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Morici: 8.9.12: Trade Deficit Stifles Growth: Boost Oil Production, Challenge China to Jumpstart Economy

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The following article was written by Peter Morici, an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist.

Trade Deficit Stifles Growth: Boost Oil Production, Challenge China to Jumpstart Economy

Today, the Commerce Department reported the deficit on international trade in goods and services was $42.9 billion in June.

Imported oil and subsidized imports from China account for nearly the entire trade gap and pose the most significant barriers to robust growth and jobs creation.

The economic recovery began five months after Barack Obama took office, and GDP growth has averaged 2.2 percent. In October 2009, unemployment peaked at 10 percent, but has fallen to 8.3 almost entirely because fewer Americans are seeking work.

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 percent, unemployment was 7.3 percent and a rising percentage of Americans were seeking work.

Nowadays, economists agree the U.S. economy suffers from too little demand. Consumers are spending and taking on debt, but too many dollars go abroad to pay for Middle East oil and Chinese goods that do not return to buy U.S. exports. Businesses remain pessimistic and don’t hire.

Mr. Reagan encouraged the development of natural resources and endured much criticism from environmentalists and academics. Whereas Mr. Obama has talked repeatedly about developing the full range of energy resources, but has bent to their pressure and imposed counterproductive 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.

These policies are premised on faulty assumptions about the immediate potential of electric cars and unconventional energy sources, and in combination, those make the United States much more dependent than necessary on imported oil.

Oil imports could be cut by two-thirds by boosting U.S. oil production to 10 million barrels a day, and immediately implementing more feasible solutions like the aggressive use of natural gas in fleet vehicles and more fuel efficient internal combustion engines.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40 percent. It pirates U.S. technology, subsidizes exports and imposes high tariffs on imports.

Mr. Reagan was a forceful advocate for U.S. economic interests with the preeminent rivals of his day, like Japan. Whereas Mr. Obama, like President George W. Bush, has sought to alter Chinese policies through endless negotiations.

Beijing offers token gestures, knowing President Obama will not take the strong actions, advocated by economists across the ideological and political spectrum, to force China to abandon its mercantilists policies. It successfully cultivates political support for the Bush-Obama policy of appeasement among large U.S. multinationals and banks doing business and profiting from mercantilism in the Middle Kingdom.

Cutting the trade deficit in half, through domestic energy development and conservation, and forcing China’s hand on currency manipulation and other protectionist practices would increase GDP by about $500 billion a year and create at least 5 million jobs.

Longer term, large trade deficits shift resources from manufacturing and service activities that compete in global markets to domestically focused industries. The former undertake much more R&D and investments in human capital.

Cutting the trade deficit in half would raise U.S. economic growth by one to two percentage points. But for the trade deficits of the Bush and Obama years, U.S. GDP would be 10 to 20 percent greater than it is today, per capital income as much as five to ten thousand dollars higher, and unemployment not much of a problem.

10 Responses to “Morici: 8.9.12: Trade Deficit Stifles Growth: Boost Oil Production, Challenge China to Jumpstart Economy”

  1. Joe Brooks says:

    Absolutely Reagan took strong steps to control the trade deficits. He imposed 100% tariffs on electronics from Japan, stating that America’s future depended on US IC manufacturing capability, among many other items. He said we should be fair traders, not just “free traders”.

    “Notice how adding the overall debt level of the economy completely changes the picture and makes it obvious how the trade deficit is impoverishing the USA despite the increase in GDP.”
    http://voxday.blogspot.com/2012/06/pat-buchanan-vs-gary-north.html

  2. Joe Brooks says:

    Some anti Libertarian free trade ammo:

    Even the most adamant opponent of Hamilton, and the Federalist supporters of his plan, Thomas Jefferson would soon come to realize the importance The American School of Economics after serving as President of the United States and watching Britain, a former trading partner of our Union, invade our nation and burn our capitol to the ground.

    1816 January 9. (Jefferson to Benjamin Austin). “You tell me I am quoted by those who wish to continue our dependence on England for manufactures. There was a time when I might have been so quoted with more candor, but within the thirty years which have since elapsed, how are circumstances changed! We were then in peace. Our independent place among nations was acknowledged. We have experienced what we did not then believe, that there exists both profligacy and power enough to exclude us from the field of interchange with other nations:

    that to be independent for the comforts of life we must fabricate them ourselves.

    We must now place the manufacturer by the side of the agriculturist…He, therefore, who is now against domestic manufacture, must be for reducing us either to dependence on that foreign nation, or to be clothed in skins, and to live like wild beasts in dens and caverns. I am not one of these; experience has taught me that manufactures are now as necessary to our independence as to our comfort…

    If it shall be opposed to go beyond our own supply, the question of ’85 will then recur, will our surplus labor be then most beneficially employed in the culture of the earth, or in the fabrications of art? We have time yet for consideration, before that question will press upon us; and the maxim to be applied will depend on the circumstances which shall then exist; for in so complicated a science as political economy, no one axiom can be laid down as wise and expedient for all times and circumstances, and for their contraries.”[26]
    http://www.monticello.org/site/jefferson/quotations-manufacturing

    • Joe Brooks says:

      Mo, I agree somewhat:

      “In the 1930s for example, the US was a creditor nation, had trade surpluses and tariffs but had a declining standard of living due to declining capital accumulation. This was a period of an unsound money and various monetary distortions.”

      The tariffs mitigated the actions of the Federal Reserve. There are varying reports of just how much of the cash in circulation they collected and destroyed. but the Fed itself admits they were largely the cause of the Great Depression. Of course Wilson’s destruction of Lincoln’s 50 year old import tariffs was the catalyst.

    • Joe Brooks says:

      Mo, I have some disagreement here:

      “The US ran current account deficits from 1850-1900 and had a growing standard of living with a vibrant manufacturing sector. During this time period under sounder money, the US incurred debt and became a debtor nation to import capital goods in which it used these goods to manufacture goods and provide services to repay back its debt”

      This debt was caused by financing the Civil War and the low tariffs of 1846 and 1857 [free trade]. The Lincoln supported Morrill tariffs of 1861 and bonds repaid these debts fairly quickly. The US was hardly a debtor nation due to this after after 1880. The US Government used import tariffs to finance itself until Wilson came along.

      The manufacturing growth you refer to is directly attributable to the import tariffs and intentional Congressional promotion of manufacturing, R&D and infrastructure building, which began in 1789, with a few hiccups until 1913.

      http://en.wikipedia.org/wiki/File:Publicly_Held_Federal_Debt_1790-2009.png

  3. Mo says:

    When it comes to free trade, its assumed under a sound monetary system. If the managed traders that have given us NAFTA and the WTO ever read Ricardo’s writings on free trade and comparative advantage they would know Ricardo was referring to a world unfettered gold standard which means exchange rates would be kept within specie points that would link price levels and interest rates between countries. So there would be no printing of money out of thin air to fund various malinvestments that have caused or contributed to offshoring.

    When the founding fathers spoke of protectionism and tariffs it was a response to mercantilism not free trade. England forced the colonies to export raw materials in exchange for manufactured goods which wasn’t free trade.

    It’s important to note that what causes economic growth is capital accumulation which means there’s an increase in the number of tools, machines and factories per a given population. The US ran current account deficits from 1850-1900 and had a growing standard of living with a vibrant manufacturing sector. During this time period under sounder money, the US incurred debt and became a debtor nation to import capital goods in which it used these goods to manufacture goods and provide services to repay back its debt. This occurred even with tariffs. So what matters is the terms of trade.

    In the 1930s for example, the US was a creditor nation, had trade surpluses and tariffs but had a declining standard of living due to declining capital accumulation. This was a period of an unsound money and various monetary distortions.

    Today with the US terms of trade, the US offshores jobs, factories, transfers technology and trades ownership of US companies so that it can fund military adventures, artificial consumption with debt, offshoring investments and financial speculation. Today shows another example like in the 1930s on how monetary mismanagement has the distorted the economy.

  4. Joe Brooks says:

    Mo, I must disagree with several of your points:

    “When the founding fathers spoke of protectionism and tariffs it was a response to mercantilism not free trade. England forced the colonies to export raw materials in exchange for manufactured goods which wasn’t free trade.”

    The major cause of the War of Independence was the British policy of free trade for the colonies and duties for themselves and I agree that was Mercantilism. The US unilateral “free trade” with protectionist countries today is mercantilism. I see little difference, as free trade has never existed and probably never will.

    Let’s take a look at the thoughts of one of America’s most influencial Economists, at the time.

    “The monopoly of all manufacturing industry by the mother
    country was one of the chief causes of the American Revolution; the
    tea duty merely afforded an opportunity for its outbreak.”
    http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/list/list1

  5. Mo says:

    The period up to the war of Independence was not free trade. The colonies by fiat where not allowed to manufacture goods. The raw materials had to be exported to Britain where in Britain the raw materials were turned into manufactured goods. The so called free trade period in Britain began in 1860 but is misleading to call this period pure free trade because they removed most tariffs but mostly on items in which they had a comparative advantage (1).

    Notes:

    (1)The Myth of Free Trade Britain
    http://www.econlib.org/library/Columns/y2003/Nyefreetrade.html

    • Joe Brooks says:

      Hey Mo, I did not think Britain practiced “free trade” during that time. I said they forced “free trade” on the Colonies. Just as we see now by Red China, Germany, Japan, Mexico, India, 150 other nations practicing protectionism/colonization, while “our” politicians go along with it.

      • Mo says:

        Britain forcing the colonies to only export raw materials and not manufacture goods is not free trade. It’s managed trade like we have today.

        Whats interesting today is that the managed traders that call themselves free traders are not in favor of a free market in money. The market decided along time ago that gold should be used as money because it imposes golden handcuffs on wasteful spending and redistribution of wealth like today. Why not a free market in money? I guess if there was a free market in money then money couldn’t be printed out of thin air to subsidize offshoring and artificial consumption with debt where the US exports jobs, factories, technology and trades ownership of US companies to pay for imported consumer goods and overseas military adventures.

        • Joe Brooks says:

          Mo, we will have to agree to disgree. By forcing the colonies to accept duties on British goods while not allowing them to place tariffs, duties, taxes, whatever on imports was one sided “free trade” by definition for the colonies.

          The exact same thing is happening now. The truth is, the US does not compete in the real world of International Trade, at all.

          150 other nations have Import Tariffs, Value Added Taxes, Currency Manipulation, Border Duties, that add up to a 300% import tariff in many cases. The US has an average 2.5% import tariff, the lowest in the world.

          The US has by far the largest Trade Deficit in the history of the world. Long known as a method of colonization.

          http://www.youtube.com/watch?v=5DvuyvuHmJI

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