Outside View: Trade deficit threatens a second recession

COLLEGE PARK, Md., March 9 (UPI) -- Thursday, the U.S. Commerce Department will report the January deficit on international trade in goods and services. Analysts expect it to increase to $41 billion from $40.2 billion in December. My forecast for January is $41.5 billion.

The trade deficit, along with the credit and housing bubbles, was among the principal causes of the Great Recession. Now, a rising trade deficit and continued weakness among regional banks threaten to stifle the emerging recovery and keep unemployment near 10 percent through 2011.

At 3.1 percent of gross domestic product, the trade deficit subtracts more from the demand for U.S.-made goods and services than U.S. President Barack Obama's stimulus package adds. Moreover, Obama's stimulus is temporary, whereas the trade deficit is permanent and growing.

Subsidized manufactured goods from China and petroleum account for nearly the entire deficit and both will rise as consumer spending and oil prices rise through 2010.

Money spent on Chinese coffeemakers and Middle East oil cannot be spent on U.S.-made goods and services, unless offset by exports.

When imports substantially exceed exports, Americans must consume much more than the incomes they earn producing goods and services or the demand for what they make is inadequate to clear the shelves, inventories pile up, layoffs result and the economy goes into recession.

From 2004-08, the trade deficit exceeded 5 percent of GDP and Americans borrowed from abroad to keep the economy going. To consume more than they produced, they posted as collateral overvalued homes financed on shaky mortgages. When mortgages and banks failed, home prices and retail sales tanked, the shortfall in demand for U.S.-made goods and services drove up unemployment, further choked consumer and investment spending and thrust the economy into the worst recession in 70 years.

Now huge federal stimulus spending is required to resuscitate business activity. However, as the economy recovers the trade deficit on oil and with China will grow, taxing demand for U.S. goods and services. Once that money is spent, demand for American products will fall and the economy will be at risk of a second recession.

Obama ignores the fundamental causes of trade deficit; consequently, his policies to fight the recession will deliver only a moderate recovery in 2010. Imports of oil and Chinese consumer goods will rise as the economy recovers. As stimulus spending runs out, the escalating trade deficit will push the economy down again and threatens a second recession -- the feared "W"-shaped recovery.

So far, the Obama administration has not challenged Beijing's most protectionist policies -- large government purchases of U.S. dollars that drive down the exchange rate for the yuan, subsidize Chinese exports and artificially elevate Chinese savings and suppress U.S. savings. The China-U.S. savings imbalance is not entirely a natural phenomenon rooted in consumer behavior.

Industrial policies to promote green industries championed by Obama will create jobs numbering in the thousands and will hardly replace the millions lost to the trade deficit. Green jobs are not a realistic prescription to resolve what are macroeconomic and systemic problems -- the overvalued dollar vis-a-vis the Chinese yuan and the inability of the World Trade Organization and International Monetary Fund to discipline and end China's predatory currency and trade polices.

In 2010 the trade deficit is slicing $400 billion to $600 billion off GDP and, longer term, it reduces potential annual GDP growth to 3 percent from 4 percent.

Manufacturers are particularly hard hit by subsidized imports. Through recession and recovery, 6 million manufacturing jobs have been lost since 2000. Following the pattern of past economic expansions and business cycles, the manufacturing sector should have retained about 3 million of those jobs, especially given the very strong productivity growth accomplished in recent years.

The trade deficit is the single most important reason why the private sector has failed to add a single job since 1999.

Thanks to the record trade deficits accumulated over the last 10 years, the U.S. economy is about $1.5 trillion smaller. This comes to about $10,000 per worker.

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(Peter Morici is a professor at the Smith School of Business, University of Maryland School, and former chief economist at the U.S. International Trade Commission.)

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(United Press International's "Outside View" commentaries are written by outside contributors who specialize in a variety of important issues. The views expressed do not necessarily reflect those of United Press International. In the interests of creating an open forum, original submissions are invited.)