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Mr. President: It's the trade deficit stupid!

By Peter Morici
web posted February 8, 2010

Since the Democrat's debacle in Massachusetts, President Obama has been campaigning.

In the State of the Union address, his new budget and other staged events for the faithful 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 and now 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 sorceresses 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. ESR

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.


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