SPEAKING
FREELY The spiraling costs of
Uncle Sam's deficits By Peter Morici
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
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The US Commerce
Department recently released figures reporting
that the United States' current-account deficit
for 2005 was US$804.9 billion, up from $668.1
billion in 2004. The current
account is the broadest
measure of the US trade balance. In addition to
trade in goods and services, it includes income
received from US investments abroad, less payments
to foreigners on their investments in the United
States.
In the fourth quarter, the
current-account deficit was $224.9 billion, up
from $185.4 billion in the third quarter. In the
fourth quarter, the current-account deficit
exceeded 7% of gross domestic product (GDP). The
current-account deficit could easily top $1
trillion a year by the second half of 2006.
Separately, the Commerce Department has
reported that retail sales were down 1.3% in
February, indicating that a consumer pullback is
beginning. The combination of slower-growing
consumer spending and a widening trade gap will
dampen US economic growth by mid-year. Real GDP
growth will likely be about 3.8% in the first half
and 3.3% in the second half.
Among US
corporates, slower second-half growth will hit
Ford and General Motors particularly hard.
Consumers will become more value-conscious in
vehicle selection, and this will play into the
strengths of Asian, and in particular Korean,
brands. Ford and GM are not well positioned with
attractive, smaller and reliable vehicles in the
value segments of the market. Among these
companies' offshore brands, Mazda is best
positioned.
Anatomy of the hemorrhaging
current account In 2005, the United States
had a $1.6 billion surplus on income flows and a
$58.0 billion surplus on trade in services. Even
together, however, these were hardly enough to
offset the massive $781.6 billion deficit on trade
in goods.
The trade deficit for petroleum
products was $229.2 billion last year, up from
$163.4 billion in 2004, reflecting the fact that
prices for imported petroleum had risen about 36%
from 2004, while the volume of imports fell 2%.
The US appetite for inexpensive imported consumer
goods and cars was a huge factor driving the trade
deficit higher. In 2005, the deficit on
non-petroleum goods was $537.2 billion, up from
$487.6 billion in 2004.
Imports of
motor-vehicle parts increased 10% to $83 billion,
as Ford and GM continue to push their procurement
offshore and cede market share to Japanese and
Korean companies offering vehicles that were
better made and less expensive to own. Even when
they assemble automobiles in the United States,
Asian auto makers import more parts than Ford and
GM do.
In addition, the Wal-Mart effect
was broadly apparent. The trade deficit with China
was $201.7 billion last year, a new record. This
was up from $162.0 billion in 2004.
This
situation is likely to become worse in the months
ahead. Crude-oil prices are rising again, and an
overvalued US dollar continues to keep imported
cars and consumer goods cheap. Announced
production cutbacks at GM and Ford will result in
more imports of motor vehicles and parts.
Meanwhile, the dollar remains at least 40%
overvalued against the Chinese yuan and other Asia
currencies. China continues to peg its currency
against the dollar. Although China revalued the
yuan from 8.28 to 8.11 in July, and announced it
would adjust the currency's value to a basket of
currencies, the yuan continues to track the dollar
very closely. Currently it is trading at 8.04.
Other Asian governments conform their
currency policies to China's, lest they lose
competitiveness in US and European markets. To
sustain undervalued currencies against the dollar,
foreign governments purchased $220.7 billion in US
securities in 2005. This created an 11% subsidy on
their exports to the United States.
Consequences for economic
growth High and rising trade deficits tax
economic growth. Specifically, each dollar spent
on imports that is not matched by a dollar of
exports reduces domestic demand and employment,
and shifts workers into activities where
productivity is lower. Productivity is at least
50% higher in industries that export and compete
with imports, and reducing the trade deficit and
moving workers into these industries would
increase GDP.
Were the trade deficit cut
in half, GDP would increase by nearly $300
billion, or about $2,000 for every working
American. Workers' wages would not be lagging
inflation, and ordinary working Americans would
more easily find jobs paying good wages and
offering decent benefits.
Manufacturers
are hit particularly hard by this subsidized
competition. Through recession and recovery, the
manufacturing sector has lost 3 million jobs.
Following the pattern of past economic recoveries,
the manufacturing sector should have regained
about 2 million of these jobs, especially given
the very strong productivity growth accomplished
in durable goods and throughout manufacturing.
Longer-term, persistent US trade deficits
are a substantial drag on growth. US
import-competing and export industries spend three
times the national average on industrial research
and development (R&D), and encourage more
investments in skills and education than other
sectors of the economy. By shifting employment
away from trade-competing industries, the trade
deficit reduces US investments in new methods and
products, and skilled labor.
Cutting the
trade deficit in half would boost US GDP growth by
25% a year. These effects of lost growth are
cumulative. Thanks to the record trade deficits
under President George W Bush, the US economy is
about $1 trillion smaller. This comes to nearly
$7,000 per worker.
Had the Bush
administration and the Congress acted responsibly
to reduce the trade deficit, American workers
would be much better off, tax revenues would be
much larger, and the federal deficit would be
about half its current size.
Were the
trade deficit cut in half, $2,000 would be
recouped, but $5,000 per worker in lost growth is
in essence lost forever. And the damage grows
larger each month, as the Bush administration and
the Congress dally and ignore the corrosive
consequences of the trade deficit.
Peter Morici is a professor at
the University of Maryland's Robert H Smith School
of Business, and a commentator on economic and
political issues.
(Copyright 2006
Peter Morici. Used with permission.)
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
