We know that some jobs are never coming back to the United States. For example, simple items of clothing are made more cheaply in Guatemala and Vietnam than in the US. Most customers don’t walk into Walmart asking for “Made in the USA”; they want what is cheap. So our economy can’t rely on textiles and other commoditized industries; it has to rely on service jobs and value-added jobs. You’re not going to fly a guy in from India to fix the sink.
But how do we create more high-wage jobs? The long-term answer is fixing our education system. The World Economic Forum has ranked the U.S. 48th in quality of mathematics and science education. Although innovation in science and engineering is a major engine of job growth, only four percent of the American workforce is employed in these fields.
Fixing education is the long term key, but it doesn’t help much in the short term. Nor does the President’s call for patent reform as a jobs initiative. And we need far more attention to the needs of small business, which is a major engine of job creation.
There is one huge stimulus program that doesn’t involve any government debt that politicians are overlooking. There is over $1 trillion that could be invested in job creation in the USA now. That is far more money than the TARP program or the amount spent by the Fed on so-called QE II. Corporations are holding that money overseas instead of bringing it home and investing it here. There are two approaches to this issue.
The first approach is to say that these companies are bad and even un-American for keeping the money overseas. This is a good approach if you are a politician posing as a champion of the little guy against big, bad corporations who don’t care about people. That is, except for shareholders, which today are largely pension funds and 401k plans. This approach is imbued with feel-good populism, but it doesn’t produce any jobs. Nor does it produce any revenue for the federal government.
There is another approach, but let me back up a step. I’ve heard politicians and labor leaders say that the companies are sending money overseas. Not exactly. Let’s take Apple, a company that most of us like. Apple sells its i-phones in countries throughout the world. Let’s say they sell $1 million worth of i-phones in Vietnam. They would still owe money to the US government if any of that money is brought back here, even after any applicable tax credits, because with a 35% marginal rate, we have the second highest corporate tax in the world. These millions earned by Apple and other big corporations now add up to over $1 trillion of idle cash. Companies are saying that they’d rather not pay $350 billion in taxes on that money. Most other countries agree; if Sony sells $1 million worth of TV sets here, it pays taxes to the US but not to Japan when it brings the profits home. Western Europe mirrors Japan here; we are the outlier.
Companies are also saying that it is much cheaper for them to take some of the money earned overseas and build new factories there, where the products are being purchased. But many of them are also saying that they would bring the money home and put new factories and new jobs here if they got a reduced tax in exchange for doing so.
Seems like a good deal to me. The government charges maybe 10%, and makes $100 billion where they are getting zero now. Politicians can bleat all they want that it should be $350 billion, but in the meantime the government is getting no money and people are getting no new jobs.
Critics say that this was tried once before. Companies got tax breaks for bringing back, or repatriating, foreign cash, but then they spent that money on share repurchases and executive pay rather than on job creation. That is a very fair criticism, and we cannot afford such abuses again. The answer is to condition tax concessions on both actual job creation and on prohibitions against having these funds go into the pockets of shareholders or corporate executives.
It may be that companies wouldn’t all take this newly repatriated cash and build new production facilities right away. So another condition for tax concessions could be putting idle cash into a government infrastructure bank. This would create construction jobs quickly that would repair or build badly needed transit and other infrastructure in the country.
A lesson of the recent debt ceiling debate in Congress was that nobody gets all they want. Sure, many would love to tax corporations at 35%. But they don’t have to pay as long as they leave the money overseas; there is no taxable transaction. So companies hold the cards. Thus the question is whether we are willing to be pragmatic and bring home billions targeted toward job creation, or whether it is more cathartic just to be angry. There are plenty of other things we can do to create jobs, but this would be a giant step in the right direction. It is much needed at a time like this.