When President Bush spoke with America about the economic crisis, he focused ultimately upon the need for a bailout of certain elements of the American financial system. He referred to a central cause for the problem with American economy..
The president said:
“… most economists agree that the problems we are witnessing today developed over a long period of time. For more than a decade, a massive amount of money flowed into the United States from investors abroad, because our country is an attractive and secure place to do business.”
The problem is that Mr. Bush did not talk about how those foreign investors had so much money to begin with. That has been the result of a combination of various free trade policies coupled with an absurd tax code.
Rewards for Overseas Manufacturing and Investment
The current tax code rewards American corporations for investments abroad, and penalizes them for investments at home. When money is made by American corporations overseas, they are taxed on that money when it is brought back to the United States. So what happens? Overseas profits are kept overseas and reinvested there, until they are funneled to “investors abroad”.
It becomes more profitable (after taxes) for an American corporation to use its money to build factories and infrastructure in places like China and India. It becomes more profitable to manufacture goods elsewhere and ship them here, with the profits being kept overseas. Soon bundles of US capital accumulate there, and there is no place to spend it.
The incentives for US companies to invest abroad are myriad and complex. They can borrow money in the United States, and deduct the interest from their taxes. They can take that money and earn income on it abroad, and perhaps never pay taxes on that income. The expenses of foreign taxes are deductible against US taxes, so in the end, United States taxpayers pay the companies taxes in places like China. David Cay Johnston highlights these issues in Free Lunch.
American Capital Returns: As Loans, Not Investment
It comes back not as investments in the United States, its manufacturing base, its infrastructure and its workers, but as loans. Our foreign trade imbalance is given back to us in the form of debt. So now the people that have sold us the goods, loan us money to buy them. When demand runs out for goods that have been made overseas, we are loaned money to buy other things like houses and cars.
The real problem is that the policies of a series of administrations in Washington have created disincentives for real investments in American manufacturing. It is virtually impossible to go to Home Depot, Wal-Mart or Target and buy anything of significance that has been made in America at a competitive price.
The choice for door locks are between those made in Mexico and those made in China. The choices both have American brand names.
There are multiple reasons for this, but prime among them is US tax policy. Corporations do not actually pay taxes, people do. When corporate strategists price their products, they price them for after tax return on investment for their shareholders. Across millions of sweaters the cost of American labor vs. Chinese labor is nominal when it comes to a single given sweater. A huge difference is the overall tax burden for products made here, which is included in the cost.
Trade Defict = Job Loss
Senators Obama and McCain have not talked in the least about our trade deficit, except for energy. Energy is a huge factor, but when we keep sending capital overseas for goods like cell phones, clothes, door locks, gym shoes and birthday presents, we will run out of capital. They talk about the need for good American jobs, but neither one says what those jobs should be. High tech manufacturing, without tax burdens will result in those jobs. Fostering a government climate favorable to creating and keeping those jobs needs to be among the long term solutions.
The fact is that current policies that have envisioned the American economy as a service economy and left manufacturing to the rest of the world are truly at the heart of the economic problem. We can only survive so long selling each other pizzas.
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