Andrew Samwick on Obama's the State of the Union speech:
One item that stood out as different was the acknowledgement that we are on our way to export-led growth, if we are to have growth at all. President Obama sounded like a good old-fashioned mercantilist with his claim that we would double exports in five years and support 2 million more jobs through those exports.
Export-led growth in what? Paul Krugman:
[I]t will probably be a long time before the trade deficit comes down enough to make up for the bursting of the housing bubble. For one thing, export growth, after several good years, has stalled, partly because nervous international investors, rushing into assets they still consider safe, have driven the dollar up against other currencies — making U.S. production much less cost-competitive. Furthermore, even if the dollar falls again, where will the capacity for a surge in exports and import-competing production come from? Despite rising trade in services, most world trade is still in goods, especially manufactured goods — and the U.S. manufacturing sector, after years of neglect in favor of real estate and the financial industry, has a lot of catching up to do.
Anyway, the rest of the world may not be ready to handle a drastically smaller U.S. trade deficit. As my colleague Tom Friedman recently pointed out, much of China’s economy in particular is built around exporting to America, and will have a hard time switching to other occupations.
The problem is that if (net) exports don't lead the way, then consumption or investment must fill the void if the private sector is going to take care of this on its own. But neither of those seems likely to grow fast enough to accomplish this, at least not anytime soon, and there's some question whether they will return to their pre-crisis levels, consumption growth in particular.
Paul Krugman's point -- the quote is from a bit over a year ago -- was that if consumption, investment, and net exports can't support the growth we need to maintain employment, then government must use aggressive measures to bridge the gap until the private sector can make the necessary adjustments.
The government did bridge some of the gap with the stimulus package, but unfortunately it didn't do nearly enough and much of the gap still remains. The gap will close by itself -- eventually -- but in the meantime people will have to contend with labor markets that are weaker than they needed to be.
It's not too late for Congress to do more, but even if it fully enacts the measures that are currently pending, once again it will be well short of what's needed.