Dr. Morici Sees Urgent Need to Cut Trade Deficit

http://www.usw.org/media_center/news_articles?id=0165

I’ve posted links to the writings of Dr. Peter Morici, former Chief Economist at the U.S. International Trade Commission,  a couple of times over the past few months.  This linked article is another.  In the past, he’s expressed concern about the trade deficit and has accused China of currency manipulation.  Now he’s seems to have an even greater sense of urgency:

Today, the Labor Department reported the economy lost 533,000 payroll jobs in November, after losing 320,000 jobs in October and 403,000 jobs in September. This was much worse than was expected and represents wholesale capitulation. The threat of a widespread depression is now real and present.

The economy has shed 1.9 million jobs since December, as the full weight of the banking crisis, trade deficit with China and burdens imposed by high-priced imported oil are bearing down on manufacturing, construction and the broader economy with unrelenting pressure.

Unemployment increased to 6.7 percent in November; however, factoring in discouraged workers, unemployment is closer to 8.7percent. Add workers in part time positions that cannot find full time employment and the hidden unemployment rate is nearly 13 percent.

You’ve heard me say repeatedly that the weekly jobless claims number, now over 500,000 per week – an annual rate of 26 million workers (or about 17% of the work force) – is a far better measure of unemployment in this country than the 6.7% rate suggested by the monthly unemployment report.  Here Dr. Morici corroborates that. 

But more interesting to me is that Dr. Morici is ratcheting up his concern about the trade deficit, and the lengths to which he would be willing to go to fix it:

The challenges facing President-elect Barack Obama could not be clearer. The current economic slowdown has two structural causes—bad management practices at the large money center banks and the huge foreign trade deficit.

To accomplish lasting prosperity, President-elect Obama will have to fix the banks and the trade deficit.

… Obama must address the huge cost of imported oil and trade deficit with China or any effort to resurrect the economy is doomed to create massive foreign borrowing, another round of excessive consumer borrowing, and a second banking crisis that the Treasury and Federal Reserve will not be able to reverse.

… Fixing trade with China will require a tax on dollar-yuan transactions if China continues to refuse to stop subsidizing dollar purchases of yuan to prop up its exports and shift Chinese unemployment to the U.S. manufacturing sector.

“… a tax on dollar-yuan transactions …”  This is about as close as I’ve ever heard an economist come to advocating tariffs – especially one with the esteem of Dr. Morici.  After all, what is a “tariff” but a tax, and what “dollar-yuan transactions” could he be talking about but imports from China? 

Dr. Morici goes on to discuss Obama’s plans to get wages and incomes rising again:

… stimulus spending, alone, won’t fix what’s broke. It didn’t end the Great Depression. Japan has had a succession of stimulus spending over the last two decades and that has failed to restore its economic dynamism. Similarly, President-elect Obama’s massive stimulus package, alone, won’t fix the U.S. economy. He must also reach into the management of the banks, and dramatically reduce U.S. dependence on imported oil and the trade deficit with China. The alternative is economic stagnation or worse, a depression.

Going forward, solutions that create better jobs will require cutting the trade deficit by at least half to substantially boost domestic manufacturing …

Finally, diplomacy has failed to redress the currency issue with China. If President Obama is not willing to take tough steps to redress the trade imbalance with China and reduce oil imports, together the Persian Gulf oil exporters and China’s sovereign wealth funds may be able to buy the New York stock exchange eight years from now. Americans, outside those working for the New York banks that facilitate this sellout, will find their best futures waiting on tables for Middle East and Chinese tourists.

I’ve warned repeatedly about the dangers of bankrolling the trade deficit with the sell-off of American assets.  Finally, an economist is looking far enough down the road to see the consequences of what happens when those assets are exhausted. 

Now President-elect Barack Obama must alter his position, and 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 deprive Americans of jobs in industries where they are truly internationally competitive.

My only criticism of Dr. Morici’s article is this:  why stop with cutting the trade deficit by half?  And why pick on China alone?  Why not do the same thing with Japan, Korea, Germany and others?  Why not tax their currency transactions?  If cutting the deficit by half will improve the economy that much, then why not go all the way? 

This is all very good news.  The cracks in the parasitic aspects of globalization are growing into gaping chasms and sentiment for taking action is gaining traction with each passing day of this economic melt-down.  Now people with real influence like Morici are getting more vocal and insistent that something has to be done.  If Obama is listening and if he heeds such advice, then much brighter days are ahead.

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3 Responses to Dr. Morici Sees Urgent Need to Cut Trade Deficit

  1. Clyde Bollinger says:

    Pete,

    Dr. Morici at least “gets” part of the problem. He would definitely benefit from reading your book.
    It is really puzzling to me how little understanding of the real cause of the trade deficit problem there seems to be in economists circles. Is it their formal education that causes them to have such a limited view? This notion that we can keep operating at a loss and hope to make it up with volume is ‘mind-boggling’.
    The old adage “When you find your self in a hole, stop digging” certainly applies here.
    Most of the time when I attempt to discuss the subject, It falls on deaf ears,
    I get the “we can be competetive with anyone if only the government would get out of the way” arguement, or “I don’t want to do anything that transfers more power (tarrifs) to the government”. but in reality, we are transfering more power to the gov’t., it is just that the gov’t. getting the power is foreign. As far as being competetive, our auto industry has tried to be competetive and look at the condition it is in.

    One of my growing concerns going forward is that the size of the mounting fiscal deficit combined with the trade deficit will generate such a hopeless situation that the only solution is to default on the US treasury obligation to debt holders. In effect the USA declares bankruptcy. Our T-bill and bond sales (loans) are all that stand between us and an empty till. Who will be paying taxes in the next few years?

    • Pete Murphy says:

      Great comment, Clyde! I’m also amazed that economists are so reluctant to question their basic assumptions. If the other sciences took the same approach, we’d still be getting around by horse and buggy and dying by age 50.

      Although I don’t think the situation is hopeless yet, it will be if the government doesn’t change its ways, primarily its trade policy.

  2. RD says:

    Dr. Morci is right. We must balance the trade deficit or continue to decline as an economic power.

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