US Corporations are sitting on more than $2 trillion cash in their balance sheets but are not hiring with the pace that our economy requires so as the recovery accelerates. The reasons are stagnant demand, excess capacity, tight credit, unfair trade practices by other export-oriented countries and lack of enforcement of trade treaties, US investments in fast growing overseas markets, as well as cheap labor, lenient tax laws and loose environmental or labor regulations in emerging countries, which together with the lack of disincentives for outsourcing enable the off-shoring of jobs. Legacy costs and the high cost of employer-based health care do not help either. The major myths are excessive regulation, high corporate taxes and the power of unions. We also discuss necessary Industrial Policies which curtail the off-shoring of jobs, and finally compare the over-emphasis of US corporate culture on short-term profits to the corporate cultures of Germany and Scandinavia who strike a balance between the pursue of profits and the common good.
1) Demand for their products and services, though on the rise, is still low. Because consumers are still recovering from the economic collapse of 2008, they are deleveraging their personal finances, pay off their credit card debts, can not use home equity lines against their houses cause their values decreased significantly. But also because wages have been stagnant and cost of education and health care has been rising significantly. Moreover, the statistical trend is that wealth is getting even more concentrated in the hands of a small percentage of the public.
According to the Economic Policy Institute the richest 10% of Americans received 100% of the average income growth between 2000 and 2007. In 2009 the richest 5% claimed 63.5% of the nation' s wealth, while the bottom 80% collectively held 12.8% of it. According to Forbes magazine in 2010 just the 400 wealthiest Americans had a net worth of $1.37 trillion, more than the $1.26 trillion of total net worth owned by the 60% of poorest Americans as calculated from multiple sources and verified by politifact.com.
The wealth of the middle class is decreasing and with it its buying power. By contrast, the top earners are already consuming what they need, more wealth in their hands will not increase demand significantly as they tend to invest the surplus in high growth emerging countries and speculative commodity and precious metal markets, trades of derivative and other tools provided by the extreme financialization of US economy.
2) Many US corporations also have excess capacity. During good economic times they expanded and developed the plants, services and workforce they needed to respond to the increased demand. But as the economy worsened and then collapsed in 2008 they had to downsize. As the economy recovers they are slowly gearing up again but advances in automation and computerization have increased their efficiency and in many cases reduced their need for additional manpower. Moreover, the slow US population growth and the even slower growth in demand discussed above force them to focus on global markets and countries with faster economic and population growth as their targets for expansion.
3) Moreover, credit for small businesses is hard to obtain, though improving. The risk faced by banks is higher and despite efforts by the government to provide vehicles and incentives for loans, the low consumer demand discussed above discourages the appetite for small business expansion. Recent measures passed as part of the 2009 Stimulus, the 2010 Small Business Jobs Bill and the Tax-Compromise for 2011-12 allow for many tax credits and accelerate the expensing of investments in equipment and software. Even a small business Lending Bank with a core capital of $20 billion and a mandate to attract up to $200 billion in private financing has been instituted; similarly the Small Business Administration has received additional funds and encouraged to work with similarly intended State agencies. But again consumer demand must rise for the smaller businesses to take advantage of these stimulative measures.
The Myth Of Over-Regulation
Corporations always complain about the restrictions caused by over-regulation. But reasonable regulations that ensure our safety and health, our food, or clean air and water are necessary. Similarly regulations that pertain to consumer protection of financial products and the operation of Wall St must be updated and enforced.
We do not disagree that regulations must be simplified and outdated ones should be eliminated without jeopardizing rules protecting our safety, food, water and air. One idea put forward by Senator Mark Warner (D-VA) is to institute, a pay-go type rule, according to which no new regulation is enacted, unless an nonessential outdated regulation is eliminated.
Unfortunately GOP's ideological disdain of regulations has reached recently such levels that Agencies which guard or oversee our safety, health, the environment, financial consumer protection and the operation of Wall St are in danger of being seriously underfunded or even crippled. In their recent proposals for federal spending cuts GOP-controlled house voted to reduce FDA funding by 14%, EPA's funding by 30% crippling its implementing of new emission regulations and eliminating new climate change programs, and SEC will not be able to effectively monitor Wall St' s operation and important new tasks dictated under the new Finance Reform Law such as overseeing the clearing houses for derivatives trading and operating the Financial Consumer Protection Bureau for limiting the abuses of Banks and mortgage companies will not be funded. Even our overall safety will be threatened by serious cuts in early warning systems for hurricane and tsunamis.
The Myth of High Corporate Taxes
Corporations complain that the corporate taxes are very high. Indeed our top corporate tax rate is 35% second highest in the industrialized world but corporations only accounted for 7% in tax receipts for 2009 (due to the great recession and the tax relief measures of the Stimulus Act); they are still projected to be only 13% of tax receipts in 2012, as compared to 43% from individual tax returns, 35% from social insurance and retirement receipts--the remaining 7% consists of excise taxes, estate and gift taxes, custom duties and deposits of profits of Federal Reserve. By contrast in the mid-1950;s corporate taxes accounted for 30% of all federal revenue.
Thanks to vigorous lobbying efforts fueled by hundreds of millions, ever increasingly favorable tax laws that allow corporations to shelter their profits from taxation have been passed by Congress since the late1950's. Interesting the last serious effort to reign on corporate tax loopholes was carried out under President Reagan' s and Speaker Tip O'Neal' s overhaul of the tax system in the mid 1980's.
An ingenious mix of tax loopholes, tax credits and subsidies and an army of tax lawyers and specialists have enabled corporations to shelter both their profits overseas but also to amass credits and write-offs that are used to reduce taxes on their profits from domestic operations. Allowing corporation to defer tax payments on profits from overseas operations till repatriation is a major loophole for multinationals which shortchanges the Treasury but also harms the economy by discouraging investment and hiring in the US-- we address some of these issues in the section below about new Industrial Policies that curtail the off-shoring of jobs.
Generous depreciation schedules, accelerated expensing of investments in equipment and software, green energy tax credits, and subsidies for several sectors (even for oil and gas exploration) are among the available tools. Another one is "active financing" which helps to avoid taxes on lending income from abroad and pertains to some kinds of banking and insurance revenue; this proved very beneficial for investment banks, brokerage firms, auto and farm equipment companies, and lenders of capital.
A great example of what is going on is GE which in 2010 reported worldwide profits of $14.2 billion of which $5.1 billion came from US operations; but instead of paying any taxes, GE claimed a tax benefit (credit) of $3.2 billion. In the last five years GE has accumulated $26 billion in US profits but received tax benefits of $4.1 billion. To complete the picture: since 2002 GE has eliminated a fifth (1/5) of its workforce in US, while increasing its overseas employment and has been rewarded for this with accumulated offshore profits of $77 billion--such profits rose from $15 billion in 2002 to $92 billion in 2010--for which taxes are deferred till repatriation.
The website of Senator Bernie Sanders (D-VT): (link: http://sanders.senate.gov/newsroom/news/?id=67562604-8280-4d56-8af4-a27f59d70de5) posted on March 27 compiles a list of the 10 worst corporate income tax avoiders and their recent tax record. Exxon Mobil, Bank of America, General Electric, Chevron, Boeing, Valero Energy, Goldman Sachs, Citigroup, ConocoPhilips and Carnival Cruise Lines make up this illustrious group of top US corporations that practically paid no taxes--or even received tax credits for future use--despite their record profits. Notice that 4 of those are oil companies. Still in February 2011, the GOP-controlled House voted to extend $46 billion (over 10 years) in tax credits and subsidies to these corporations.
Some in Washington talk about simplifying the Corporate Tax Code by closing almost all loopholes, eliminating unnecessary excessive subsidies (e.g., for oil companies and large agricultural businesses) and then possibly lowering the corporate tax rate. But this will make sense only if loopholes are eliminated (including the active financing, and the deferment of tax payments on overseas profits till repatriation). More suggestions are provided below in the section about new Industrial Policies.
The Myth of Union Power
This is one of the weakest of assertions by corporations. Union power has been diminishing all over the country. Union membership has been steadily declining since the 1970' s to the point that less than 7% of workers in the private sector are unionized. Entire regions of US, such as the South, have no unionized private sector workers. By contrast 32% of public employees belong to unions. This latter fact explains the attempts by GOP in Wisconsin and other states to eliminate the bargaining rights of public union workers and bust their unions so that this last bastion of union power disappears.
Legacy Costs and Rising Health Care Costs
On the other hand in some industries such as the automaker sector, the legacy costs, such as pensions and health care plans for employees and management have contributed somewhat to the problems that GM, Chrysler and Ford have been experiencing for a number of years and which deteriorated during the Great Recession of 2008-2009 necessitating the Bailouts of GM and Chrysler. About the history of these bailouts and an update on the paybacks to the Treasury refer to the article in Erie Lead about "FactCheck: Revisiting The National Debt, Budget Deficits and Corporate Bailouts" by Evan Geraniotis (March 5).
In particular the rising cost of health care remains a problem for the employer-based health care system in the US and this affects businesses both small and large. The Affordable Health Care Act of March 2010, provides help via tax credits to small businesses and attempts to create pools of patients and health care recipients so they be able to bargain with health insurance companies and obtain competitive plans, but the lack of a public option will make these efforts difficult given the monopolies still allowed for the health insurance companies in several regions of the country.
The Need for Industrial Policies To Curtail Job Off-Shoring
The fact is that US corporations are sitting on $2 trillion in cash reserves. Instead of boosting their dividends and buying back their stock, or investing in overseas facilities and jobs, they should invest in job-creating enterprises in the US. How we compete globally with export-oriented economies such as China, Germany and others is also key to the above considerations. As President Obama called for during his State of The Union address, we need to invest seriously in our future by out-educating, out-innovating and out-building our competitors. But we also need to protect intellectual property, enforce trade agreements and promote new industrial policies that discourage off-shoring of jobs.
Since corporate strategy relies on increasing sales and maximizing profits and not on social considerations like creating jobs in America, a mix of rewards and penalties is needed to encourage investments in US plants and workers. In this context, a letter by Don Swift recently published in Erie Times News (ETN) titled "Kelly Urged To Stop Rewards" (Feb 11) [also refer to his DailyKos.com Diary entry (as Big Chuck) of Feb 3] and an Op-Ed in ETN by Evan Geraniotis titled "Winning The Future Demands Pro-Growth Investments, Industrial Policies" (Feb 12) provide a number of suggestions for pro-growth industrial policies that may help improve hiring and curtail off-shoring of jobs. These include:
Restrict providing H1 B visas, used to bring in foreign workers to take American jobs, to only highly technical jobs and not to tellers or clerks as is occasionally done by banks and drug stores. Limit the access of multinationals to Government contracts, loans, subsidies, credits, and loan guarantees. Make such access or the awards inversely proportional to the number of jobs outsourced by each corporation. Similarly, States that award contracts to multinationals that export large numbers of jobs should be penalized with smaller grants in aid, if the States are not themselves willing to penalize such corporations. Offer tax breaks to firms who hire American workers to replace foreign workers in their foreign subsidiaries. Penalize corporations for moving jobs overseas when they give short notice or implement the move too fast to follow an orderly process.
Offer tax breaks, such as the accelerated expensing and others provided by the recent 2010 Tax-Compromise, only to corporations that invest in US plants and jobs. Tax excessive cash idling in big corporations' balance sheets (if idling for too long); but at the same time--since a large portion (2/3 according to estimates) of this cash is held outside the US--offer a repatriation tax holiday and thus the opportunity to invest it back in US.
A Comparison of Corporate Cultures: US vs Germany and Scandinavia
As Germany has shown, it is possible to retain a manufacturing sector by producing products of high added value, even when labor costs are high. But Germany's corporate culture is different, it gives to profits and the public interest almost equal influence in planning corporate strategy; in US short-term profits reign supreme.
Indeed US corporate culture (for big corporations) is among the worse of advanced industrialized nations, though there are exceptions. Maximizing short-term profits and increasing shareholder value are the supreme directives, without consideration for the common good. Corporate boards of directors are a parody in too many cases. Shareholders' wishes are not respected in countless others. One can argue that profits should be the only purpose of a corporation but it does not need to be so.
By contrast In Germany and several Scandinavian countries the board of directors often include representatives of unions and of the local community, or the state. They still pursue profits but they also care about the community and the common good. They have excellent job retraining programs, employment insurance (rather than unemployment insurance) to keep people involved in the production activities when hard times hit and some people are put on part-time or even a long leave, and government jointly with corporations often decide to invest in areas critical to global competitiveness. And we should not forget that there is single-payer health delivery system (all individuals and corporations contribute to it through direct taxes) that takes the burden of the employer-based system away from been solely the responsibilities of the corporations.
These countries believe in investing in the personal development and well being of their population through education, job training, health care and the environment; in many cases they view corporate interests as synergistic with the common good, not independent of it, or against it. Both their corporate and individual tax rates are high, but they accept this as necessary in order to spread the wealth, avoid widespread income and wealth inequality, and keep budget deficits reasonable. Finally, they take the off-shoring-jobs problem seriously, with industrial policies that providing disincentives for outsourcing and reward corporations that create domestic jobs. Result Germany, a major export-oriented economy has lost much fewer jobs to off-shoring (in proportion to the size of its economy) than US has.
Evan Geraniotis and Steve Brown co-operated on writing this article after Steve's letter "Why Corporations Are Not Hiring" appeared in Erie Times News on March 19.