Talk Back

A reader in Bangalore, India, responds to Alex Frangos’s column “HEARD ON THE STREET: India’s Woes Make China Look Rosy”:

Good analysis by Alex. However, I have a somewhat different view on one point, which is increasing government spending.

India can’t afford to further increase its budget deficit. I think a better solution is to bring a fresh round of policy reforms, which are now long overdue. India needs to attract FDI, which would bring dollars and would ease some pressure off the rupee. Foreign investors’ confidence is at a low due to policy paralysis.

Some areas that immediately need reforms are FDI in multibrand retail, aviation and some other areas, a land acquisition bill, labor policy, and policy to attract private investment in infrastructure development. Infrastructure continues to remain poor and create supply bottlenecks.

(TALK BACK comments may well be submitted by readers who have a financial interest in securities that are being discussed.)

(TALK BACK: We invite readers to send us comments on this or other financial news topics. Please email us at TalkbackAmericas@dowjones.com. Readers should include their full names, work or home addresses and telephone numbers for verification purposes. We reserve the right to edit and publish your comments along with your name; we reserve the right not to publish reader comments. Talk Back comments can be found under the N/TLK code.) Continue reading…

 These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

The Commerce Department reported the deficit on international trade in goods and services was $51.8 billion in March. This was up from $45.4 billion in February, thanks to weakening conditions in Europe and chronic deficits with China and in petroleum.

The $620 billion annual deficit is the most significant barrier to economic recovery and creating jobs, and consumer goods from China and oil account for virtually the entire problem.

Economists agree the pace of economic recovery has been too slow, because of too little demand for what Americans make.

Consumers are spending again, the process of winding down household debt that followed the Great Recession; however, too many consumer dollars go abroad to purchase Middle East oil and Chinese consumer goods but do not return to buy U.S. exports. Consequently, businesses can’t justify expanding U.S. facilities and hiring workers.

Since the economic recovery began in June 2009, the trade deficit has doubled and GDP growth has averaged a disappointing 2.4% a year. Unemployment has fallen from above 10% to 8.1% mostly because Americans have quit looking for work, not found jobs. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

The China currency bill is the most significant jobs bill Congress could pass. It enjoys the bipartisan support of nearly 80 Republican and Democratic senators, yet President Obama and Speaker Boehner oppose it, illustrating both are out of touch with the problems besetting the American economy.

The nearly $600 billion trade deficit is destroying more American jobs than the mortgage crisis, too much business regulation, and high health-care costs combined.

Americans haven’t forgotten how to make things or compete. Unlike what President Obama would have us believe, Americans are not undereducated dolts, unenlightened in the ways of global competition. Rather, through a failure to act on issues the president has identified–Chinese mercantilism–and on issues where his ideology prevents action–the development of abundant U.S. energy–Americans are being denied their fair opportunity to compete.

Simply, the U.S. economy suffers from too little demand for what Americans make. Americans are spending again, but since the first quarter of 2009, the trade deficit is up 55%. In the second quarter, it was nearly $600 billion, or 4% of GDP–thanks almost entirely to surging imports of subsidized imports from China, barriers to U.S. exports into the Middle Kingdom and higher oil prices. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Friday forecasters expect the U.S. Labor Department to report the economy added only 65,000 jobs in September–my estimate is 80,000. Either would be much less than the 130,000 needed for the economy to stay even with adult population growth.

Overall, gross domestic product and employment are growing more slowly than the adult population, and the private sector is much smaller than before the Great Recession–even with big boosts in federal subsidies for private health care and federal mandates for large health care spending by the states.

Employment grew in the second and third quarters despite very slow GDP growth, because labor productivity fell the first half of 2011. Consequently, real wages, per capita income and living standards are dropping, all exacerbated by hungry state and local tax collectors who refuse to tighten belts as quickly as households and businesses.

A downsizing private sector, falling productivity per capita GDP, and a shrinking share of the adult population employed or even seeking employment are ominous signs of economic decline.

Near term, employment in health care, retail and manufacturing should post modest gains, and construction should exhibit some bounce because it fell to such low levels during the recent recession. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

No economic policy could better serve Americans than genuine free trade but open trade policies are failing Americans.

The basic idea is compelling. Let each nation do more of what it does best, and specialization will raise productivity and incomes.

Americans are not sharing in those benefits because President Barack Obama, like President George W. Bush, permits China and others to cheat on the rules, unchallenged and to the detriment of the U.S. interests he was elected to champion.

The World Trade Organization has greatly reduced tariffs, prohibits virtually all export subsidies, and regulates other national policies that could subvert trade, such as health and product safety standards arbitrarily slanted to favor domestic suppliers.

For these rules to optimize trade, raise productivity and boost incomes, exchange rates must adjust to reasonably reflect production costs. To buy Chinese televisions, Americans must be able to purchase yuan with dollars; however, an artificially strong dollar that overprices U.S. tractors and software in China unravels the benefits of trade by denying Americans opportunities to export to pay for those televisions.

Exchange rates are established in currency markets, created by businesses trading through major financial institutions. Unfortunately, China and several other Asian governments blatantly manipulate those markets without a credible U.S. response and with ruinous consequences for the U.S. economy and American workers. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

The Commerce Department reported the deficit on international trade in goods and services was $48.2 billion in March, up from $45.4 billion in February. The deficit on oil surged $5.8 billion on higher prices and increased volumes.

This trade deficit subtracts from demand for U.S.-made goods and services, just as a large federal budget deficit adds to it. Consequently, a rising deficit slows economic recovery and jobs creation and limits how much Congress and the President may cut the deficit without sinking the economic recovery.

Rising oil prices and imports from China are driving the trade deficit up, and these are major barriers to creating enough jobs to pull unemployment down to acceptable levels over the next several years. Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Analysts expect the Commerce Department to report on Wednesday the deficit on international trade in goods and services was $47.7 billion in March, up from $45.8 billion in February.

This trade deficit subtracts from demand for U.S.-made goods and services, just as a large federal budget deficit adds to it. Consequently, a rising deficit slows economic recovery and jobs creation and limits how much Congress and the President may cut the deficit without sinking the economic recovery.

Rising oil prices and imports from China are driving the trade deficit up, and these are major barriers to creating enough jobs to pull unemployment down to acceptable levels over the next several years.

Jobs Creation

The economy added 244,000 jobs in April; however, 360,000 jobs must be added per month to bring unemployment down to 6% over the next 36 months. With federal and state governments trimming civil servants, private-sector jobs growth must exceed 360,000 per month to accomplish this goal.

Americans have returned to the malls and new car showrooms but too many dollars go abroad to purchase Middle East oil and Chinese consumer goods that do not return to buy U.S. exports. This leaves too many Americans jobless and wages stagnant, and state and municipal governments with chronic budget woes.

Simply, policies regarding energy and trade with China are not creating conditions for the 5% GDP growth that is needed and easily could be achieved to bring unemployment down to acceptable levels.

In April, the private-sector added 268,000 jobs per month, but many were in government-subsidized health care and social services. Netting those out, core private-sector jobs have increased only 229,000 in April. That comes to 73 non-government-subsidized jobs per county for more than 5,000 job seekers per county.

Early in a recovery, temporary jobs appear first, but 22 months into the expansion, permanent, non-government-subsidized jobs creation should be much stronger.

Economic Growth

Since the recovery began in mid 2009, GDP growth has averaged 2.8%, disappointing administration economists who have consistently assumed 4% growth in budget projections and forecasts for the job-creating effects of stimulus spending.

Consumer spending, business technology and auto sales have added strongly to demand and growth, and exports have done quite well. However, soaring oil prices and the continued push of subsidized Chinese manufactures in U.S. markets have offset those positive trends.

Administration imposed regulatory limits on conventional oil and gas development are premised on false assumptions about the immediate potential of electric cars and alternative energy sources, such as solar panels and windmills. In combination, administration energy policies are pushing up the cost of driving and making the United States even more dependent on imported oil and indebted to China and other overseas creditors to pay for it.

To keep Chinese products artificially inexpensive on U.S. store shelves, Beijing undervalues the yuan by 40%. It accomplishes this by printing yuan and selling those for dollars and other currencies in foreign-exchange markets.

Presidents Bush and Obama have sought to alter Chinese policies through negotiations, but Beijing offers only token gestures and cultivates political support among U.S. multinationals producing in China and large banks seeking additional business in China.

The United States should impose a tax on dollar-yuan conversions in an amount equal to China’s currency market intervention divided by its exports–about 35%. That would neutralize China’s currency subsidies that steal U.S. factories and jobs. It is not protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it’s self defense.

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Gold is selling for close to $1,500 an ounce, up from $258 in 2001.

Jewelry and industrial applications absorb at least 80% of new supply. The economic expansion of the 2000s and the recent recovery have boosted commercial demand, but this alone cannot explain the persistent surge in gold prices.

The cost of bringing new deposits on line has been less than the market price of recent years–investors see in gold what they cannot find in interest-bearing securities.

Exchange traded funds (ETFs) have made storing wealth in gold or simply speculating easier. These store bullion for investors who have lost confidence in the dollar, euro and yen, and may be a precursor of a new gold standard.

In 1944, the International Monetary Fund established a system of fixed currency exchange rates. The dollar was fixed to gold and other currencies fixed to the dollar. This system failed because rising production costs pushed the industrial price of gold above its monetary value, and fixed exchange rates among currencies proved unsustainable.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Economists expect the Labor Department will report the economy added 185,000 jobs in April, after adding 192,000 in February and 216,000 in March. While stronger than in prior months, jobs growth remains too weak, and the economy is in danger of slipping into a second recession. Longer term, the nation faces fundamental structural problems that neither political party seems willing to address in a comprehensive and systemic fashion.

In the first quarter, bad weather slowed construction activity, rising gas and health-care prices tapped off consumer dollars and weakened demand in other sectors, and defense and state and local government spending slowed. GDP growth was a paltry 1.8%–much less than economists forecasted in January and well below the minimum sustainable rate.

Growth less than 2% to 2.5% is not sustainable, because many businesses can meet such modest growth in demand by improving productivity and laying off workers to maintain margins in the face of rising energy and other commodity prices. Layoffs slice household income, and a negative cycle of reduced spending begins.

Indeed, the four-week moving average for new unemployment claims moved up to 408,000 for the week of April 23 from 390,000 the week of April 2. A rate below 350,000 is consistent with a strong economy and above 400,000 is perilously close to recession levels.

Without stronger growth in the second quarter, the economy will cycle down into recession–it can’t likely continue to drag along at about 2%.

Continue reading…

These are the personal views of Peter Morici, a professor at the University of Maryland’s Robert H. Smith School of Business and former chief economist at the U.S. International Trade Commission:

Wednesday, Federal Reserve Chairman Ben Bernanke will discuss with reporters decisions taken by the Federal Open Market Committee. For this unprecedented press conference to be successful, Bernanke must venture where Fed chairmen are most reluctant to go–into politics.

Economists have long held that transparency about goals and means makes monetary policy more effective. However, genuine transparency requires that Bernanke acknowledge the limits imposed on the Fed policy by the actions of Congress, the administration and foreign governments.

Inflation is heating up, thanks to rising oil, food and other commodity prices. Many in Congress and financial markets blame QE2–the Fed’s policy of purchasing Treasury securities to moderate interest rates on mortgages, corporate bonds and the like–but easy money is not causing inflation.

China and several other Asian governments choose to keep their currencies substantially undervalued against the dollar and regulate domestic gasoline and other commodity prices. Those policies boost Asian exports and growth, slow U.S. and European growth, and push up global prices for oil and other commodities.

Continue reading…