More than a year into the recovery, the economy should be expanding at about a 5 percent annual rate; however, growth is dragging along below 3 percent, because of the surging in imports from countries whose governments engineer undervalued currencies.
Consumer and businesses are spending again, adding 1.4 and 2.3 percentage points to the 2.9 annual growth rate. Increases in government purchases of goods and services added another 0.3 percentage points. However, too much of what consumers and businesses spend goes into imports from countries with undervalued currencies, and the growing U.S. trade deficit subtracts 1.0 percentage points from growth.
But for the growth in the trade deficit, U.S. employment would be 8.2 percent instead of 9.6 percent. Were the trade deficit cut in half, it would fall to 6 percent or less.
U.S. imports and unemployment are kept high by a dollar that is overvalued against the currencies of big exporters. These currencies are kept cheap, not by private investment in the United States financed by foreign private savings, but by purposeful government intervention in currency markets designed to bolster domestic growth at the expense of the United States and other free traders.
The worst malefactors are China and Germany. China spends 35 percent of its export revenues buying U.S. dollars to keep its yuan, and this subsidizes its sales into the United States by a like amount. This unfair advantage far exceeds the benefits bestowed by its cheap labor.
Germany benefits from an undervalued euro for its economy by being grouped with Spain, Portugal, Ireland, Greece and perhaps Italy, whose fiscal woes pull down the euro.
Were Germany on an independent Deutsche Mark, its currency would trade much higher against the dollar than the euro, Germany’s trade surpluses with the United States and its southern neighbors would be much smaller, and the fiscal woes of those southern countries would be much more manageable.
Overall, without currency realignments—especially a stronger yuan and currency reform in Europe—the U.S. economy cannot grow at the pace that will pull down unemployment and the nations of southern Europe and Ireland will need perpetual bailouts or face default on sovereign debt.
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.