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Morici: Self-Inflicted Wounds Threaten Jobs

Susan Trigg | Photographer's Choice RF | Getty Images

Friday, the Commerce Department is expected to report the annual deficit on international trade in goods and services remained about $500 billion a year. Along with higher taxes and other anti growth policies, this deficit slows recovery and threatens to thrust the economy into a second recession and push unemployment to truly painful levels.

Consumer spending continues to expand, though haltingly,and the annual federal deficit has increased from $161 billion before the financial crisis to more than $1 trillion, injecting enormous additional demand nto the system. However, too many of those dollars go abroad for Middle East toil and Chinese goods that do not return to buy U.S. exports, and higher oil prices will up the trade gap in 2013

Businesses, consequently, are pessimistic about future demand for U.S.-made goods and services, and bearing higher corporate and other business taxes than foreign competitors, rising employee benefit costs mandated by Obamacare and more cumbersome business regulations are reluctant to hire in the United States. (Read more: Morgan Stanley Plans Layoffs)

Although rising wages in China are making U.S. locations somewhat more attractive than in recent years, cumbersome business regulations add costs and slow, and even stifle, Greenfield investments and expansion of existing facilities.

According to the U.S. Chief Executive of Flextronics International, a world-wide product design, logistics and manufacturing services company, a manufacturing plant for 5000 employees can be set up in Asia in 90 days but it takes much longer in the United States.

Those barriers have slowed the manufacturing renaissance and frustrated the virtuous cycle of temporary tax cuts and additional government spending, new hiring, and additional household spending the first-term Obama stimulus sought to beget.

Now the Fiscal Cliff deal will raise combined federal and state tax rates for many small businesses on expansion and reinvestment to maintain existing facilities to more than fifty percent. Look for multinational corporations to shift sourcing and jobs from many U.S. small enterprises to Asia.

Prior to the Fiscal Cliff tax increases, economists predicted growth of about 2 percent for 2013. However, these new taxes on small business investment and innovation strike at the heart of this once vibrant American jobs creating machine—look for growth in the range of 1.5 percent and a tougher jobs market. (Read more: Dim View for Labor Market)

Growth below 2 percent is difficult to sustain—any disruption could set off a cycle of layoffs, falling consumer spending and ultimately a recession that pushes unemployment into double digits.

Imported oil and subsidized imports from China account for the entire trade gap. President Obama has talked repeatedly about developing the full range of energy resources, but has toughened counterproductive limits on oil production in the Gulf, off the Pacific and Atlantic Coasts, and Alaska.

Development of new onshore reserves in the Lower 48 has not delivered enough new oil, and full push on U.S. reserves would cut U.S.imports in half. Shifting federal subsidies from cost ineffective electric cars, wind and solar to more fuel efficient internal combustion engines and plug-in hybrids could further cut U.S. petroleum imports.

To keep Chinese products artificially inexpensive on U.S.store shelves, Beijing undervalues the yuan through intervention in currency markets. It pirates U.S. technology, subsidizes exports and imposes high tariffs on imports. Other Asia governments, most recently Japan, have adopted similar policies to stay competitive with the Middle Kingdom.

Economists across the ideological and political spectrum have offered strategies to offset the deleterious consequences of currency strategies on the U.S. economy and force China and others to abandon mercantile policies. However, Beijing offers token gestures, knowing President Obama will not take the strong actions.

Cutting the trade deficit by $300 billion, through domestic energy development and conservation, and forcing China's hand on protectionism would increase GDP by about $500 billion a year and create at least 5 million jobs.

Longer term, large trade deficits shift resources from manufacturing and service activities that compete in global markets to domestically focused industries. The former undertake much more R&D and investments in human capital. (Read more: Most Stressful Jobs)

Cutting the trade deficit in half would raise long-term U.S. economic growth by one to two percentage points a year. But for the trade deficits of the Bush and Obama years, U.S. GDP would be 10 to 20 percent greater than it is today, and unemployment and budget deficits not much of a problem.

By Peter Morici, an economist and professor at the University of Maryland, and a widely published columnist. Follow him on Twitter: @pmorici1