Restore nation’s ability to produce

The $789 billion stimulus doesn’t fix what ails the economy and is doomed to fail.

Since 2007, the private sector has shed 6.6 million jobs — half in manufacturing and construction. Governments added 185 thousand employees, hired teachers, and no change in those trends can be detected since the stimulus began.

During the economic boom, a huge structural international trade deficit emerged. Imports exceeded exports by about $700 billion annually from 2005 to 2008. By the end of the boom, nearly all was manufactured goods from China and oil.

The failure to pay for imported consumer goods and gasoline with exports creates a huge shortage of demand for U.S. made products. Money spent on imports that does not return as payment for exports can’t be spent on U.S. made products. Inventories pile up, and layoffs result.

Americans solved that problem, temporarily, by borrowing against homes, cars and credit cards to spend more than they earned. Banks got the cash from China and Middle East oil exporters, stuck with dollars from selling to Americans but not buying U.S. exports.

A bubble resulted in home construction, housing prices and stocks that inevitably burst.

Viola, the Great Recession.

To lift the economy, President Obama must resurrect manufacturing, which requires exporting more and importing less, and shift idle construction workers from housing, which is in oversupply, to rebuilding schools, roads, hospitals and factories.

Of the $789 billion stimulus, only about $100 billion is infrastructure. About $280 billion is tax cuts for individuals and businesses who are too scared to spend.

The remaining, $400 billion mostly rewards Democratic Party constituencies — for example, huge increases in the Department of Education budget and grants to state and local governments are not laying off teachers and policemen as President Obama often asserts.

Cap and trade will only make matters worse — economically and environmentally. It will raise the cost of manufacturing in the United States and send jobs to China, where CO2 emissions are unregulated and higher.

Proposed changes in health care would increase the cost of insurance to businesses instead of decreasing prices for drugs, doctor’s visits and malpractice insurance, as true reform would accomplish. That may reward yet other Democratic Party constituencies but it will further disadvantage Americans competing in global markets.

Real alternatives are available to failed Bush-era policies.

Recalibrate trade policy to promote exports, balance trade with China and develop domestic oil and gas. Abandon cap and trade until China and India sign on to the same disciplines, require drug companies and doctors to charge no more than they are paid in Canada, and find honest work for malpractice lawyers.

All would require Obama to think outside the box and abandon the conventional wisdom of the left.

Just as President Bush’s blind adherence to conservative ideology threw America into crisis, Obama must unshackle his policies from liberal group think to succeed.

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