Jobs Drought Means Choosing: Higher Taxes or Less Spending?

by: Peter Morici

This Friday, economists expect the Labor Department to report the economy added 140,000 jobs in December, barely enough to hold unemployment steady at about 9.8 percent and far less than should be expected 18 months into an economic recovery.

The President’s $800 billion dollar stimulus package gave the economy a lift and additional tax cuts in 2011 will help too, but those did not address structural problems holding back jobs creation—principal among those is the huge trade deficit.

Since July 2009, spending by consumers, businesses, and federal and state governments has increased at a 3.8 percent annual pace, but imports and the trade deficit have jumped 17 and 37 percent. Simply, too many stimulus dollars are being spent on goods from China, and too few of those dollars return to purchase U.S. exports.

The growing trade deficit is a tax on domestic demand that offsets much of the benefits of stimulus spending and tax cuts. Consequently, the U.S. economy is expanding at a 2.9 percent annual pace, which is not enough to dent unemployment.

Since December 2010, the private sector has added 106,000 jobs per month, but most of those have been in government subsidized health care and social services, and temporary business services. Netting those out, core private sector jobs creation has been a paltry 51,000 per month—that comes to 16 per county as compared to more than 5000 job seekers per county.

Coming out of a recession, temporary jobs appear first, but 18 months into the expansion the pace of permanent, non-government subsidized jobs creation should be accelerating. Instead, core private sector jobs fell 13,000 in November. It will increase in December, but monthly data is erratic, and the November and December figures should be evaluated together.

By the end of 2013, about 13 million private sector jobs must be added to bring unemployment down to 6 percent, and current policies are not creating conditions for businesses to hire 350,000 workers each month.

The President and new Republican majority in the House agree the budget deficit must be slashed, but whether accomplished through higher taxes or less spending, a significantly smaller budget deficit will reduce domestic demand, kill the economy recovery and push unemployment well above 10 percent, unless the trade deficit is slashed by a like amount.

Beijing’s intervention in currency markets and undervalued yuan creates a 35 percent subsidy on Chinese exports into the U.S. market. Together with high tariffs and other barriers to U.S. sales in the Middle Kingdom, the undervalued yuan is responsible for about half the U.S. trade deficit and high unemployment in the United States.

Diplomacy has failed to end China’s currency market intervention and aggressive mercantilism, and more assertive action toward China protectionism is needed to bring down the trade deficit while reducing the federal budget deficit.

Imposing a tax on the conversion of U.S. dollars into yuan in proportion to Beijing’s currency market intervention—either for the purpose of importing Chinese products or investing in China—would offset the effects China’s currency market intervention on the U.S. economy. Such a tax would significantly rebalance trade, instigate more investment and jobs creation in the United States, and reduce federal and state budget shortfalls.

Whatever the merits of free trade internationally and laissez faire domestically, trade with China is hardly free now. Chinese mercantilism and a U.S. government that has not answered it are victimizing too many unemployed Americans.

Imposing such a tax is a tough choice for a president who views himself a liberal internationalist, and for Republicans in Congress who view themselves as champions of free markets, but these are extraordinary times. America needs pragmatic leadership, not blind allegiance to lofty principles, textbook theories and ideology.

We must address the world as we find it, not as we believe it should be.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.