Trade Deficit, Ailing Banks Threaten Recovery

Friday, analysts expect the Commerce Department to report the deficit on international trade in goods and services was $44 billion in October, or 3.6% of GDP.

The trade deficit and crippled regional banks starve U.S. businesses of the customers and capital needed to create jobs and fire up growth.

Trade Deficit 

Retail sales are up and businesses are purchasing critical equipment, but too much spending is going to imports.

Dollars spent in China to purchase coffee makers and Internet routers that don’t return to buy   U.S. exports destroy jobs in U.S. import-competing industries without creating new jobs in U.S. export industries

In the third quarter, the imports grew so much more rapidly than exports that the trade gap subtracted 1.8% from the demand for U.S. made goods and services.

But for the growing trade deficit, GDP would have been up 4.3% instead of 1.7%. At that pace, unemployment would fall to 5% by the end of 2013.

Oil and goods from China account for nearly the entire deficit, and without a dramatic change in energy and trade policies, the U.S. economy faces unemployment at or above 10% indefinitely.

Limits on offshore drilling and otherwise curtailing conventional energy supplies -- premised on false assumptions about the immediate potential of electric cars and alternative energy sources -- are making the United States even more dependent on imported oil and more indebted to China and other overseas investors.

Detroit could build many more attractive and efficient gasoline-powered vehicles now, and a national policy to accelerate fleet replacement would reduce imports, spur growth and create jobs much more rapidly than investments in battery and electric technologies.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40%. It accomplishes this by printing yuan and selling those for dollars other currencies in foreign exchange markets. Annually, those purchases exceed $450 billion or about 10% of China’s GDP, 35% of its exports.

President Obama has pleaded with China to stop manipulating its currency, but Beijing shrewdly recognizes President Obama lacks the will to meaningfully counter Chinese mercantilism with strong, effective actions; hence, Beijing offers token gestures and cultivates political support among U.S. businesses like Caterpillar who lead in outsourcing jobs to China and profit from Chinese protectionism at the expense of American workers.

President Obama should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports—currently, about 35 percent. That would neutralize China’s currency subsidies that steal U.S. factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and protectionism, it is self defense.

Banks

Even with effective responses to oil import dependence and Chinese mercantilism, most small businesses would need credit from regional banks to expand.

Unfortunately, the Treasury used the TARP to recapitalize Wall Street banks and trading houses, like Goldman Sachs (NYSE:GS), that are now again paying record bonuses in the range of $150 billion, or 1% of GDP, to a handful of Wall Street traders and executives.

Treasury did not create a “Bad Bank” -- an analog to the Savings and Loan Crisis Resolution Trust -- to rehabilitate the Main Street banks. Many of those banks were blindsided by Wall Street trading and the credit crisis, and are now stuck with bad commercial mortgages and securities backed by those loans.

While Wall Street pays bank executives $5-10 million dollars a year with the $3 trillion in taxpayer money pushed into Wall Street by the Federal Reserve and TARP, as many as 3,000 of the 8,000 regional banks may disappear through failure or acquisition by larger brethren.

Washington provided Wall Street with taxpayer cash to monopolize banking. Now those banks are pushing down CD rates the elderly receive on savings, jacking up credit card fees, and setting aside credit for big multinationals that outsource more jobs than they create. Meanwhile, disappearing small banks have no cash to lend the small businesses to create jobs.

To fix small banks, Congress should use repaid TARP money to create a Resolution Trust to purchase loans and securities from regional banks. That trust could work out the loans and securities over several years and return a profit to the taxpayers. Smaller banks would then have the funds to lend and stay in business.

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.