Like too many other long-reigning fixtures on Capitol Hill, Senator Carl Levin (D-MI) doesn’t appreciate the magnitude of the challenge to the authority he presumes to hold over America’s job and wealth creators. Or maybe he does, and frustration over that fact explains why he besmirches companies like Apple, Google, Microsoft, and Hewlett-Packard.
Levin presided over a Senate hearing last week devoted to examining the “loopholes and gimmicks” used by these multinational companies to avoid paying taxes – and to branding them dirty tax scofflaws. Well here’s a news flash for the senator: incentives matter.
The byzantine U.S. tax code, which Senator Levin – over his 33-year tenure in the U.S. Senate (one-third of a century!) – no doubt had a hand or two in shaping, includes the highest corporate income tax rate among all of the world’s industrialized countries and the unusual requirement that profits earned abroad by U.S. multinationals are subject to U.S. taxation upon repatriation. No other major economy does that. Who in their right minds would not expect those incentives to encourage moving production off shore and keeping profits there?
Minimizing exposure to taxes – like avoiding an oncoming truck – is a natural reaction to tax policy. Entire software and accounting industries exist to serve that specific objective. Unless they are illegal (and that is not what Levin asserts directly), the tax minimization programs employed at Apple, Google, Microsoft, and Hewlett-Packard are legitimate responses to the tax policies implemented and foreshadowed by this and previous congresses. If Levin is concerned about diminishing federal tax collections from corporations (which, of course, reduces his power), the solution is to change the incentives – to change the convoluted artifice of backroom politics that is our present tax code.
Combine the current tax incentive structure with stifling, redundant environmental, financial, and health and safety regulations, an out-of-control tort system that often starts with a presumption of corporate malfeasance, exploding health care costs, and costly worker’s compensation rules, and it becomes apparent why more and more businesses would consider moving operations abroad – permanently. Thanks to the progressive trends of globalization, liberalization, transportation, and communication, societies’ producers are no longer quite as captive to confiscatory or otherwise suffocating domestic policies. They have choices.
Of course many choose to stay, and for good reason. We are fortunate to have the institutions, the rule of law, deep and diversified capital markets, excellent research universities, a highly-skilled workforce, cultural diversity, and a society that not only tolerates but encourages dissent, and the world’s largest consumer market – still. Success is more likely to be achieved in an environment with those advantages. They are the ingredients of our ingenuity, our innovativeness, our willingness to take risks as entrepreneurs, and our economic success. This is why companies like Microsoft, Apple, Google, and Hewlett-Packard are born in the United States.
But those advantages are eroding.
While U.S. policymakers browbeat U.S. companies and threaten them with sanctions for “shipping jobs overseas” or “hiding profits abroad” or some other manifestation of what politicians like to call corporate greed, characterizing them as a scourge to be contained and controlled, other governments are hungry for the benefits those companies can provide their people. Some of those governments seem to recognize that the world’s wealth and jobs creators have choices about where they produce, sell, and conduct research and development. And some are acting to attract U.S. businesses with incentives that become less necessary every time a politician vents his spleen about evil corporations. Not only should our wealth creators be treated with greater respect from Washington, but we are kidding ourselves if we think our policies don’t need to keep up. As I wrote in a December 2009 Cato paper:
Governments are competing for investment and talent, which both tend to flow to jurisdictions where the rule of law is clear and abided; where there is greater certainty to the business and political climate; where the specter of asset expropriation is negligible; where physical and administrative infrastructure is in good shape; where the local work force is productive; where there are limited physical, political, and administrative friction.
This global competition in policy is a positive development. But U.S. policymakers cannot take for granted that traditional U.S. strengths will be enough. We have to compete and earn our share with good policies. The decisions made now with respect to policies on immigration, education, energy, trade, entitlements, taxes, and the role of government in managing the economy will determine the health, competitiveness, and relative significance of the U.S. economy in the decades ahead.
Since another hearing devoted to thanking these companies for their contriubtions to the U.S. economy is unlikely, perhaps Senator Levin should at least consider the perils of chasing away these golden geese.
In 1980 Milton Friedman made a splash with his 10-part PBS documentary, Free to Choose, which also became a bestselling book. Thirty years later Cato senior fellow Johan Norberg travels in Friedman’s footsteps to see what has actually happened in those places Friedman’s ideas helped transform. From Stockholm to Estonia to India, from New York to Hong Kong to Chile and Washington, D.C., Norberg examines the contemporary relevance of Friedman’s ideas in the 2011 world of globalization and financial crisis. The result is a one-hour documentary, Free or Equal: A Personal View, which is now running on PBS stations across the country.
Visit the Free to Choose Network page to find out more about the documentary. Click on “Carriage Grid” to find showings in your area. Note that it’s arranged by size of media market, so New York is first, then Los Angeles, and so on down through 210 media markets. It’s searchable.
I missed the first Washington showing on Sunday, so check it out today. But note that showings will run into mid-September, so your friends will have many chances to catch the show.
And for a book by Norberg on related issues, check out In Defense of Global Capitalism.
Who knows more about inflation, Richard Galanti or Ben Bernanke? I maintain that, when it comes to the facts, Mr. Galanti knows more than the Fed chairman. Galanti is the CFO of Costco Wholesale Corp.
The Wall Street Journal reported last Thursday (May 26th) on a conference call with Mr. Galanti. He said “we saw quite a bit of inflationary pricing” in the 3rd quarter.
Price increases occurred in a broad range of products” dry dog food (3.5%). Detergents (10%+), plastic products (8-9%). Costco will “hold prices as long as we can.” When it can no longer, the consumer will face rising prices.
Costco is a good leading indicator of inflation at the retail level. It turns over inventory quickly, and is leading other retailers in restocking at higher prices. Costco offers a forward-looking view of consumer price inflation.
Meanwhile the Fed and its chairman, Ben Bernanke, rely on backward looking measures of inflation, like the CPI. That index, and the “core” component that excludes food and energy prices, overweight the depressed housing sector. And they are yesterday’s news.
For years, American consumers have benefitted from cheap imports from China and India. When those countries liberalized and opened up to global commerce, Americans got the benefit of the hard work and low wages of 2 ½ billion workers. The era of cheap labor is coming to an end, and with it the flood of imports that held down prices in the U.S. Especially in China, wage rates are rising rapidly.
Heretofore, the flood of dollars has chiefly affected asset prices and inflation in other countries. The flow through to U.S. consumer prices will now be quicker. You’ll experience it when you go to Costco to restock.
Back in February, more than 100 House members introduced a bill that would make it easier to slap duties on imports from China. I explain why picking a trade fight with China would be a bad idea all around in an article just published in the print edition of National Review magazine.
Titled “Deal with the Dragon: Trade with the Chinese is good for us, them, and the world,” the article explains why our burgeoning trade with the Middle Kingdom is benefiting Americans as consumers, especially low- and middle-income families that spend a higher share on the everyday consumer items we import from China.
We also benefit as producers—China is now the no. 3 market for U.S. exports and by far the fastest growing major market. Chinese investment in Treasury bills keeps interest rates down in the face of massive federal borrowing, preventing our own private domestic investment from being crowded out.
The article also argues that, “As the Chinese middle class expands, it becomes not only a bigger market for U.S. goods and services, but also more fertile soil for political and civil freedoms.”
You can read the full article at the link above. Better yet, pick up the April 4 print edition of the magazine, the one with Gov. Rick Perry on the cover. My article begins on p. 20. (It might be a holdover from my newspaper days, but I still get an extra kick out of seeing an article printed in a real publication.)
P.S. For a fuller treatment of our trade relations with China, you can check out my 2009 Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization. China takes center stage in several places in the book, which—did I mention?—was just named a runner-up finalist for the Atlas Foundation’s 22nd Annual Sir Antony Fisher International Memorial Award for the best think-tank book of 2009-10.
University of Michigan economist and American Enterprise Institute scholar Mark Perry has an excellent oped in today’s Wall Street Journal [$] about how U.S. manufacturing is thriving. It can’t be emphasized enough how important it is to present such illuminating, factual, compelling analyses to a public that is starved for the truth and routinely subject to lies, half-baked assertions, and irresponsibly outlandish claims about the state of American manufacturing.
The truth matters because U.S. trade and economic policies—your pocketbook—hang in the balance.
When it became clear that President Obama would make “competitiveness” a theme of his SOTU address, I looked forward to seeing Paul Krugman’s statement pointing out how much nonsense that is. Here he is, after all, in his excellent 1997 book, Pop Internationalism (MIT Press):
…International trade, unlike competition among businesses for a limited market, is not a zero-sum game in which one nation’s gain is another’s loss. It is [a] positive-sum game, which is why the word “competitiveness” can be dangerously misleading when applied to international trade.
Sure enough, President Obama’s speech last night was peppered with references to “the competition for jobs,” “new jobs and industries take root in this country, or somewhere else, “the competion for jobs is real,” etc. And of course there was a healthy dose of the usual mercantalist obsession with exports.
Although written before the President’s address was delivered, what would Paul Krugman 2.0 think of this sort of talk? The title of his column Sunday was certainly encouraging: “The Competition Myth.” But the substance of the column went in a … er… different direction from that which I had anticipated/hoped:
…talking about “competitiveness” as a goal is fundamentally misleading. At best, it’s a misdiagnosis of our problems. At worst, it could lead to policies based on the false idea that what’s good for corporations is good for America…
So what does the administration’s embrace of the rhetoric of competitiveness mean for economic policy?
The favorable interpretation, as I said, is that it’s just packaging for an economic strategy centered on public investment, investment that’s actually about creating jobs now while promoting longer-term growth. The unfavorable interpretation is that Mr. Obama and his advisers really believe that the economy is ailing because they’ve been too tough on business, and that what America needs now is corporate tax cuts and across-the-board deregulation. [emphasis mine]
In other words, Krugman’s objections to the “competitiveness” rhetoric are based on his fear that it will lead to policies favorable to corporations, not that the whole concept is flawed.
[Disclaimer: the above is by no means an exhaustive analysis of the problematic parts of the column]
I yield to no-one in my admiration for Paul Krugman, trade economist. He made a real contribution to the discipline I’ve loved since I was a teenager. But Paul Krugman, columnist…not so much.
This work by Cato Institute is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.