Morici: A Preview of Friday's Jobs Report

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Friday, economists expect the Labor Department will report the economy added 200,000 jobs in March. After adding 192,000 jobs in February, this would indicate the economy is finally accomplishing momentum.

The February gain was in sharp contrast to weaker gains the previous 13 months, and largely resulted from stronger, potentially self-sustaining private sector jobs growth.

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As measured by GDP, the economic recovery began in July 2009, but the economy did not begin adding jobs until January 2010.

Through January 2011, the economy only gained 77,000 jobs a month, mostly thanks to stimulus spending, temporary business services, and health care and social services, which are heavily subsidized by federal and state governments. Job gains in the core private sector-private employment less temporary business services, and health care social services and temporary business services averaged only 45,000 a month.

Core private sector jobs are so important because those have the potential to set off a virtuous cycle of hiring, consumer spending and more hiring. In February, this barometer of private sector vitality gained 170,000 new positions. A similarly strong core private sector gain will be needed to add 200,000 new jobs overall in March. If that is accomplished, we may finally be getting someplace.

Still job gains in the range of 200,000 a month are not enough to push unemployment down to acceptable levels. Continued dependence on foreign oil, the growing trade deficit with China, and health care and tax policies that penalize the location of businesses in the United States are responsible for slower jobs creation than has been accomplished during past recoveries and that could still be achieved.

The economy must add 13 million private sector jobs over the next three years -- 360,000 each month -- to bring unemployment down to 6%. Core private sector jobs must increase at least 300,000 a month to accomplish that goal.

The economy is expanding at a 3% annual rate and this is barely enough to hold unemployment steady, because the working age population increases 1% a year, and productivity advances about 2%. Growth in the range of 4-5% is needed and possible to get unemployment down to 6% over the next several years.

At 3.3% of GDP, the $500 billion trade deficit is a drag on domestic demand and taxes U.S. growth. Oil and trade with China account for nearly the entire U.S. trade deficit.

The Administration is banking on electric cars and alternative technologies, such as wind and solar, to replace imported oil, but those won't pull down gasoline consumption enough to significantly reduce the oil import bill for a least a decade. Failure to produce more domestic oil and gas, by sending dollars abroad that do not sufficiently return to purchase U.S. exports, is a jobs killer.

China maintains an undervalued currency by spending 10% of GDP to purchase dollars -- this reduces domestic Chinese consumption and subsidizes Chinese exports by about 35%. Failure to act to offset Chinese currency subsidies, for example by taxing dollar yuan conversions, is the single most significant flaw in Administration policy to create an adequate numbers of jobs.

More broadly, major trading partners in Europe and Asia rely on value added taxes to finance government and health care, whereas Americans pay higher corporate taxes and directly for health care. Under WTO rules, VATs are rebateable on exports from Europe and Asia and are applied on imports from the United States into those markets, creating huge pricing disadvantages-American products are essentially taxed twice. A neutral change in U.S. tax policy toward a VAT-swapping a VAT for reductions in corporate and personal income taxes-would help remove a major competitive disadvantage on U.S. exporting and import-competing industries.

Finally, the 2010 health-care law is pushing up health-care costs, rather than reducing those as promised, making insurance unaffordable for many small and medium sized businesses. Although manufacturing has enjoyed a stronger recovery than the rest of the economy, it has been significantly focused on activities that use very little labor illustrating the burden that health care imposes on U.S. employers.

Without fixing energy policies, addressing Chinese currency subsidies, modifying the tax structure, and truly reforming health care, high unemployment will be a permanent feature on the U.S. economy and real wages will decline. Neither the Obama Administration nor Republican leadership in the Congress appears inclined to do what needs to be done.

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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