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Peter Morici
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Peter Morici is a Professor of Business at the University of Maryland. Prior to joining the University, he served as Director of Economics at the U.S. International Trade Commission. He directed the agency's professional economists working on ITC investigations and provided international... More
  • Obama, Pelosi Neglect of Trade Deficit Imperils Recovery
    Thursday, economists expect the Commerce Department to report the deficit on international trade in goods and services was $47.2 billion in July. That is less than the $49.9 billion registered in June, because many analysts expect stagnating wages are slowing import demand.
    Still too large, the trade deficit subtracted 3.4 percentage points from second quarter GDP growth, and threatens to derail an already weak U.S. recovery, throw the economy into a double dip recession, and dramatically increase unemployment.
    Without the second quarter jump in imports—led by consumer goods from China and boosted by an undervalued yuan and export subsidies President Obama neglects—GDP growth would be close to 5 percent, hundreds of thousands of Americans would be finding jobs, and Democrats would be poised to retain their majorities in the House and Senate.
    President Obama and Speaker Pelosi chose to ignore the undervalued yuan and other Chinese subsidies that result in an outsized trade deficit and millions of lost jobs across the industrial Midwest and South. 
    Instead, the President and Speaker of the House obsess about taxing the rich and social issues, and appease China on trade and the environment, as the United States sinks into an economic quagmire similar to Great Britain in the 1950s and 1960s.
    Notably, Britain in 1950 was on par with Germany and France. Twenty years later, it enjoyed living standards half its continental rivals.
    Each month, more and more Americans lose decent jobs, can’t find comparable employment, and then settle for lower wages, as Americans enjoy the British post-war folly of an overvalued currency and distracted leaders.
    Simply, dollars that go abroad to purchase U.S. imports cannot be spent on U.S. goods and services. When those dollars do not return to purchase U.S. exports, jobs are lost and not replaced. A rising trade deficit slows growth and increases unemployment.
    Free trade based on a balance between exports and imports helps nations specialize in what they do best, grow and prosper. Rising trade deficits, financed on borrowed money to cover profligate government spending, erode prosperity and compromise sovereignty.
    But for the increase in the trade gap, GDP would have grown 5.2 percent, and unemployment would fall to 7.5 by early 2011, and less than 5 percent by 2013.
    Oil and consumer goods from China account for nearly the entire trade deficit, and sustained economic recovery is not possible without dramatic changes in energy and trade.
    President Obama’s efforts to halt offshore drilling and otherwise curtail conventional energy supplies—premised on false assumptions about the immediate potential of electric cars and alternative energy sources—threaten to make the United States even more dependent on imported oil.
    Detroit can build many more attractive and efficient gasoline-powered vehicles now, and a national policy to accelerate the replacement of the existing fleet would reduce imports, spur growth and create jobs.
    To keep Chinese products artificially inexpensive on U.S. store shelves and discourage U.S. exports into China, Beijing undervalues the yuan by 40 percent. It accomplishes this by printing yuan and selling those for dollars to augment the private supply of yuan and private demand for dollars. In 2009, those purchases were about $450 billion or 10 percent of China’s GDP, and about 35 percent of its exports of goods and services. 
    In 2010, the trade deficit with China reduces U.S. GDP by more than $400 billion or nearly three percent. Unemployment would be falling and the U.S. economy recovering more rapidly, but for the trade imbalance with China and Beijing’s protectionist policies.
    In June, China indicated it will adopt a more flexible exchange rate policy, but that has not resulted in the needed realignment in exchange rates.
    China recognizes President Obama is not likely to counter Chinese mercantilism with strong, effective actions; hence, it offers token gestures and cultivates political support among U.S. businesses like General Motors and Caterpillar who profit from investments in China.
    President Obama should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports—in 2009 that was about 35 percent. For imports, at least, that would offset Chinese subsidies that harm U.S. businesses and workers.
    Until the President tackles the root causes of the trade deficit, unemployment will remain near 10 percent and could surge much higher, and Americans face economic decline.

    Disclosure: no positions
    Sep 08 8:59 AM | Link | Comment!
  • Deflation and President Obama’s Legacy
    Deflation is coming and Americans should be alarmed.
    Many, though hardly all, prices are falling.
    Government regulations, subsidies and sanctioned monopolies make some price increases inevitable—the world may end before doctors’ visits, prescription drugs, college tuition, and cable TV rates stop rising. For now, President Obama has legislated higher car prices and profits by removing large amounts of capacity at GM and Chrysler, offering subsidies for hybrid and electric vehicles, and imposing tougher fuel economy standards.
    Even with those industries pulling up inflation, prices outside the erratic energy and food sectors—so called core inflation—have increased less than one percent over the last year.
    Prices are falling for many discretionary items like furniture, apparel, personal computers and electronics, recreational and communications services, and personal care products. Real estate prices and rents remain in the pail.
    Some deflation may not be bad if accompanied by decent growth—4 to 5 percent a year until unemployment comes down and 3 percent over the business cycle. That would discourage reckless lending better than any regulator. Treasury securities could still pay 1 to 2 percent a year, real interest commercial and mortgage rates at 3 or 4 percent would be aligned with long term growth, and borrowers hardly would be victims.
    However, deflation is spreading, because Americans have been sold a false idea by Treasury Secretary Geithner: high unemployment and tepid growth are the new normal and desirable.
    For the 24 months prior to the Great Recession, unemployment was less than 5 percent and optimism abounded that new technology would carry Americans into an age of cleaner energy, higher productivity and plenty.
    If ineffective regulation caused the financial crisis, President Obama’s reforms should have fixed the problem, and the economy should be able to grow fast enough to pull down unemployment to acceptable levels.
    Americans are not wandering fools, heirs to a lost civilization. They can still make goods and services but demand for what they make is inadequate.
    Consumers are buying again but not enough, because housing prices are depressed and many homeowners, crushed by high-interest mortgages, simply cannot refinance with prices depressed. Credit card companies are becoming the last refuge of the financial flimflam man.
    Baby boomers are trimming spending and postponing retirement, because the stock market and their retirement accounts have not gained much value in more than a decade.
    President Obama’s health care reforms are pushing up insurance premiums and co-pays, and local governments are imposing new taxes, leaving consumers with much less to spend on everything else.
    The trade deficit is growing again, and each additional dollar spent on imports that does not return to purchase U.S. exports reduces demand for what Americans make.
    President Obama wants to double exports in five years, and is banking on emerging industries such as wind and solar generation and electric vehicle components. That will be tough because China is the fastest growing market, and the president refuses to meaningfully challenge its protectionist technology and procurement policies.
    For example, China requires that state run wind farms purchase wind turbines with at least 70 percent domestic components and state owned farms are 80 percent of China’s market. GE has superior technology and could export turbines and components from the United States but must produce in China to serve the market.
    Doubling exports to China and elsewhere does no good if U.S. imports more than double.
    In many industries, locating in China or India to gain access means exporting back to the United States with that capacity. And China’s undervalued exchange rate and other export subsidies in industries ranging from tee-shirts to telecommunications equipment remain unanswered by President Obama.
    A tax or restrictions on CO2 emissions, which the President has pledged to impose on U.S. industries but Beijing refuses to apply to Chinese competitors, would make matters worse
    The housing and stock markets are not something President Obama can address directly, but he needs to rethink his health care, environmental and other regulatory policies, and trade with China.
    If not, President Obama’s legacy will be deflation and an America in economic decline.
    A nation that can’t grow enough to take of its elderly, educate its young or provide a decent future for anyone but Wall Street financiers, Hollywood stars and Washington’s policy elite.

    Disclosure: no positions
    Aug 18 8:34 AM | Link | Comment!
  • Fixing the Economy
    To accomplish robust growth and lower unemployment to pre-recession levels, President Obama must temper his impulse to tax and regulate, and stop appeasing China and Wall Street.
    The Bush years were better than he admits, and a lot better than his policies promise.
    The 24 months prior to the financial crisis, unemployment was less than 5 percent.
    Now, Treasury Secretary Geithner and liberal intellectuals advising the President say 10 percent unemployment is the new normal, tutelage to China is inevitable, and Wall Street financiers deserve obscene bonuses for engineering it all.
    The pre-crisis prosperity was created by bipartisan policies that empowered Americans to create wealth.
    Freer trade championed by Presidents since Kennedy, and deregulation begun by Carter with the airlines were critical.  So were cutting excessively high taxes on middle and upper-income Americans, initiated by Ronald Reagan, interrupted by Bill Clinton, and reinstated by Mr. Bush.
    Now, Barack Obama threatens to intrude into every dimension of private enterprise—not just in health care and banking. Large non-financial corporations have almost $2 trillion dollars in idle cash, because CEOs can’t identify profitable opportunities and worry ever higher taxes and regulators on steroids will destroy their businesses.
    Raising taxes on families earning more than $250,000—as President Obama obsesses to do—would sink the recovery. Increasing marginal rates to about 50 percent on half the income earned by proprietorships would leave small and medium sized businesses with too few resources and incentives to invest and create new jobs.
    Treasury Secretary Timothy Geithner states repeatedly the growth of the past several decades was unstable and riddled with crises. Yet, economists refer to the mid-1980s through 2007 as the “Great Moderation.” Fluctuations in GDP, industrial production and employment were mild, and inflation ceased to be a problem.
    Now, President Obama tells us we must endure higher taxes, higher health insurance premiums and more expensive energy to enjoy the stability of crippling unemployment, as he socializes large chunks of the economy and expands federally-sponsored welfare to compensate the victims.
    President Barack Obama’s impulse for broader state control, higher taxes and more federal largess are wrongheaded, because problems in only two areas instigated the financial crisis and destroyed the recent prosperity.
    China and the big banks abused the opportunities created by free trade agreements and repeal of Glass-Steagall, both crafted by the Clinton Administration.
    China undervalues its currency, blocks U.S. exports and otherwise subsidizes its exports into the United States. Banks made reckless loans and hid risks in arcane mortgage backed securities and structured investment vehicles to create huge executive bonuses.
    The trade deficit deflated demand for what Americans make, and the credit crunch made business expansion impossible. Voila, the Great Recession!
    The Bush tax cuts and deregulation in other industries did little to encourage those abuses.
    Mr. Obama continues the Bush policy of negotiating with China, obtaining few meaningful results. The Obama’s bank reforms leave the big banks bigger than before (still too big to fail), ineffectively regulates mortgage-backed securities, and handicaps the 8,000 regional banks that do most of the lending to small and medium-sized businesses.
    Systemic ills unaddressed, the economy is mired in a weak recovery and may soon double dip. Housing is depressed, consumers correctly distrust banks and are fearful to use credit cards even for good purposes, and more than 450 thousand Americans file for first-time unemployment benefits each week.
    Anemic growth causes big deficits. And like the death bed physicians that bled President Washington twice, President Obama wants to double down on higher spending and taxes. Speaker Nancy Pelosi has put a national sales tax on the table.
    In 2007, federal spending was 19.6 percent of GDP and the federal deficit was a quite manageable $161 billion. For 2011, President Obama projects spending at 25.1 percent of GDP and the deficit at $1.3 trillion.
    President Obama should dust off President Bush’s 2007 budget and spend less, finally fix trade with China, craft policies that permit regional banks to compete, and bust up the big banks that thrust the global economy into the abyss.
    Aug 10 7:14 AM | Link | Comment!
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