Think bigger, Mr. Obama
America, President Obama emphasized in his State of the Union address, must really be open for business. It must create growing markets for the alternative energy industry. It must generate more scientists and engineers. It must build high-speed rail and Internet to compete with other nations'. It must adjust corporate taxes so they're more in line with our global competitors'.
All of these proposals are well and good, and a distinct improvement over the Republicans' alternative program of disinvesting public funds in the nation's future in hopes that the private sector will take up the slack. But making America more open for business addresses just one part of our national economic decline. The other challenge is how to make our corporations more open to doing business in America.
U.S. corporations can't sit on their nearly $2 trillion in cash reserves forever - but that doesn't mean they're going to invest their stash in job-creating enterprises within the United States. In recent weeks, several leading corporations have boosted their dividends and buybacks of their own stock. Those are legitimate ways to use their money, but as job generators they fall short even of John Maynard Keynes's facetious proposal to hire people to bury banknotes in the ground and then dig them up again.
Will Obama's suggestions, if enacted, lead to a renaissance of domestic investment? The long-deferred upgrading of America's online and on-the-ground infrastructure would in itself create jobs and certainly enhance productivity. Helping universities turn out more scientists and engineers would increase productivity, too, though our ability to do this on a scale large enough to matter probably depends on limiting pay in the financial sector, to which increasing numbers of our young quants have been flocking for the past two decades.
Lowering the corporate income tax rate from 35 percent while closing the loopholes that enable companies to pay far lower rates will surely simplify the tax code. Whether it will increase domestic investment, however, is anybody's guess. According to a University of North Carolina survey of multinational corporations' tax payments from 2003 to 2007, as reported by Bloomberg Businessweek this month, the effective tax rate of U.S. multinationals was 26 percent, while the global average for multinationals was 25 percent. General Electric paid taxes at a rate of 11.5 percent, while Siemens, GE's German counterpart, paid 29 percent of its income to that government.
So is Siemens fleeing Germany while GE shutters its foreign plants and hurries home? Not quite. Both companies have more employees overseas than they do in their homelands, but Siemens has also struck a deal with its union, IG Metall, to keep its highly skilled production workforce - 128,000 German workers - in place, at work on its highest-value-added projects. The union has reached similar agreements with other leading manufacturers, such as BMW and Daimler.
If we're going to rewrite our corporate tax code, why don't we rewrite it to reward those companies that employ workers at good jobs here at home? U.S. unions are almost surely too weak to get the kind of deals that German unions get, but why can't our tax laws discriminate between those companies that both develop and manufacture their products here and those that go abroad for cheaper labor?
To put America's multinationals on a homeward-bound course requires more than simply the nominal lowering of taxes, building better roads and rails, and turning out more scientists and engineers. We need to either raise tariffs on unfair foreign competition or reduce taxes on companies that keep, bring or create jobs at home. Neither solution addresses the fundamental problem, which is that the model of capitalism in the United States (as in Britain) prioritizes short-term shareholder value over all other concerns - a prescription for domestic disinvestment if ever there was one. In Germany, where share value is just one concern of corporate boards, which consist of an equal number of management and employee representatives, gross investment in plants and equipment increased 9.4 percent last year amid a booming economy.
The United States is hardly about to alter our fundamental corporate structures, necessary though that may be to engender a full-blown economic renaissance. But we can at least use tariffs and taxes to reward those corporations that invest at home and penalize those that disinvest in this nation's future. We can, one hopes, distinguish between friend and foe. That carrot and stick is what's missing from the president's commendable-as-far-as-they-go proposals.