on GDP, employment, and international trade.
Fourth quarter GDP growth was 5.7 percent, but 60 percent of that was a slower pace in depletion in business inventories. Businesses continued to sell more goods off their shelves than they produced, but the reduction in inventories fell from $157 billion in the third quarter to $40 billion in the fourth.
In the arcane world of GDP accounting, that increased GDP by 3.4 percentage points -- another example of why most folks view economists as sorcerers dressed in academic robs in lieu of the customary pointy hats and magic wands.
Domestic consumption and investment, which most define the sustainable pace of GDP growth, contributed a paltry 1.8 to those 5.7 percentage points, and despite all the bravado from the White House, government spending contributed zero, zilch, nada!
With nearly $800 billion in stimulus spending and tax cuts, all Secretary Geithner's Treasury can manage is to take pails of water from the deep end of the swimming pool to the shallow end.
American businesses need customers to create jobs and the statistic indicates domestic demand for what those enterprises make is growing at no more than a 2 percent annual pace. That anemic showing was in the second quarter of economic recovery. Ouch!
Exports did grow faster than imports in the fourth quarter, contributing 0.5 percent to growth, but that was likely a temporary jolt made possible by the dollar's dip against the euro. Atlantic markets are not likely to drive U.S. demand up much more-they are simply not growing very fast.
As the U.S. economy expands, the trade deficit will again drag the economy down, as the price of oil and purchases of Asian consumer goods and electronics rise. Unless, Obama finally finds the courage to confront China about its mercantilist currency policies and protectionist tariffs and regulations against competitive U.S. exports, the U.S. recovery will just not accomplish the growth necessary to bring down unemployment.
An iron law of economics -- if there such a thing beyond the comfortable confines of college colloquiums --is that GDP growth must exceed the sum of potential labor force growth and productivity growth to bring down unemployment.
In the United States, that is between 3 and 4 percent. Labor force growth is determined by the expansion of the adult population, and productivity growth by technology advances.
To recoup jobs lost during the Great Recession, growth must be in the range of 5 to 6 percent over the next three years. That sounds ambitious, but remember, Chinese growth has been pushing 10 percent by exporting more to the United States than importing.
Unless the President addresses the trade deficit with China, he simply won't accomplish 4 percent growth on a sustained basis, never mind 5 to 6 percent.
Campaigning in Ohio or Baltimore or Timbuktu won't do that for him, taxing the wealthy won't help, another bogus jobs package and more loans for small businesses won't accomplish much, and his constant cursing the shortcomings of Republican governments past is getting tiresome.
Only coming back to Washington and getting to work a trade policy toward China will save the economy and his Presidency from disaster.
Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission
Viewpoint -- Why Free Trade Is Failing America
The U.S. can't create the 9 million jobs needed to bring unemployment down to pre-recession levels without taking on China's currency manipulation and other unfair trade practices.
By Peter Morici, Univeristy of Maryland School of Business
Jan. 5, 2010
No economic policy could better serve Americans than genuine free trade but open trade policies are failing Americans.
Free trade is a compelling idea. Let each nation do more of what it does best, and specialization will raise productivity and incomes.
Americans are not sharing in those benefits because President Obama, like President Bush, permits China and others to cheat on the rules, unchallenged, to the detriment of the U.S. interests he was elected to champion.
The World Trade Organization has greatly reduced tariffs, prohibits virtually all export subsidies, and regulates other national policies that could subvert trade, such as health and product safety standards arbitrarily slanted to favor domestic suppliers.
For these rules to optimize trade, raise productivity and boost incomes, exchange rates must adjust to reasonably reflect production costs. To buy Chinese televisions, Americans must be able to purchase yuan with dollars; however, an artificially strong dollar that overprices U.S. tractors and software in China will unravel the benefits of trade by denying Americans opportunities to export to pay for those televisions
Exchange rates are established in currency markets, created by businesses trading through major financial institutions. Unfortunately, China and several other Asian governments blatantly manipulate those markets without a credible U.S. response and with ruinous consequences for American workers.
The United States annually exports $1.6 trillion in goods and services, and these finance a like amount of imports. This raises U.S. gross domestic product by about $170 billion, because workers are about 10% more productive in export industries, such as software, than in import-competing industries, such as apparel.
Unfortunately, U.S. imports exceed exports by another $400 billion, and workers released from making those products go into non-trade-competing industries, such as retailing, where productivity is at least 50% lower. This slashes GDP by about $200 billion, overwhelming the gains from trade, and requires workers displaced by imports to accept lower wages. The trade deficit creates an excess supply of dollars in international currency markets, as Americans offer more dollars to purchase foreign products than foreigners demand to purchase U.S. products.
Simple supply and demand should drive down the value of the dollar against the yuan and other currencies, make U.S. imports more expensive and exports cheaper, and reduce or eliminate the trade deficit. But the Chinese government subverts this process by habitually printing and selling yuan for dollars in currency markets, keeping its currency and exports artificially cheap.
Currency manipulation creates a 25% subsidy on China's exports, and other Asian countries are impelled to follow similar policies, lest their exports lose competitiveness to Chinese products.
Also, huge trade imbalances between Asia and the West, perpetuated by currency mercantilism, create an imbalance in demand -- a shortage of demand for the goods and services produced in the United States and Europe, and artificially robust demand for products made in China and elsewhere in Asia.
Consequently, to keep the U.S. economy going, Americans must both borrow from foreigners and spend too much, as they did through 2008, or their government must amass huge budget deficits by borrowing from abroad, as it is now does thanks to stimulus spending and the TARP.
In the bargain, the United States sends manufacturing jobs to Asia in industries that would be competitive, but for rigged exchange rates. The trade deficit slices $400 to $600 billion off GDP, and Americans suffer unemployment above 10%.
China grows at nearly 10% a year and makes American diplomats look like fools for advocating free markets as a growth policy.
Campaigning for the Presidency, Barack Obama promised to do something about Chinese currency manipulation. Instead, like a good supplicant, he now thanks Chinese officials for buying U.S. Treasury securities. China's development policies make its leaders look smart but nothing makes them look like geniuses better than an American president who appeases their beggar-thy-neighbor policies.
It will be impossible for the United States to create the 9 million jobs needed to bring unemployment down to pre-recession levels without taking on China's currency manipulation and other unfair trade practices.
For that Americans may need to wait for a better president -- one with the courage to stand up to China.
Peter Morici is a professor at the Smith School of Business, University of Maryland School of Business, and former Chief Economist at the U.S. International Trade Commission.
Trade deficit threatens a double-dip recession, economic Armageddon By Peter Morici Online Journal Contributing Writer
Nov 13, 2009, 00:18
Today, the Commerce Department will report September international trade in goods and services. The trade deficit -- the amount imports exceed exports -- is expected to rise to $32.5 billion from $30.7 billion in August.
The trade deficit was a principal cause of the Great Recession. Now, it threatens to torpedo the economic recovery and keep unemployment above 10 percent for the foreseeable future.
More than anything else, U.S. businesses need customers -- more sales of U.S.-made goods and services -- to get the economy rolling and hire more Americans.
The deficits on oil and trade with China account for nearly the entire U.S. trade imbalance, and money spent on imported gasoline and Chinese coffeemakers can’t be spent on American-made products, unless offset by exports.
At 2.7 percent of GDP, the trade deficit subtracts more from the demand for U.S.-made goods and services than President Obama’s stimulus package adds.
Obama’s stimulus is temporary, whereas the trade deficit is permanent. Moreover, the trade deficit will increase, because oil prices will rise and imports of Chinese consumer goods will climb as the global and U.S. economies expand in 2010.
When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services, or the demand for what they make is inadequate, inventories pile up, layoffs result, and the economy goes into recession.
From 2004 to 2008, the trade deficit exceeded 5 percent of GDP, and Americans borrowed from abroad to consume more than they produced and keep the economy going. They posted as collateral overvalued homes financed on shaky mortgages. When mortgages failed, banks stumbled, home prices tumbled, and retail sales tanked. The economy was thrust into the worst recession in 70 years.
Now huge federal stimulus spending is required to resuscitate business activity. Once the stimulus money is spent, the demand for U.S.-made goods and services will fall, and the rising trade deficit will further tax demand and threaten a new round of layoffs and a second economic contraction. The much feared double dip recession could result and unemployment could rocket past 15 percent, igniting a second Great Depression.
President Obama ignores the fundamental causes of a rising trade deficit -- China’s subsidies for domestic oil consumption, which drive up global prices and the cost of U.S. oil imports, and China’s purposeful manipulation of currency markets, which keeps the yuan undervalued against the dollar and subsidizes Chinese sales in U.S. markets.
President Obama’s policies to fight the recession will deliver an inadequate, temporary lift to the U.S. economy, and he has not offered meaningful policies to reduce the trade deficit. He fails to challenge China’s subsidies for domestic petroleum consumption and to even acknowledge the threat to American prosperity posed by China’s currency mercantilism.
Industrial policies to promote exotic alternatives to conventional oil, conservation and battery powered cars will hardly dent oil imports for many years, and will create jobs numbering in the thousands, not the millions lost in the recession.
Left to fester much longer, the trade deficit could cause an economic Armageddon reminiscent of the Great Depression.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the U.S. International Trade Commission.
Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.
An “X” Shaped Recovery and Old Time Religion By Peter Morici Sep 3, 2009 Will the economic recovery be enduring—V shaped? Collapse after a short time—W shaped? For the middle class, it may be none at all—an X.
By conventional wisdom, the housing bubble, credit crisis and collapse in consumer spending caused the recession.
With home sales rising, new cars flying off lots, and Wall Street profits soaring, analysts see an imminent recovery, but the economy is running on steroids.
About 90 percent of existing home sales are distress sales—foreclosures and homeowners in financial difficulties. New home purchases are juiced by the $8000 first-time buyer subsidy that expires December 1.
Summer car sales were pumped by cash for clunkers.
Regional banks are failing under bad commercial loans, and mortgage-backed securities purchased from Wall Street financial houses. In part, Wall Street posts big profits by shifting its debauchery onto smaller brethren, and the FDIC may run out of cash to guarantee regional banks’ deposits.
Clueless behavior by big players is frightening. Automakers are boosting production, assuming car sales will continue at their torrid summer pace.
Wall Street is planning big year-end bonuses instead of shoring up capital for a possible second dip in the recession. The backup may be a Broadway lyricist to pen “Bail ‘em out again Ben.”
Consumers, recognizing danger, stay away from the malls and seize what dollars they have.
The economy will be lifted by businesses rebuilding depleted inventories and replacing outdated computers and federal stimulus dollars. Those simply will not deliver annual GDP growth greater than 2.5 percent or many new jobs.
The stock market will rally with modest growth, because U.S. multinationals produce so much in Asia where growth is robust.
To Wall Street, the recovery will appear V-shaped, but for ordinary workers, it will be an X.
Unemployment will reach 10 percent, and stay there until President Obama stops obsessing about redistributing wealth by nationalizing car companies and health care and raising taxes on energy and the wealthy.
The country needs pro-growth policies—fixing the huge trade deficit and the banks.
Dollars spent on imports that do not return to purchase exports can’t be spent on American products. That saps demand for American-made products, keeps factories and offices shuttered, and idles workers.
The trade deficit is mostly oil and Chinese consumer goods. Export more, import less, or the economy flops.
Without bank credit, businesses can’t expand, entrepreneurs can’t create, and workers don’t work.
Obama dodges the toughest aspects of the banking morass. Compensation structures built on the too big to fail doctrine permit Wall Street to take huge risks, shift losses onto smaller investors and the government, and suffer too few consequences for their calamities. Until those change, Wall Street bankers will be too busy chasing rainbows to adequately reestablish lines of credit to regional banks essential for business expansion.
Buy only as much as you sell, reasonable pay for honest work, and let the reckless fail.
Old time religion? That’s what made America great.
Peter Morici is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.
Dr. Peter Morici: China and the Great Recession - - Recalibrating US-China By Professor Peter Morici Jun 15, 2009 - 2:40:36 AM
A paper by Dr. Peter Morici, published last week by the New America Foundation, examines the impact of US trade with China on domestic macroeconomic conditions.
With the breakdown in discipline in lending and the securitization of that debt, the large structural trade deficits on oil and with China combined to create the perfect storm—the credit market meltdown and the Great Recession. The failure by Congress and the Bush and Obama Administrations to address these forthrightly guarantees the recovery in 2010 will be modest and unemployment will remain high.
Recalibrating US-China: The United States now confronts its greatest economic challenges since the Great Depression. In addition to resolving crises in financial and housing markets, trade deficits with China and on oil must be addressed for the US economy to achieve robust growth.
Fixing credit markets and energy policy are largely domestic challenges, whereas recalibrating trade with China requires cooperation from Beijing. However, such cooperation requires fundamental changes in Chinese industrial policies and a departure from maintaining an undervalued yuan to spur industrial development.
Chinese Industrial and Currency Policies
Since the late 1970s, China has transformed from a centrally-planned economy dominated by state enterprises to a public-private economy highly responsive to global market opportunities. China has accomplished dramatic growth and modernization by empowering town and village enterprises, private businesses and foreign-invested enterprises, and delegating smaller, though still significant, roles to national state-owned enterprises. Exports are critical to this strategy.
In addition to exploiting comparative advantages in labor-intensive manufacturing, China has applied industrial policies and regulation on foreign investment to ensure the rapid development of priority industries where it may lack the resources, technology and a comparative advantage.For example, China lacks adequate metallic resources to produce large amounts of steel competitively, and modern capital equipment and technology were initially purchased on global markets. Yet, China exports steel even when transportation costs to destination markets are greater than total labor costs in those markets. Similarly, China should be importing many more automobiles to meet its requirements, but Beijing encourages foreign automakers to assemble cars and source parts in China, and to transfer technology to indigenous firms.
China maintains an undervalued yuan that makes exports cheaper in foreign markets and imports more expensive at home. The Chinese government persistently purchases dollars and other currencies with yuan to suppress its value, rather than permitting market forces to determine its value. It converts those purchases into US Treasury securities and foreign assets.
In 2008, Chinese monetary authorities purchased more than $400 billion in US and other foreign currencies-this was about 10 percent of China's GDP and 25 percent of its exports. China holds about $2 trillion in foreign exchange reserves, mostly in US securities.
Undervaluation subsidizes exports and protects domestic industries from import competition, and contributes importantly to trade deficits in the United States and other countries. The Chinese people consume 10 percent less than they produce to finance China's large trade surpluses and production that exceeds consumption in the United States and elsewhere.
The rapid pace of modernization and productivity growth in China should rapidly drive up the dollar value of the yuan; however, in 1995, the Chinese government pegged the yuan at 8.28 per dollar.
In July 2005, China adjusted this peg to 8.11 and announced the yuan would be aligned to a basket of currencies. Subsequently, the yuan still tracked the dollar quite closely, falling slowly to 6.83 it July 2008. Since, the yuan has fluctuated closely around that value-essentially, China has repegged the yuan.
From 1995 to 2008, the annual US trade deficit with China grew from $34 to $266 billion, accounting for virtually all of the increase in the US non-oil deficit from $44 to $282 billon.
Trade Deficits and US Economic Growth
Imported oil petroleum contributes significantly to the US trade deficits. From 1995 to 2008, the petroleum deficit increased from $34 to $386 billion. This huge deficit is caused primarily by the failure to impose higher mileage standards on automobiles, implement other fossil-fuel saving technologies, and to develop US domestic oil and gas resources.
Together, imports of oil and from China account for 90 percent of the US trade deficit, and that deficit has averaged more than 5 percent of GDP over the last five years.
In theory, increased imports of manufacturers from China and petroleum should shift US employment from import-competing industries to export activities. Since export industries create about 10 percent more value added per employee and undertake more R&D than import-competing industries, this would raise US productivity and GDP growth. Those are the expected gains from expanding trade based on comparative advantage.
Instead, large trade deficits shift U.S. employment from trade-competing industries into nontrade-competing industries. Trade-competing industries create at least 50 percent more value added per employee, and spend more than three times as much R&D per dollar of value added, than nontrade-competing industries. By shifting labor and capital into nontrade-competing industries, chronic trade deficits have reduced U.S. economic growth by at least one percentage point a year, or about 25 percent of potential GDP growth.*
Lost growth is cumulative. Had trade deficits been significantly smaller over the last two decades, U.S. GDP would likely be $3 trillion or 20 percent greater than it is today.
Trade Deficits and the Recession
Dollars spent abroad cannot be spent on U.S. goods and services.
With the trade deficit at 5 percent of GDP, Americans must spend 105 percent of what they earn, or the supply for U.S. goods and services exceeds the demand, inventories of new homes, cars and other goods mount, layoffs result, and the economy slips into recession.
During the recent economic expansion, purchases of U.S. securities by China, Middle East oil states and other foreign investors kept interest rates low on long-term bonds, even when the Federal Reserve raised its target rates on short-term paper. This permitted U.S. financial institutions to offer homebuyers and consumers very attractive term mortgages and other consumer loans. Many Americans spent more than they earned, and this kept the economic expansion going. When the credit bubble burst, consumer demand collapsed and the economy fell into recession.
Certainly, inappropriate lending standards, and aggressive marketing of loans packaged into securities to private and foreign investors, by U.S. financial institutions permitted the bubble to occur.
Even with lending and securitization practices reformed and credit markets restored, the demand for U.S. goods and services will not again be adequate, and the U.S. economy cannot again achieve robust and sustainable growth, unless either consumers spend more than they earn and Americans finance it all by borrowing from abroad or the trade deficit is significantly reduced to redirect more U.S. spending to domestic suppliers of goods and services.
The $789 billion stimulus spending approved by Congress will help lift demand for U.S. goods and services, temporarily, and help the economy recover. Essentially, government spending and borrowing from foreigners is replacing consumer spending and borrowing to prop up aggregate demand.
However, once the stimulus spending is through, consumers must again borrow and spend more than they earn to sustain demand for U.S. goods and services and keep the recovery going, or the trade deficit must be reduced significantly. Otherwise demand will flag and the recovery will collapse.
To reduce the trade deficit, the United States will need several strategies to reduce dependence on foreign oil. The increase in automotive mileage standards to be implemented by 2016 and Obama Administration initiatives to develop alternative energy sources will help. However, abundant domestic oil and gas resources remain untapped, and with oil likely to head above $100 or even $150 a barrel, these resources will be needed in addition to conservation and alternatives to fossil fuels.
Regarding nonenergy trade, no solution is possible without recalibrating trade with China, and that requires revaluing the yuan dollar exchange rate to a level consistent with more balanced trade. That entails raising the value of the Chinese yuan, administratively or letting market forces revalue the yuan to a level that does not require Chinese monetary authorities to consistently purchase and accumulate dollars and other currencies to sustain its value.
Engaging China
The United States has engaged in high level talks with China since negotiations for its entry into the World Trade Organization. Most recently, the Strategic Economic Dialogue was launched in 2007.
Throughout this process the United States has encouraged China to more substantially raise the value of the yuan, which would require Beijing to purchase fewer dollars and other currencies to sustain its value. Instead, China has increased its foreign exchange market intervention as the gap between the official value of the yuan and its fundamental value has widened. This has exacerbated the damage to the U.S. economy and China's other trading partners.
The United States has three broad policy options to leverage change.
First, the United States could bring a complaint in the World Trade Organization. China's currency policy policies create a WTO illegal subsidy on exports, and subvert the benefits its trading partners expected when they acceded to China's entry into the world trade body.
Were the United States to bring such a suit, other WTO members would likely join the petition. If they prevailed, either China would have to stop intervening in currency markets, or face tariffs--approved by the WTO and imposed by WTO members participating in the complaint--to redress the trade imbalance. Those tariffs would be strictly temporary and removed when China complied with the WTO decision, ended currency market intervention, and let the yuan rise in value.
Second, the United States, consistent with its WTO obligations may impose tariffs on imported goods that receive government subsidies, if those goods harm U.S. industries when they enter U.S. markets. Until 2006, the United States did not apply the subsidy and countervailing duty law to commerce with China, but in a case regarding imports of Chinese paper, the Bush Administration changed that policy. However, in addressing the domestic industry's petition, the Bush Administration denied application of the subsidy and countervailing duty law to China's undervalued currency.
Bills sponsored by Senators Jim Bunning (R-KY) and Debbie Stabenow (D-MI) in the Senate and by Representatives Tim Ryan (D-OH) and Tim Murphy (R-PA) would make more likely the subsidy implicit in an undervalued currency were included in the computation countervailing duties in both dumping and subsidy cases, when a "fundamental and actionable misalignment" is present. Such circumstances would be determined by a standard consistent with International Monetary Fund guidelines.
Third, Americans need to accommodate to the fact that China is much less a market economy, either by design or by policy, than North American and Western European economies.
Its financial system may not be able to sustain an unmanaged floating exchange rate; however, China can manage the value of the yuan at 4 as easily as it does 6.8. In fact, it would be a lot easier to manage a value closer to balance of payments equilibrium.
Simply, the United States could offer China an opportunity, with a hard deadline, to manage down its trade surplus with the United States, either through meaningful and complete currency revaluation-complete means raising the dollar value for the yuan to a level that reduces China's trade surplus to zero-or through other mutually acceptable changes in China's domestic policies.
If China declines, the United States should simply tax dollar-yuan conversion in proportion to its official and surrogate currency market interventions. The United States should impose a tax equal to the quarterly value of China's intervention divided by its exports of goods and services. China would then have a strong incentive to reduce and then stop intervening.
If China does not reduce and eliminate intervention and chooses for the United States to tax currency conversion, then the benefits from a revalued yuan of higher prices for Chinese imports that should go to Chinese businesses would instead go into the U.S. Treasury. If China reduces and then eliminates one-way intervention and lets its currency rise to a value that balances trade, Chinese businesses would capture those benefits in the form of higher dollar prices for their goods.
Eliminating the trade deficit with China by eliminating or at least redressing currency manipulation would have a much greater stimulus effect on the economy than the stimulus spending approved by Congress. It would permanently increase aggregate demand for U.S. goods and services, whereas the benefits of the stimulus spending are temporary. As importantly, it would restore incentives for the efficient use of labor and capital that free trade would normally provide.
Affirmative policies to redressing the trade deficit with China would not be protectionist. China's currency policies are protectionist, and efforts to obtain a revision of these policies would restore balance to their trading system and permit both economies to grow and prosper, consistent with their resources and comparative advantages.
*Peter Morici, The Trade Deficit: Where Does It Come From and What Does It Do? (Washington, DC: Economic Strategy Institute, 1998).
Peter Morici,
Professor, Robert H. Smith School of Business, University of Maryland,
College Park, MD 20742-1815,
703 549 4338 Phone
703 618 4338 Cell Phone
Dr. Peter Morici: Friday’s US Jobs Report: Look to Retail Employment for signs of turnaround; Unemployment headed above 9% By Professor Peter Morici May 8, 2009 - 3:05:51 AM
Today Friday, the US Labor Department will report employment data for April. In March, the economy lost 663,000 jobs, and the consensus forecast is for another 620,000 jobs lost in April. My forecast is for a 630,000 loss.
Unemployment should reach 8.8 percent, and by my forecast, is headed for 9.3 percent before the end of 2009. Factoring in workers that have left the workforce and those who work part time but would prefer full-time jobs, the unemployment rate is greater than 16 percent.
From December 2007 through March 2009, the economy lost 5.1 million jobs. Construction and manufacturing shed 1.1 million and 1.5 jobs, respectively, as the credit market meltdown and trade deficit wrecked havoc on residential construction and manufacturing. In more recent months, layoffs spread to commercial construction, finance, retail sales, and other sectors.
The economy contracted at more than a 6 percent annual rate in the fourth quarter of 2008 and first quarter of 2009. By summer, residential construction and business investment should bottom. Many analysts saw first quarter surge in consumer spending as a hopeful sign of economic recovery.
However, most of the first quarter consumer spending gains came in January—February and March were weak. Retail employment fell in February and March, and store jobs should rebound in the April data if consumers are rushing out to the malls again.
The stimulus package should raise GDP by 2 percentage points in 2010 and 2011 and add about 3 million jobs. Most of these jobs will be temporary, and 3 million jobs will not be enough to replace the more than 6 million that will be lost before the recession ends.
Unless the Obama Administration addresses the structural problems that caused the crisis—management issues at the big banks and huge trade deficits on oil and consumer goods from China—the economy will slip back into recession once the stimulus spending is done.
Simply, as the economy expands, the businesses will struggle to find capital to expand, and the trade deficits on oil and consumer goods from Asia will balloon. These will create a shortage of demand for U.S. goods and services and new layoffs once the stimulus spending ends.
Treasury Secretary Timothy Geithner and National Economic Policy Director Lawrence Summers have not indicated they recognize the need for a fundamental change from Bush Administration policies to address these issues.
Timothy Geithner, as President of the New York Federal Reserve, was one of the principal architects of the Bush Administration’s bank bailout policy, including the workouts at Citigroup and AIG. Unveiled in February, the Financial Sector Stabilization Plan is vague and closely resembles the policies pursued by his predecessor, Henry Paulson. Subsequent announcements have failed to indicate a focused understanding of the problems in banking and a confident path to solutions.
The trade deficit, which at the peak of the economic expansion exceeded 5 percent of GDP, is a huge drain on demand for U.S.-made goods and services. Imports exceeding exports by 5 percent require Americans to consume 105 percent of what they produce to keep the economy going. Essentially, China, Saudi royals and other foreign sovereigns and private investors have been buying the bonds that permit Americans to borrow to consume more than they produce.
Oil imports and trade with China account for 90 percent of the trade deficit. President Obama’s energy policies address mostly the more efficient use of domestic coal and natural gas and alternative energy sources to generate electricity, and will do little to quickly reduce oil imports.
President Obama, like George Bush, is emphasizing diplomacy to persuade China to stop subsidizing exports, undervaluing its currency through currency market manipulation and blocking imports. It is unlikely that Hillary Clinton will be any more successful in prying open China than was Henry Paulson.
In addition to opposing genuine bank reform, the New York banking establishment opposes upsetting China on trade, because it hopes to expand its presence in the Middle Kingdom once the credit crisis passes. Being heavily invested in the auto industry and receiving significant investments from Middle East oil exporters, New York banks are not strong advocates of aggressive policies to reduce U.S. oil import dependence.
The multiple connections between the New York Federal Reserve Bank, Treasury and White House, on the one hand, and Goldman Sachs and other big New York banks, on the other hand, create conflicts of interest within the Obama Administrations, and may explain its jaundiced views banking, energy and trade policies
In Friday’s jobs report the key variables to watch are:
Jobs Creation. April 3, the Labor Department reported the economy lost 663,000 payroll jobs in March, 2.0 million jobs in the third quarter and 5.1 million since December 2007. My forecast is for a 630,000 loss in April.
Even if the economic contraction slows in the second and third quarters, job losses in the range of 500,000 appear likely for the next several months. We will not see the worst of things until summer. Job losses could top 6 or 7 million before the hemorrhaging ends.
The economy continued to contract at a 6.1 percent annual pace in the first quarter. The numbers would have been much worse but for a January surge in consumer spending.
Weak data for consumer spending and retail sales in February and March, notwithstanding, some analysts believe consumer activity has been stronger than Commerce Department reports indicate. They expect Commerce to eventually revise retail sales data upward.
In February and March, the retail sector continued to bleed jobs, and if consumer spending is indeed strengthening, April retail jobs figures should show a gain and point to recovery.
Unemployment. In March, the unemployment rate, as computed by the Labor Department, was 8.5 percent, and is expected to rise to at least 8.8 percent for April. According to my forecast, unemployment will reach 9.3 percent by the end of 2009.
Since President Bush took office, more adults have chosen not to seek employment owing to worsening labor market conditions. If labor force participation today were at the same level as when President Bush took the helm, the unemployment rate would be about 11 percent. The difference is discouraged workers that have quit looking for work that the Labor Department does not count when computing the unemployment rate. Add in part-time workers who would prefer full-time employment, and the hidden unemployment rate is above 16 percent.
Business vs. Government Payrolls. In March, government employment dropped by 5,000, as overall payroll jobs contracted 663,000. This indicates the private business economy shed 658,000 jobs.
Construction. In March construction lost 305,000 jobs. Since construction employment peaked in September 2006, the sector has lost 1.2 million jobs.
Those losses indicate the housing recession, credit crisis, high oil prices, and China trade deficit are infecting the long-term growth prospects of the entire U.S. economy. American businesses are simply not hiring or building for the future in the United States, and this bodes poorly for GDP growth in the second half of 2009 and beyond.
Productive assets not put in place during the recession will not be available to produce goods and services after the slump ends. The U.S. economy will be on a permanently lower growth path thanks to mismanagement of the credit crisis, energy policy and trade with China and other Asian developing countries pursuing mercantilism strategies.
Retailing. Retail trade has shed 697,000 jobs since November 2007, and lost 51,000 jobs in February and 48,000 jobs in March. Again look for a jump in retail employment if the recession is ending.
Finance and Insurance. During the economic expansion finance and insurance, along with technology sectors offered some of the best new job opportunities, outside of health care and technology-related activities. Since December 2007, finance and insurance has shed 243,000 jobs, and 25,000 in March alone.
It’s not just the U.S. credit crisis. U.S. financial services are facing tougher competition in booming markets, like the Persian Gulf, where the U.S. credit meltdown has tarnished the image of U.S. service providers like Citigroup. Increasingly U.S. investment banking firms cannot demand premium high prices for their services, as sophisticated buyers prefer local, more reasonably-priced and less-tarnished competitors.
Manufacturing. Over the last 108 months manufacturing has lost 5.0 million jobs. The dollar remains overvalued against the Chinese yuan and other Asian currencies, and the large trade deficit with China and other Asian exporters is a key factor pushing down U.S. manufacturing employment.
To keep the value of the yuan low against the dollar policy, the Chinese government intervenes in currency markets, selling yuan for dollars and other western currencies at a discount from a market determined price. The yuan is at least 40 percent undervalued, and provides a like amount subsidy on Chinese exports into the United States and on Chinese products competing with U.S. exports in China and other markets around the world.
Many U.S. manufacturers find it easier to locate production in China and elsewhere in Asia than to add jobs in the United States to produce goods. U.S. made goods must scale considerable trade barriers and compete against subsidies provided by undervalued currencies in China, India and elsewhere in Asia and regulated fuel prices.
Were the trade deficit cut in half, manufacturing would recoup at least 2 million of the 5.0 million jobs lost since 2000. U.S. GDP growth would be in the range of 3.5 to 4.0 percent a year instead of 2.5 to 3 percent expected as the economy resumes growth in 2010. Real wages would rise briskly.
At his confirmation hearing Treasury Secretary Geithner acknowledged China is manipulating its currency and promised to work toward a realignment of currency values; however, the Administration has backed off this position.
President Obama must get behind a policy to reverse the trade imbalance with China, or preside over the wholesale destruction of many more U.S. manufacturing jobs. These losses have little to do with free trade based on comparative advantage. Instead, they derive primarily from currency practices that make Chinese products artificially cheap in U.S. and other markets and Chinese restrictions on imports. These Chinese policies deprive Americans of jobs in industries where they are truly internationally competitive.
In the end, without assertive steps to fix trade with China, as well as fix the banks and curtail oil imports, the Bush years will seem like a walk through the park compared to job and real income losses Americans will suffer during the Obama years.
Why the US Trade Deficit matters? By Professor Peter Morici, Robert H. Smith School of Business, University of Maryland Jan 9, 2008, 09:34
On Friday, the US Commerce Department will release data for the November 2007 trade deficit. The consensus estimate is $60 billion, up from $57.8 billion in October. It may be a bit larger or smaller, but either way, it comes to about 5 percent of GDP, That is an enormous drag on national income and growth, and has corrosive consequences for our children’s future.
Budget Deficit Sophistry
In the discussions about the trade deficit, a great deal has been made of the US federal budget deficit; however, during the third quarter the current account deficit, which includes goods and services, net flows of foreign investment income and transfer payments, was $178.5 billion, but the federal deficit was only $57.3 billion. How can a $57.3 billion domestic financing requirement cause a $178.5 billion external deficit?
In 1991, the federal budget deficit was huge and the current account was in surplus. When Bill Clinton left office in 2001, the budget was in surplus and the current account was in deficit. That is the absolute opposite of what those who blame the trade deficit on the budget deficit would have us expect.
Of course the budget deficit matters but so do a lot of other factors. That said, it is hard to find good reasons for the rest of the problem in the competitive fitness of the US economy and business.
Each year the World Economic Forum computes a growth potential index for 131 economies. It examines factors like public finances (e.g., budget deficits, efficacy of the tax system), the environment for the cultivation and commercialization of technology, and quality of civil institutions (e.g., the prevalence of corruption, evenhandedness of the judiciary and respect for law), and openness to international competition. In this assessment of national competitive potential, the United States ranks 1st—China and India rank 34th and 48th.
Our labor force is much stronger than education entrepreneurs in search of higher taxes would have us believe. Virtually our entire native born population finishes high school, two thirds receive some post secondary training, and our universities are among the nation’s most prolific export industries. The most important determinant of quality in the classroom is the student population, and if our universities are populated by dullards, why do so many foreign students want to pay our pricey tuition?
US productivity is advancing briskly. Since 1997, private business productivity has increased 2.7 percent a year. In durable goods manufacturing, where technology matters as much as anywhere, productivity has been advancing at a 6.0 percent pace. Those are solid gains.
New products and methods continue to burst from our research labs. We would have to go back to electrification, the railroad and the opening of the West to find epic events that so transformed our economy and the global economy as contemporary American innovations in new materials, electronics and logistics.
So where are the problems? I suggest we look in three places.
Oil, China and Automobiles
Net imports of petroleum, products from China, and automobiles and parts total about 110 percent of the trade deficit, and no solution to the overall trade imbalance is possible without addressing these segments.
Petroleum accounted for $26.3 billion of the monthly trade gap in October 2007.
From December 20001, the cost of imported petroleum increased $20.8 billion, the average price of a barrel of imported oil rose from $15.46 to $72.49, and the volume of imports increased from 353 million to 406 million barrels.
In 2008, prices are higher, and the monthly oil import bill could easily exceed $35 billion. Yet, neither the Republicans nor the Democrats seem inclined to do what could be done to address our dependence on imported oil.
Last year, the Congress managed to push through the first increase in automobile mileage standards in 32 years but don’t cheer loudly. The 35 mile-per-gallon standard to be achieved by 2020 is far less than what is possible.
The bill also requires the production of about 2.4 million barrels a day of ethanol. Along with other conservation measures, the 2007 Energy Act could reduce U.S. petroleum consumption by 4 million barrels a day by 2030. Over the last 23 years, petroleum consumption has increased by about 5.5 million barrels a day, despite improvements in mileage standards, automobile and appliance technology, and conservation.
Being optimistic, in 2030 we will be just as dependent on imported oil as before. Factor in falling production from U.S. oil fields, the situation gets worse.
We could do a lot better. Retuning conventional engines and transmissions, more hybrids, electric vehicles, lighter vehicles, and more nuclear power are attainable. The Chinese are likely to turn in those directions in greater force than we do. Then we can buy our cars from the Middle Kingdom just like our coffee makers.
China accounted for $25.9 billion of the October trade deficit, up from $23.8 billion in September and $5.5 billion in December 2001. The bilateral deficit keeps rising, because China undervalues the yuan, and this makes Chinese exports artificially inexpensive and U.S. products too expensive in China.
China revalued the yuan from 8.28 to 8.11 in July 2005 and has since permitted the yuan to rise 3.6 percent every twelve months. Modernization and productivity advances raise the implicit value of the yuan about 7 percent every 12 months, and the yuan remains undervalued against the dollar by 50 percent.
China’s huge trade surplus creates an excess demand for yuan on global currency markets; however, to limit appreciation of the yuan against the dollar and drive its value down against the euro, the Peoples Bank of China sells yuan and buys dollars, euros and other currencies on foreign exchange markets.
In 2007, the Chinese central bank purchased about $450 billion in U.S. and other foreign currency and securities. This comes to about 15 percent of China’s GDP and about 45 percent of its exports. These purchases provide foreign consumers with 3.6 trillion yuan to purchase Chinese exports, and create a 45 percent “off budget” subsidy on foreign sales of Chinese products, and an even larger implicit tariff on Chinese imports.
In addition, China provides numerous tax incentives and rebates, and low interest loans, to encourage exports and replace imports with domestic products. These practices clearly violate China’s obligations in the WTO, and it agreed to remove those when it joined the trade body.
Automotive products account for about $11.2 billion of the monthly trade deficit. Japanese and Korean manufacturers have captured a larger market and are expanding their U.S. production. However, Asian manufacturers tend to use more imported components than domestic companies, and GM and Ford are pushing their parts suppliers to move to China.
GM, Ford and Chrysler carry a significant cost disadvantage against Toyota plants located in the United States, thanks to clumsy management and unrealistic wages, excessive fringe benefits and arcane work rules imposed by United Autoworker contracts. Recent negotiations have improved the Detroit Three’s cost position but did not wholly close the labor cost gap with Toyota and other Asian transplants.
Recently negotiated labor agreements should reduce, but not eliminate, these cost disadvantages. Even with retiree health care benefits moved off the books and a two tier wage structure, the cost disadvantage will remain well above $1000 per vehicle.
Also, the central banks of Japan and Korea have aggressively stepped up sales of yen and won for US dollars and other securities to keep their currencies cheap against the dollar. This discourages Toyota, Hyundai and others from moving more auto assembly and sourcing more parts in the United States.
More Debt and Slower Growth
Apologists for Chinese currency and trade policies point out that U.S. consumers benefit from less expensive products at Wal-Mart and other purveyors of subsidized imports. But these bargains come at high cost: we are saddling our children with debt to foreigners and slashing economic growth.
Trade deficits must be financed by foreigners investing in the U.S. economy or Americans borrowing money abroad. Direct investments in the United States provide only about a tenth of the needed funds, and Americans borrow about $50 billion each month. The total debt is about $6 trillion, and at five percent interest, the debt service comes to about $2000 per U.S. worker each year.
High and rising trade deficits tax economic growth. Each dollar spent on imports, not matched by a dollar of exports, shifts workers into activities in non-trade competing industries like department stores and restaurants.
Manufacturers are particularly hard hit by this subsidized competition. Through recession and recovery, the manufacturing sector has lost 3.3 million jobs since 2000. Following the pattern of past economic recoveries, the manufacturing sector should have regained about 2 million of those jobs, especially given the very strong productivity growth accomplished in technology-intensive durable goods industries.
Productivity is at least 50 percent higher in industries that export and compete with imports. By reducing the demand for high-skill and technology-intensive products, and US made goods and services, the deficit reduces GDP by about $250 billion a year or about $1750 for each worker.
Longer-term, persistent US trade deficits are a substantial drag on growth. U.S. import-competing and export industries spend at least three-times the national average on industrial R&D, and encourage more investments in skills and education than other sectors of the economy. By shifting employment away from trade-competing industries, the trade deficit reduces US investments in new methods and products, and skilled labor.
Cutting the trade deficit in half would boost US GDP growth by one percentage point a year, and the trade deficits of the last two decades have reduced U.S. growth by one percentage point a year.
Lost growth is cumulative. Thanks to the record trade deficits accumulated over the last 20 years, the US economy is about $3.0 trillion smaller. This comes to about $1000 per worker.
Our Legacy
As a consequence of decades of trade deficits, our children will be less productive, poorer and saddled with huge interest payments to foreign creditors.
No surprise these costs are overlooked by advocates of the status quo. Many work for private equity firms, hedge funds, and large commercial and investment banks on Wall Street. They champion outsourcing, as it offers the opportunities to finance big deals that move Midwestern factories to Asia and to enter Chinese financial markets. We would do well to remember they are the same bunch that gave us the subprime crisis, the collapse and foreign rescues at Merrill Lynch and Citigroup, the melt-down in the mortgage and housing markets, and the pending recession.
Meanwhile, the Bush Administration lectures China but ignores the corrosive consequences of the trade deficit. Leaders in Congress talk tough but have not acted.
Our children will be poorer, much poorer for this sophistry.
Peter Morici,
Professor, Robert H. Smith School of Business, University of Maryland,
