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Morici: Trade Deficit, Fiscal Cliff Threaten Second Recession

Thursday, 8 Nov 2012 | 10:25 AM ET

The Commerce Department reported the deficit on international trade in goods and services was $41.5 billion in September, up from $24.9 billion prior to the economic recovery.

Imported oil and subsidized imports from China account for nearly all of the $500 billion annual trade gap. Dollars spent abroad that do not return to buy U.S. exports reduce demand for U.S. goods and services, and slack demand is the principal reason for slow growth and jobs creation in the United States.

In 2009, stimulus spending and additional tax cuts increased domestic spending by $1 trillion and jump-started growth, but those tripled the federal deficit.

In 2010, consumer spending accelerated—deleveraging, as measured by new consumer credit ended—and the recovery had its best year—GDP grew 2.4 percent.

(Read More: Weekly Jobless Claims Edge Lower; Trade Deficit Shrinks)

However, too many stimulus and consumer dollars went abroad to purchase more oil and other imports, principally from China, and too many stimulus dollars were squandered on dead-end projects like failed solar panel manufacturer Solyndra or electric vehicle technologies that failed. Those kept the initial recovery from accelerating hiring and boosting wages, and in turn, from becoming self sustaining.

Ultimately, the recovery remained dependent on huge federal deficits, which have averaged $1.3 trillion over the last four years— three times the last Bush Administration deficit in 2008.

The economic recovery began five months after Barack Obama took office, and GDP growth has averaged 2.2 percent. In October 2009, unemployment peaked at 10 percent, and has since fallen to 7.9.; however, a lower percentage of adults working or seeking work accounts for about 80 percent of that reduction.

Ronald Reagan inherited a similarly troubled economy with unemployment cresting at 10.8 early in his presidency. When he sought reelection, the economy was growing at 6.3 percent, unemployment was 7.3 percent with adult labor force participation rising.

Mr. Reagan encouraged the development of natural resources and endured much criticism from environmentalists and academics. Whereas Mr. Obama has talked repeatedly about developing alternative energy resources and imposed limits on oil production in the Gulf, off the Pacific and Atlantic Coasts, and Alaska. Merely, replacing domestic oil with imports does little to improve air quality or curb CO2 emissions.

(Read More: Fiscal Cliff: Why Rise Above?)

To boost sales of Chinese products in the United States, Beijing undervalues the yuan through intervention in currency markets and subsidizes exports. It pirates U.S. technology and imposes high tariffs on imports. Diplomatic efforts pursued by both Presidents Bush and Obama have failed to yield much relief for competing U.S. businesses and workers.

Eliminating the trade deficit by developing U.S. energy and taking aggressive steps to counter Chinese protectionism would boost GDP by $1 trillion and create 10 million jobs.

However, in coming months the President and Congress will be preoccupied with averting the Fiscal Cliff and deficit reduction—without action by January 1, taxes will increase by $136 billion and spending will be cut by $532 billion.

(Read More: What Is the 'Fiscal Cliff'?')

The likely outcome is higher taxes on the wealthy and spending reductions that will slice the deficit by some about $300 billion. This reduction in demand could throw the economy into a deep recession without offsetting policy actions to jump start additional oil and gas production, curb the growing trade deficit with China or offer businesses relief from new regulations and health care mandates.

Other items on President Obama's second term agenda—tax reform, immigration reform and alternative energy projects will take many months to affect and few immediate effects on growth.

In the end, the President and Congress will not be able to raise taxes—be those on the wealthiest of the wealthy or anyone else—and cut spending without risking a second recession, deeper and more painful than the Great Recession.

Peter Morici is a professor at the Smith School of Business, University of Maryland, and former Chief Economist at the U.S. International Trade Commission.

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