"Shared Economic Growth" - for whom?

A friend draws my attention to: http://www.sharedeconomicgrowth.org/. The view there has been helpfully summarised as follows:

"President elect Obama has promised to reverse the current tax incentives that lead corporations to move jobs off shore, and to reward companies that place operations in America. The web site http://www.sharedeconomicgrowth.org/ outlines a simple, feasible, revenue neutral and progressive proposal that would enable him to fulfill that promise in a meaningful way, while also allowing hundreds of billions of dollars of cash to flow home and recapitalize our economy.

"Benefits:
* Reverses the current incentive to locate high value jobs off shore. Today net profit can be increased 54% purely by having operations outside of the U.S. Reversing this incentive will increase the demand for American workers and drive up wages.
* Eliminates the incentive to hold cash off shore. Today there is a penalty of up to 35% for bringing cash into the U.S. economy. Corporations accumulate hundreds of billions off shore each year to avoid this penalty. Removing that penalty would add liquidity to our economy as those hundreds of billions flow home.
* Eliminates the incentive to over-leverage corporations by putting debt and equity on an equal tax footing. Corporations borrow too much today, reducing their stability, because they have a tax motive to do so.
* Increases the equity returns to hard-hit IRAs, 401(k)s, and other retirement savings by up to 54%, restoring the value of savings and rewarding responsible middle class people who live within their means and save for the future.
* Unlike the current bail-outs that are subsidizing operations that have failed, it provides incentive to place high profit winning operations in the U.S., revitalizing our economy. We should build our economy on stars, not on dogs.
* Shuts down tax abuses.
* Best of all, Shared Economic Growth does all of this without adding a dollar to the deficit and while improving the fairness of our income tax structure."

So much for the benefits. What is the actual proposal and the rationale for it?

"1) Starting back in the 70s American employees started to lose market value as productivity improvements combined with international competition to reduce demand. For low margin operations, this waas pure wage competition - an operation paying $10 an hour to U.S. workers had trouble competing with an operation paying $2 an hour to Mexican workers. For high margin operations - basically high technology and other desireable products - it was driven by tax policy. If you put a plant in the U.S. the income is taxed at 35%, but if you put it abroad it could be taxed at zero, resulting in 54% more profit. For high margin products this is much more important than labor cost. In the 70s it was hard to find enough skilled labor in low tax places, but over time it has become easier to do so. Thus, low skilled employees had their average pay flat-line in real terms in the 70s, and the phenomenon gradually moved up the education scale so that most college graduates flat-lined in the past decade.
2) Thus, consumer purchasing power stopped growing. Productivity gains concentrated in the hands of an elite few with more money than they could spend. Since America's economy is 70% consumer driven, we lost our engine for natural growth. The government thus became desperate for artifical stimulus.
3) The crazy financial policies developed and grew in this retirement. I have had conversations with people in all walks of life for years where they have commented that the policies of lending to people who clearly lacked real ability to pay made no sense and would have to crash. But the government continued to encourage this system, because it stimulated artifical consumer demand without obviously increasing the deficit.
4) Now that gimmick has crashed. What is the government response? Explicitly and implicitly deficit funded artificial spending. That cannot last.
5) But if we changed tax policy to collect the same money at the shareholder level, rather than the corporate level, corporations would suffer no tax by placing their operations in the U.S. High value operations would thus be placed here preferentially, increasing demand for workers, which in turn would increase worker market power and wages. This would increase natural, sustainable consumer demand, replacing the ponzi scheme with organic growth. Absent this, R&D and new products and operations will continue to flee, and we will continue to develop dysfunctional schemes to obscure our economic disease. "

Here is my view: The tax-change proposed by "Shared Economic Growth" would incentivise all NEW factories to be located in the US, yes - but it would not close down existing factories in the rest of the world - which is where most factories NOW exist!

It is essential to distinguish discussion of new factories and what should be done about those, from discussion of existing factories and what should be done about those.

It is not clear how many new factories are going to be built over the next say 5-10 years, depending on how long the current crisis lasts.

If they do want existing factories to be relocated back to the US, that will cause certainly China to collapse, as well as possibly Vietnam and some other countries....which will not be in anyone's interest!

So the better way to go, for both existing and new factories, is to entirely stop playing this global game of tax incentives and subsidies (abolish all subsidies and move to simple flat-rate taxes), and create a genuine global "level playing field" in terms of health and safety, holidays, pensions, and environmental regulation. Any country that does not belong to the level playing field should be banned from trading with other countries that do belong to the level playing field - and I mean a TOTAL ban in all trade - financial services as well as all other trades, manufactures and agricultural products.

Naturally, some countries need to be given time to get their countries up to the required level, so trade needs to be phased in as countries do progressively and increasingly belong to the "club" according to an agreed timetable.

China and Russia are startlingly clear cases of countries that HAVE the wealth and the organisational resources to move their countriest to a level playing field but refuse to do so, maintaining poor environmental conditions, zero pensions, very few holidays, and extremely dangerous standards in health and safety - principally in order to continue offering Western companies the possibility of manufacturing cheaply there....

So, my main problem with "Shared Economic Growth" is that the vision of these folk extends simply to sharing economic growth WITHIN the USA. They do not have a global perspective. That is what they need to have in today's world which, in spite of the current crisis (or as the current crisis so clearly shows!) is still very much a global economy.

Whenever the global community starts taking steps back to protectionism (as Russia and China have now started to do), there will be danger of moving to war - particularly if the USA also starts taking protectionist measures.

I had hoped that we would have clear signals regarding this from the recent inter-governmental conference on the crisis, organised by President Bush, but nothing clear emerged (beyond saying that they were going to WORK on something clear!).

That is why nothing substantial can be said or done till we have a clear signal from the new Obama administration. That is why the global economy will continue dribbling along the current level (barring a disaster or two, when of course it will fall even further) till the Obama administration makes some clear statements. And then, of course, it depends on what those statements are - and on how the market likes those statements as well as the timetable for implementing them.

What is happening at present is that "hundreds of billions of dollars" ARE flowing "back home" (to the USA) - which is partly what is creating a crisis in China, Russia, India and other "demerging" countries (as I now call them).

What the USA *can* get back are the "liquid" dollars that sit in accounts. What the USA *cannot* get back (easily!) are the dollars sunk in actual buildings and equipment. My argument is that the US should not even *want* to get those back. The future of the USA as well as the future of the world, lies in increased trade (not less trade) - but trade built on proper human and ethical foundations - not the sort of unethical and inhuman trade regime we have at present. Sphere: Related Content