The Commerce Department says first quarter U.S. GDP growth was an abysmal 0.5 percent, following a meager 1.4 percent in the fourth quarter of 2015. This is the weakest economic performance since the third and fourth quarters of 2012, when the U.S. economy grew at 0.3 percent rate.
Barack Obama, in a new New York Times interview, regrets that his economic legacy is “misunderstood.” He is, however, the first president to fail to achieve at least one year of 3.0 percent growth. And, after more than seven years of subpar economic performance, he will be lucky to average 1.55 percent growth during his time in office, one of the worst presidencies on record.
Obama’s misunderstanding of economic growth was on full display during his recent remarks at the Hannover Messe, the massive German fair grounds that is currently the site of the world’s largest industrial exposition. Note that this leading manufacturing event is in Germany, not the United States.
The president called for a big negotiating push to complete his last trade deal, the Trans-Atlantic Trade and Investment Partnership, better known as TTIP, which he thinks will burnish his legacy.
He urged swift action as there is only a small window of opportunity to complete the TTIP negotiations before he leaves office. Of course, the Germans and other Europeans are already highly skeptical of many TTIP provisions and accuse the Americans of unwarranted secrecy, the same penchant for closed negotiations that the president preferred for the Trans-Pacific Partnership, which he hopes to ram through Congress during a lame session after the elections, despite widespread opposition.
Obama clearly stated his rationale for his free-trade deals in Hannover: “If you look at the benefits to the United States or to Germany of free trade around the world, it is indisputable that it has made our economies stronger.” Indisputable? OK, perhaps understandable cheerleading for what he sees as his trade/economic legacy. But is it true? Sadly, no.
In fact, trade can boost growth and create new jobs in a country running trade surpluses. But the opposite is the case in a country running trade deficits, which subtract from overall growth and destroy jobs.
The United States has run large trade deficits for all Obama’s years in office, in fact for the last 40 years. These deficits are one of the big reasons US GDP has lately not grown at historical rates. More importantly, the deficits played a fundamental role in creating the housing bubble that led to the Great Recession — as dollars sent overseas for foreign goods flowed back massively into this country’s real estate market. (Yes, failed regulation, crooked lending institutions, corrupt Wall St investment houses, and crony ratings agencies, ran with the ball the bubble created.)
What the president has failed to learn, and what is, in fact, “indisputable”: Trade deficits shave points off GDP growth — unless Obama wants to toss away as inconvenient widely accepted national income accounting. Last year, for example, the trade deficit took about 3.3 percent off of GDP growth.
Remember that Obama once tried using the bully pulpit to expand US exports and thus lower the deficit. He asserted that the world was dying for US-made products and actually blamed Americans for lack of effort. He promised that over a five year time span, his administration would double our exports. That effort was a spectacular failure, expanding exports by a little more than half. The president also promised to create a million manufacturing jobs, but again fell well short of the margin — reaching only 331,000 with less than a year to go in office.
Our trading partners are just not cooperating to help the president fulfill his promises. They want what they have always wanted: to sell more goods to Americans than they buy from us, thus running trade surpluses, creating healthy industries, good jobs, and wealth at home.
What is the specific case with Germany and the EU more generally? Well, in spite of Obama’s bragging that “Germany has long been one of our top trading partners, and during my time in office, we’ve boosted U.S. exports to Germany, and we’ve increased our bilateral trade by nearly 40 percent — to a record $235 billion last year.”
But Obama’s logic is faulty here. Combining U.S. exports to Germany with German exports to the U.S. and bragging about the total misses the point completely. It is irrelevant. If he were talking about baseball, he would say, “In the Yankees-Red Sox game last night, both teams boosted their run production; it was 40 percent more than their last game; and there were 18 runs scored.” Okay, but do those facts tell you anything important? No, unless you don’t care about who won, which is after all the point of the game. If, in the analogy, the U.S. is the Yankees and they scored 5 of the 18 runs, it would be a miserable and losing performance compared to the Red Sox.
The truth Obama obscured is that the US ran a $74 billion deficit with Germany in 2015. And the EU? Our deficit with the EU was $153.3 billion, roughly half of which was accounted for by our trade deficit with Germany.
Incidentally, Germany has a 19 percent value-added tax that is applied to all American goods entering at the border.
The EU VAT by law must be a minimum of 15 percent and currently ranges as high as 27 percent. EU goods entering the United States face no VAT. Further, the VAT is rebated at the border to EU goods destined for the US market, acting as a subsidy, while US income tax paid by US producers is not. Thus the VAT causes a huge price differential between European goods sold here and US goods sold in the EU, clearly harming American exports and economic growth. Does the vaunted Obama TTIP equalize the situation? No. In fact, while Obama touts TTIP’s tariff cutting, it does absolutely nothing about the massive, trade-distorting EU VATs.
Obama clearly can’t read a business ledger or he would know that there are two sides that must be reconciled — in this case exports and imports. And if imports exceed exports, which they have for living memory in the United States, we are ceding economic growth to our trading partners.
Is it any wonder, with leadership like Obama’s, that two percent or less growth is the “new normal?” And is it any wonder that after 40 years of trade deficits the middle and working classes are insecure and angry, seeing their livelihoods and standard of living slip away to poor trade deals, currency manipulation, foreign VATs, foreign subsidies to their national champion industries, and a host of non-tariff barriers? So perhaps the only person surprised that Obama’s economic legacy is not perceived as he wants it to be is the president himself.
Kevin L. Kearns is president of the U.S. Business & Industry Council, a national business organization advocating for domestic U.S. manufacturers since 1933.