Monday, September 5, 2011

Creating Jobs

Political policies to create jobs is about economic incentives. Here I present two ideas to help create jobs, neither of which will cost a dime in additional tax expenditures.

As a preface, the President and Congress are currently yammering about creating jobs. This concern is long overdue. In my view, any time we have significant unemployment, policies to facilitate the creation of jobs should be a top issue in national politics. That President Obama waited until he was 3 years into office to get serious about this issue is a disgrace. Lest you think I'm just another Obama-basher, I have just as many complaints about Bush Jr. before him. But, I don't merely want to complain, so without further ado, here are my recommendations:

#1. Permanently eliminate or dramatically reduce the corporate repatriation tax.
#2. Have the Securities and Exchange Commission (SEC) change the age-old definition of fiduciary responsibility for publicly-held corporations to put domestic employees on an equal footing with shareholders.


1. Economists estimate there are over a trillion dollars in profits held overseas by U.S. corporations. If every billion dollars brought home eventually resulted in 1,000 new jobs, a trillion dollars brought home would result in 1,000,000 new jobs. If every billion resulted in 10,000 new jobs, it would result in 10,000,000 new jobs. So this is not a trivial suggestion; It would have a large, beneficial impact on our national economy. I say eventually, though, because it takes months for companies to gear up new projects, and a given company can only manage a certain number of new projects at a time.

Most of our overseas profits are held by only a few dozen of our largest companies. If they bring that money back into the United States, it is currently, and normally, taxed at a 35% rate. That's an extremely powerful incentive for these companies to keep that money overseas. Eliminating or dramatically reducing that tax increases their incentive to bring that fortune back into the U.S.

What does this have to do with creating jobs? Well, what do companies do with profits? For the most part, they reinvest them, in a perpetual effort to increase their profits, but job creation depends on how the companies invest those profits: there are both job-creating investments and job-neutral investments. The same is true for how individuals invest, although most people only think about job-neutral investments.

If you take some of your retirements funds (or your pension plan managers do this for you) and purchase some stocks in an established company, that's a job-neutral investment. You and someone else are trading shares of that company's stock. That's a valuable function in society, but it doesn't create jobs. If, however, you  were to invest in a start-up company, or start your own company, that creates jobs. If you start your own company and succeed in it, then you've created at least one job, even if you don't hire anyone else.

There are quite a few job-neutral investments available to corporations if they repatriate their overseas profits, the same as with domestic profits, such as repurchasing shares of their own stock to try to increase their stock prices or issuing stock dividends to directly reward investors.

The corporate repatriation tax has been in effect for many years, with an occasional tax "holiday" that resulted in bringing overseas profits home in big lumps. Some opponents of eliminating or reducing this tax point out that when the holidays have occurred in the past (the last one in 2004), companies put most of that money into job-neutral investments, not job-creating ones. Of course they did! Because they can only manage a certain number of new projects at a time, they invest what they need in those projects, creating jobs, and they invest the rest as wisely as possible. For example, if they repurchase stock now, they are later able to reissue that stock to raise cash when they're ready to start or expand new projects.

The previous paragraph highlights why it would be beneficial to make this change permanent, rather than have unreliable, once-in-a-while tax holidays. It would create stability in those cash flows, allowing corporations to make reliable plans further out into the future, and that is a critical factor to any company considering hiring new employees. In addition, if the change is not permanent, then the remaining tax creates incentives for companies to permanently move jobs overseas, the opposite effect from what we need.

As far as eliminating vs. dramatically reducing, some of the CEO's of the companies holding that trillion dollars overseas have indicated they would have sufficient incentive to bring the money home if the tax rate was lowered to 5% or less, as opposed to eliminating it. I have no strong objection to that, so why do I suggest eliminating the tax? Because permanently eliminating the tax would maximize the incentives to bring the money home, and keep it working here to create jobs on a steady basis. 

It is more than interesting that the United States is almost the only nation in the world to tax repatriated corporate profits. Why did a previous short-sighted Congress create this tax? They obviously thought it would raise revenue. They were wrong. Companies simply hold those profits overseas and wait for the next tax holiday and invest those funds overseas in the meantime. Also obviously, other nations see this tax for what it really is: a counter-productive drain on the national economy. 

2. As long as we've had public-stock companies, the managers of those companies have been legally required to make their decisions in such a way as to maximize benefits to the stockholders. This didn't always result in moving jobs overseas because international shipping and communication used to be far more expensive and far less reliable. However, in the last half-century or so, both shipping and communication have become much less expensive and highly reliable. When this is combined with placing stockholder interest as the exclusive top-priority of corporate managers, of course they've been moving jobs overseas where labor is cheaper: They're legally required to do so if it increases their profitability!

We can permanently reverse this trend with one simple adjustment that won't cost any taxes: Have the Securities and Exchange Commission (SEC) change the age-old definition of fiduciary responsibility for publicly-held corporations to put domestic employees on an equal footing with shareholders. 

This change won't stop all American jobs from ending up in other countries, but it will protect many of them, and will eventually result in many jobs coming back to the United States from overseas. When the needs of domestic employees are given equal consideration to those of shareholders, an existing factory will only be relocated when that factory is completely unsustainable where it is. In that case, the local factory has to be shut down no matter what. The company could, under those conditions, still build a replacement factory in another country, if that's feasible. But no U.S.-based factory would ever again be relocated to another country just to increase profits when that factory could be sustained where it is at marginal profits.

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