Tag: investment

Damning Trade with Faint Praise

A Washington Post editorial today pushes back against the argument that a Trans-Pacific Partnership agreement would exacerbate income inequality. Amen, I suppose. But in making its case, the editorial burns the village to save it by conceding as fact certain destructive myths that undergird broad skepticism about trade and unify its opponents.

“All else being equal,” the editorial reads, “firms move where labor is cheapest.”  Presumably, by “all else being equal,” the editorial board means: if the quality of the factors of production were the same; if skill sets were identical; if workers were endowed with the same capital; if all production locations had equal access to ports and rail; if the proximity of large markets and other nodes in the supply chain were the same; if institutions supporting the rule of law were comparably rigorous or lax; if the risks of asset expropriation were the same; if regulations and taxes were identical; and so on, the final determinant in the production location decision would be the cost of labor. Fair enough. That untestable premise may be correct.

But back in reality, none of those conditions is equal. And what do we see? We see investment flowing (sometimes in the form of “firms mov[ing],” but more often in the form of firms supplementing domestic activities) to rich countries, not poor. In this recent study, I reported statistics from the Bureau of Economic Analysis revealing that:

Nearly three quarters of the $5.2 trillion stock of U.S.-owned direct investment abroad is concentrated in Europe, Canada, Japan, Australia, and Singapore. Contrary to persistent rumors, only 1.3 percent of the value of U.S.-outward FDI [foreign direct investment] was in China at the end of 2011.

A Microeconomic Look at Regulatory Overkill

In this new paper, I argue that an overly burdensome U.S. regulatory state is partly responsible for the downward trend in domestic and foreign investment in U.S. factories, professional services operations, distribution centers, and research and development facilities. EPA mandates, Obamacare’s costly, complicated new health care directives, and the slowly emerging financial services restrictions stemming from Dodd Frank, are just some of the new regulations that have thickened the Federal Register to more than 80,000 pages per year and added 16,500 new pages to the Code of Federal Regulations during the Obama presidency, undoubtedly deflecting and chasing investment and business creation to foreign shores.

Oddly, this massive expansion of federal rules has evolved as President Obama has simultaneously expressed concerns about the impacts of both declining investment and regulatory overkill on economic growth. In 2011, the president issued Executive Order 13563 under the heading “Improving Regulation and Regulatory Review.” Section 1 states:

Our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness and job creation. It must be based on the best available science. It must allow for public participation and an open exchange of ideas. It must promote predictability and reduce uncertainty. It must identify and use the best, most innovative, and least burdensome tools for achieving regulatory ends. It must take into account benefits and costs, both quantitative and qualitative. It must ensure that regulations are accessible, consistent, written in plain language, and easy to understand. It must measure, and seek to improve, the actual results of regulatory requirements.

The president issued this EO in the wake of his party’s mid-term election rebuke, perhaps to indicate that he understood the concerns of business. He even required that his agencies formulate plans for undertaking systematic, retrospective reviews of their rules and regulations with an eye toward making them less imposing on society:

Sec. 6. Retrospective Analyses of Existing Rules. (a) To facilitate the periodic review of existing significant regulations, agencies shall consider how best to promote retrospective analysis for rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned…

In the words of a former chief economist at the Council of Economic Advisers:

The single greatest problem with the current system is that most regulations are subject to a cost-benefit analysis only in advance of their implementation. That is the point when the least is known and any analysis must rest on many unverifiable and potentially controversial assumptions.

U.S. Policies Deter Inward and Encourage Outward Business Investment

This morning, Cato published a new study of mine titled, “Reversing Worrisome Trends: How to Attract and Retain Investment in a Competitive Global Economy.” The thrust of the paper is that, despite still being the world’s premiere destination for foreign direct investment, the U.S. share of the global stock of direct investment fell from 39% in 1999 to 17% today.

This downward trend is attributable to two broad factors. First, developing economies – many of which have achieved greater political stability, sustained economic growth, improved infrastructure and higher-quality worker skill sets – are now viable options for pulling in the kinds of FDI that was once untenable in those locales. Second, a deteriorating business and investment climate in the United States – owing to burgeoning, burdensome, and uncertain regulations; an antiquated, punitive corporate tax system; incoherent immigration, energy, and trade policies; a wayward tort system; cronyism and perceptions thereof; and other perverse incentives and disincentives of policy have pushed investment away.

The first trend should be welcomed and embraced; the second must be reversed. From the study:

Unlike ever before, the world’s producers have a wealth of options when it comes to where and how they organize product development, production, assembly, distribution, and other functions on the continuum from product conception to consumption. As businesses look to the most productive combinations of labor and capital, to the most efficient production processes, and to the best ways of getting products and services to market, perceptions about the business environment can be determinative. In a global economy, “offshoring” is an inevitable consequence of competition. And policy improvement should be the broad, beneficial result.

The capacity of the United States to continue to be a magnet for both foreign and domestic investment is largely a function of its advantages, many of which are shaped by public policy. Considerations of taxes, regulations, trade openness, access to skilled workers, infrastructure, energy policy, and dozens of other policy matters factor into decisions about whether, where, and how much to invest. It should be of major concern that inward FDI has been erratic and relatively downward trending in recent years, but why that is the case should not be a mystery. U.S. scores on a variety of renowned business surveys and investment indices measuring policy and perceptions of policy suggest that the U.S. business environment is becoming increasingly less hospitable.

Although some policymakers recognize the need for reform, others seem to be impervious to the investment-repelling effects of some of the laws and regulations they create. Some see the shale gas and oil booms as more than sufficient for overcoming policy shortcomings and attracting the necessary investment. The most naive consider “American” companies to be tethered to the U.S. economy and obligated to invest and hire in the United States, regardless of the quality of the business and policy environments. They fail to appreciate that increasingly transnational U.S.-based businesses are not obligated to invest, produce, or hire in the United States.

It is the responsibility of policymakers, however, to create an environment that is more attractive to prospective investors. Current laws, regulations, and other conditions affecting the U.S. business environment are conspiring to deter inward investment and to encourage companies to offshore operations that could otherwise be performed competitively in the United States.

A proper accounting of these policies, followed by implementation of reforms to remedy shortcomings, will be necessary if the United States is going to compete effectively for the investment required to fuel economic growth and higher living standards.

Details, charts, and analysis, and citations are all included here.

Anemic Business Investment Indicts U.S. Policies

Since the beginning of the Great Uncertainty – the period that began with the “stimulus,” the auto bailout, the push for another major entitlement program, Dodd-Frank, the regulatory dam burst, the subsidies for favored industries, and the proliferation of distinctly anti-business rhetoric from the White House – President Obama has appeared puzzled by the dearth of business investment and hiring. Go figure.

Nonresidential fixed investment fell off a cliff in 2009, and has yet to recover even in nominal terms. As a share of GDP and relative to the trend in investment growth prior to the 2008 recession, the picture is more troubling still. If tomorrow’s wealth and living standards are functions of today’s investment – and they are – reversing the decline in investment should be the economic priority of U.S. policymakers. 

Instead, the administration has been cavalier about the problem and aloof to real solutions, choosing to view investment as a casualty of partisan politics, as though business is intentionally holding back to sully the economy on this president’s watch. Such narcissism has obscured the White House’s capacity to grasp the power of incentives.

It’s not just domestic investment that is lagging. Foreign direct investment in real U.S. assets is also on the decline. The United States is part of a global economy, which means that U.S. and foreign based businesses can invest, hire, develop, produce, assemble and service almost anywhere they choose. And that means the United States is competing with the rest of the world to attract and retain investment. Of course, the implication of this – whether policymakers know it or not and whether they like it or not – is that globalization is serving to discipline bad public policy. Policies that are hostile to wealth creators chase them away, while smart policies attract them and harvest their fruits.

Business investment is ultimately a judgment about a jurisdiction’s institutions, policies, human capital, and prospects. As the world’s largest economy featuring a highly productive work force, world-class research universities, a relatively stable political climate, strong legal institutions, accessible capital markets, and countless other advantages, the United States has been able to attract the investment needed to produce the innovative ideas, revolutionary technologies, and new products and industries that have continued to undergird its position atop the global economic value chain. 

The good news is that the $3.5 trillion of foreign direct investment parked in the United States accounted for 17 percent of the world’s direct investment stock in 2011 – more than triple the share of the next largest single-country destination. The troubling news is that in 1999 the United States accounted for 39 percent of the world’s investment stock.

Senators Levin and McCain: Two Peas All Up in our iPods

Earlier this year, Senator Carl Levin (D-MI) announced that he will be retiring after many, many, many decades of lawmaking when his term expires in January 2015. But he doesn’t intend to make for the exits without sealing his legacy of disdain for America’s wealth creators. After holding hearings last September to shed light on the “loopholes and gimmicks” employed by U.S. multinational companies to avoid paying their “fair share” of taxes, Levin resumed his inquisition today by holding a hearing intended to publically shame one of America’s most successful and most bountiful companies:

Apple sought the Holy Grail of tax avoidance. It has created offshore entities holding tens of billions of dollars, while claiming to be tax resident nowhere. We intend to highlight that gimmick and other Apple offshore tax avoidance tactics so that American working families who pay their share of taxes understand how offshore tax loopholes raise their tax burden, add to the federal deficit and ought to be closed.

Man, the spite in those words is palpable.

At the outset, it is important to note that no illegalities have been alleged, nor have any likely been committed. Like most other U.S.-based multinational corporations, who face tax rates of 35 percent on profits repatriated from abroad, Apple has tax avoidance specialists on its payroll to figure out the most effective ways to minimize their tax burden. They’d be sued for corporate malfeasance by their shareholders if they didn’t.

Unlike foreign-based multinationals whose governments don’t tax their profits earned abroad (or do so very lightly), U.S multinationals are subject to double taxation—first in the foreign countries where they operate at local tax rates and then by the IRS, at up to 35 percent, when profits are brought home. Well guess what? That system discourages profit repatriation, depriving the economy of working capital, and it encourages elaborate, legal tax avoidance schemes.

Oddly, Senator Levin’s problem is not with these perverse incentives, but with the act of following them. Thank you, sir, may I have another! But even worse, Senator John McCain (R-AZ) acknowledges the faults and disincentives of the system, but still casts the blame on those following Congress’s incentive structure:

I have long advocated for modernizing our broken and uncompetitive tax code, but that cannot and must not be an excuse for turning a blind eye to the highly questionable tax strategies that corporations like Apple use to avoid paying taxes in America. The proper place for the bulk of Apple’s creative energy ought to go into its innovative products and services, not in its tax department.

A company that found remarkable success by harnessing American ingenuity and the opportunities afforded by the U.S. economy should not be shifting its profits overseas to avoid the payment of U.S. tax, purposefully depriving the American people of revenue. It is important to understand Apple’s byzantine tax structure so that we can effectively close the loopholes utilized by many U.S. multinational companies, particularly in this era of sequestration.

Apple’s byzantine tax structure?

Should Apple be blamed for optimizing according to the legal incentives created by the likes of Senators Levin and McCain? Rather, the public would be better served if Senators Levin and McCain were hauled before a public panel to explain why the tax system they helped create and have failed to reform penalizes U.S. companies, and discourages domestic reinvestment.

The Myth of a Manufacturing Renaissance

Have you heard all the banter about a U.S. manufacturing renaissance? Numerous media reports in recent months have breathlessly described a return of manufacturing investment from foreign shores, mostly attributing the trend to rising wages in China and the natural gas boom in the United States, both of which have rendered manufacturing state-side more competitive. Today’s Washington Post includes a whole feature section titled “U.S. Manufacturing: A Special Report,” devoted entirely to the proposition that the manufacturing sector is back!

The myth of manufacturing decline begets the myth of manufacturing renaissance. This new mantra raises a question: How can there be a manufacturing renaissance if there was never a manufacturing “Dark Ages”?

Contrary to countless tales of its demise, U.S. manufacturing has always been strong relative to its own past and relative to other countries’ manufacturing sectors. With the exception of a handful of post-WWII recession years, U.S. manufacturing has achieved new records, year after year, with respect to output, value-added, revenues, return on investment, exports, imports, profits (usually), and numerous other metrics appropriate for evaluating the performance of the sector. The notion of U.S. manufacturing decline is simply one of the most pervasive economic myths of our time, sold to you by those who might benefit from manufacturing-friendly industrial policies with the abiding assistance of a media that sometimes struggles to distill fact from K Street speak.

What the Candidates Won’t Explain about Outsourcing

Like almost everything about the 2012 presidential campaigns, the bickering between the major party candidates over who is most responsible for shipping jobs overseas has been banal and utterly uninformative. While politicians have scared many Americans with hyperbolized sales pitches about the costs of foreign outsourcing, most people remain in the dark about the causes and benefits of outsourcing. What is foreign outsourcing anyway? Why do some businesses invest in sales operations, research and development, production and assembly operations, or the provision of services abroad? Are low wages and lax environmental and safety standards in poor countries really the magnets attracting U.S. investment? If so, why is 75% of U.S. direct investment abroad in rich countries? What explains the fact that the United States (high-standard, rich country that it is) is the number one destination in the world for foreign direct investment? Doesn’t the fact that businesses have options in our globalized economy serve to discipline some of the worst government policies?

As I suggested in this recent post:

In a globalized economy, outsourcing is a natural consequence of competition. And policy competition is the natural consequence of outsourcing. Let’s encourage this process.

Answers to the questions raised in this post and some other thoughts about outsourcing are expressed in this cool 4+ minute video produced by Cato’s Caleb Brown and Austin Bragg: