Smith Faculty Opinion Article
October 6, 2010
Jobs Growth Stalled and New Federal Reserve Polices Won't Help
Friday, the Labor Department will report September employment, and
forecasters expect the economy added zero new jobs. Unemployment is anticipated
to rise a notch to 9.7 percent.
Completion of temporary jobs cloud the picture, subtracting an expected 75
thousand positions, but the private sector likely added about the same number of
Core private sector employment-private jobs less government subsidized health
care and social services, and temporary services-likely added a paltry 35,000
Core private wage earners must be added to pay taxes for new positions
mandated by new federally subsidized health benefits, financial sector
regulations, and alternative energy technologies, or the federal deficit will
fly into orbit; nevertheless, new tax-paying jobs are simply not materializing
in sufficient numbers.
By the end of 2013, 13 million private sector jobs must be added to bring
unemployment down to 6 percent, and Obama Administration policies are not
creating conditions for businesses to hire 333,000 workers each month.
Since the recovery began in July 2009, demand for U.S.-made goods and
services has increased at a 1.2 percent annual pace. Potential demand growth is
about five percent but the economic stimulus package, health care and bank
reforms, and policies to bolster alternative energy and conservation have not
delivered the jolt to growth the Administration promised.
In the second quarter, consumer spending; investment in new structures,
equipment and software; and government purchases added 4.4 percent to demand-but
imports grew much more rapidly than exports, and the trade deficit tapped 3.5
percent off demand. The difference, about 0.9 percent, was growth in demand for
U.S.-made goods and services.
Businesses can accommodate up to 2 percent growth by boosting productivity
without adding workers. Unless rapid growth in imports can be curbed, the U.S.
economy is headed for very slow expansion and unemployment permanently near 10
percent or higher.
Permanent increases in federal spending and regulatory burdens are further
encouraging outsourcing and discouraging hiring.
Prior to the 2008 crisis, President Bush spent 19.6 percent of GDP and the
deficit was $161 billion; whereas President Obama's budget projects outlays at
25.1 percent of GDP and a $1.3 trillion deficit in 2011, assuming the economy is
growing at 4 percent. Most economists just don't see growth that robust, and the
government's share and federal deficits are likely to be much greater than
President Obama's economic team is projecting.
Too much spending will require too many new taxes-and not just pushing rates
marginally above 50 percent on families earning $250,000. Fears about new taxes
and more regulations are stifling business investment and further encouraging
Without addressing oil and China, and curbs on government spending and
smarter regulatory reforms, other efforts to create jobs are futile.
The moratorium on deep water drilling, though popular with environmentalists,
kills jobs in petroleum and supporting industries and sends too many consumer
dollars abroad that could be spent here, creating U.S. jobs.
Detroit has the technology to build much more efficient and attractive
gasoline-powered vehicles now, and a national policy to rapidly replace the
existing fleet would reduce oil imports and create many high-paying jobs.
China's purposefully undervalues the yuan making its products artificially
cheap and deceivingly competitive on U.S. and European store shelves, and
Beijing's promises of new flexibility on exchange rates have not translated into
Beijing prints billions of yuan to purchase dollars and other currencies in
foreign exchange markets to push down the value of the yuan, creating a 35
percent subsidy on exports. Beijing's purchases exceed $450 billion annually.
Without progress on currency manipulation by China, Japan and others, which
essentially fix exchange rates, efforts to jump start growth through
"quantitative easing" and other central bank tricks won't work. Those won't
change the consequences of aggregate trade deficit of western economies via
Asian currency manipulators-in fact, it could make those deficits worse.
As Ben Bernanke wrote with co-author Andrew Abel in their macroeconomics
textbook, a central bank operating under fixed exchange rates "...cannot use
monetary policy to pursue macroeconomic stabilization goals."
Unless Barack Obama stands up to China on exchange rates, Ben Bernanke knows
his options are severely constrained.
A U.S. tax on conversion of dollars into yuan could be set to just offset the
subsidies Beijing provides Chinese producers exporting into the United States,
and cause prices of Chinese products to reflect their true cost to the U.S.
economy. That would stimulate U.S. manufacturing and supplying industries more
than any spending package Congress could conspire.
Simply, the tax could be set equal to China's official purchases of foreign
currency divided by its exports-currently about 35 percent-and be phased out as
China reduces its currency intervention and lets the value of the yuan rise.
If President Obama wants to fix the federal deficit and create jobs, perhaps
he should spend less, get serious about better using and developing American
energy resources and implement a currency tax.
Then the Asian Wall Street Journal could treat its readers to stories about
the American industrial renaissance.
Peter Morici is a professor at the University
of Maryland School of Business and former Chief Economist at the U.S. International