That Giant Sucking Sound
During the 1992 presidential election campaign, Ross Perot liked to refer to a “giant sucking sound” made by jobs draining out of the U.S. Perot was referring to passage of the North American Free Trade Agreement making it too attractive to invest in foreign manufacturing operations relative to the U.S. Well, NAFTA passed and the 90s economy worked out pretty well, so perhaps free trade wasn’t such a problem after all.
Twenty years on, we live in a far more global economy and no longer need to pass anything in order to hear jobs being siphoned away to more attractive locales. And they are heading elsewhere, since the United States is no longer the only game in town. The Wall Street Journal reports:
As savvy investors and entrepreneurs search for ways to minimize the impact of the U.S. tax system, with its relatively high rates and global reach, they are increasingly incorporating overseas, tax experts say. Some private-equity firms have relocated U.S. companies or divisions to tax-haven countries. U.S. multinational companies have spun off foreign subsidiaries in tax havens. U.S. start-ups are even beginning life offshore.
President Obama acts as if “winning the future” is a fait accompli. But there are other contestants in the race, and they aren’t just giving speeches. Our foreign competitors are matching the United States on open markets and the rule of law, then closing the deal with dramatically lower corporate income tax rates, straightforward regulatory hurdles for expansion and stable electricity prices, among other factors. Unfortunately, the preferred liberal response is and has been punitive:
A decade ago, a handful of U.S. companies sought to move to offshore havens such as Bermuda to reduce their tax bills. An outcry led Congress in 2004 to bolt the door. But the law left exceptions for U.S. companies that undergo a substantial change of ownership, such as being acquired by a private-equity firm. The Internal Revenue Service in 2009 tightened the rules but left some exit doors open, for example in the case of a complete buyout.
Unsurprisingly to anyone not a liberal Democrat, U.S. firms are now being purchased for the sole purpose of being reincorporated in another country. If current managers object for patriotic or other reasons, three outcomes are possible:
- The firm is bought anyway, the buyers making a risk-free profit by reincorporating the entity in a jurisdiction with a sane corporate tax policy.
- The company limps along, earning less money after taxes than its foreign competitors, making it more difficult to raise capital, reducing its ability to maintain investment in R&D, leading to less attractive products and its eventual sale or demise.
- Management invests heavily in foreign subsidiaries, “offshoring” jobs and expanding operations in that foreign jurisdiction with any local profits, thereby avoiding the tax penalty from bringing the cash back to the United States, and reducing its effective tax rate enough to ensure its survival.
This is not an academic exercise for me. In the past year, my 10-year-old development stage company has hosted multiple foreign economic development delegations (they contacted us). Each group presents an arithmetically irrefutable case detailing the adverse consequences for my company should it somehow reach profitability while still remaining a United States corporation.
I didn’t dedicate the last decade of my life to creating another buyout target for KKR or some other private equity firm.
Why don't we trade the sucking for a giant blowing sound?
- Abolish the corporate income tax. Watch foreign companies rush to our shores.
- The air is plenty clean: Shut down the Environmental Protection Agency. Better yet, box it up and send it to smoggy Beijing as a gift from the United States. At the very least, strip the EPA of the authority to regulate carbon dioxide and eliminate its ability to issue any other new regulations without congressional assent. Companies cannot invest in manufacturing operations in the face of electricity rates that will “necessarily skyrocket,” in candidate Obama’s colorful formulation, nor can they withstand the lawsuits environmental groups like to file to help the EPA in its transformative mission to become the Federal Bureau of Industrial Planning.
- Repeal Obamacare: the first and biggest step in removing legal and regulatory barriers to hiring new employees.
And tell the president not to worry. Even if he brings his War on Jobs to a responsible end and allows a little spontaneous nation building here at home, all the millionaires and billionaires he obsesses over will still support him.
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Comments :
Jan '11
Re: That Giant Sucking Sound
The wordsmith-like intellectuals won't allow for it. I fear that a total collapse or near total collapse will have to occur before most people -- who are influenced by the intellectuals -- will decide that that we have to abolish these obstacles. You know that there are many people who work for the state apparatus (and who vote) who will lose their incomes if this were to ever happen. Yet the can will be continued to be kicked down the road prolonging (and sharpening) the natural course of things needed.
Edited on Jun 25, 2011 at 2:41pmAug '10
Re: That Giant Sucking Sound
Ah, but why put politicians through the hassle of reducing corporate taxes and paring down the regulatory regime when it's so much easier to slap protectionist tariffs on everything?
Dec '10
Re: That Giant Sucking Sound
By what metric do you say NAFTA was a success for the citizens of the United States? We were told it would mean more and better jobs for Americans at higher wages due to increased exports. Right?
Did any of this happen? We lost almost a million jobs to Canada and Mexico while our trade deficits unsurprisingly increased with each as well.
I happen to concur with you that our corporate income tax rates are absurd. The EPA and Obamacare, though, while onerous in their own right, pale in comparison to our trade agreements when it comes to ensuring the international competitiveness of US companies in high-margin industries.Obamacare is certainly a problem for a host of other reasons, though. I do not mean to imply I think it won't bankrupt us.
Finally, may I in what vertical this development-stage company is? This may give our discussion a little more edifying specificity.
If you're in nanotechnology, for example, our nation should fight tooth and nails to keep you. If you're in chopstick manufacturing or IT outsourcing...well...that's something else.
Dec '10
Re: That Giant Sucking Sound
Note: In immediate hindsight, I regret the "pale in comparison" language above, and would like to revise it to "are equal partners in".
Jan '11
Re: That Giant Sucking Sound
Amount of hours worked to purchase things. This did happen since NAFTA was signed.
KarlUB:
...while our trade deficits unsurprisingly increased with each as well.
What is wrong with a current account deficit when, on the flip side, we have a capital account surplus?
How? And how does one ensure competitiveness in these industries? isn't the free(er) market in international trade already doing this? Surely you're not advocating the government promoting some kind of mythological fairness here, are you?
May '10
Re: That Giant Sucking Sound
Sounds like a good start to me. I'd also push for a dramatic expansion of the H-1B visa program.
Karl, the textile industry took a beating here in Carolinas to the point that nearly all of the grand old cotton mills are gone, mostly to Asia I reckon. Since those jobs started "sucking" away, the region has added auto and aircraft manufacturers (e.g., BMW, Volvo/Mack Trucks, Daimler Trucks/Freightliner, Boeing), attracted industrial headquarters operations (e.g., Freightliner, Mack Trucks, Michelin), expanded the financial services sector (e.g., Bank of America, Wells Fargo-Wachovia, BB&T), fostered high tech and biotech growth (i.e., Research Triangle Park, Glaxo, Red Hat, SAS), and has enjoyed the influx of vendors and suppliers necessary to support these new ventures. Overall, since those earlier jobs started fleeing for other shores, I'll argue with a great deal of confidence that the region's economy has tallied a significant net plus by wisely rejecting a static mercantilist attitude (although there are some loud voices here calling for just that). Am I wrong to draw that conclusion?
May '10
Re: That Giant Sucking Sound
George, your post reminds me of that movie Night Crossing made in 1982. The movie is based on the true story of the Strelzyk and Wetzel families who were desperate to get out of East Germany during the communists' reign. Those two families were not the only families desperate to leave communist countries.
That is how I am beginning to see this desire for the Obama Administration to keep businesses locked up in the U.S. or in union-heavy states. Instead of changing inhospitable conditions for American enterprises, the government powers want to keep those businesses under their thumb. That will only make the businesses want to flee more rapidly.
Edited on Jun 25, 2011 at 4:03pmMay '10
Re: That Giant Sucking Sound
The best way to fight tooth and nails for a company to stay is to alter the environment making it the most hospitable option. As that old saying goes, "You will attract more bees with honey than with vinegar." George's ideas above are precisely what turns that vinegar into honey.
Mar '11
Re: That Giant Sucking Sound
Hehe...that's just nasty, that is. Comprehensive, cogent and...nasty!
That's the Chicago Way, FeliciaB.
Re: That Giant Sucking Sound
I am a fan of free trade. I think it provides the net benefits that Matthew Gilley describes above. However, opening the border to the free flow of goods and services while locking down the domestic supply side is a recipe for hollowing out an industrial base.
I am convinced that the US can compete effectively on the the world stage, but we need competitive, stable tax and regulatory policies for all, not special incentives and waivers for a few well-connected players.
My company, by the way, is Proteus Biomedical.
Apr '11
Re: That Giant Sucking Sound
Agreed. But good luck selling abolition of double taxation when we have run the freaking currency into the toilet by over-spending and borrowing up the wazoo.
Re: That Giant Sucking Sound
Karl,
May I ask by what standard you judge the fitness of various industries to participate in the American economy? I understand your IT outsourcing comment in light of your general opposition to free trade, but if the US has a comparative advantage in chopstick manufacturing (and I realize that's a reference to a previous post by Rob), why would we turn it away (or at least, by your formulation, not fight tooth and nail for it)?
KarlUB:
If you're in nanotechnology, for example, our nation should fight tooth and nails to keep you. If you're in chopstick manufacturing or IT outsourcing...well...that's something else. · Jun 25 at 3:11pm
Apr '11
Re: That Giant Sucking Sound
Karl,
Government doesn't know enough to decide which industries are worth keeping and which are not. If the people in government had that level of insight, then they would be billionaire stock traders.
May '10
Re: That Giant Sucking Sound
The problem the anti-trade people have is not that jobs migrate to lower cost regions, it is that products in a competitive environment always seek to decline in price. If you are a manufacturer of a good that is in demand, someone will always look for a way to undercut your comfortable price point. That may be with lower cost labor, or it may be with machinery- but the basic equation still applies, and no matter what artificial barriers you put up to try to slow the other guy, unless you fix your own cost of good sold problem, you are doomed in the long run. Consumers are not stupid.
The Luddites in England tried to destroy the mechanical looms, and textiles moved to the US. New England next had a textile industry, then the South took it over. Then it moved to Central America, now a lot is done in Vietnam and Thailand.
If production efficiencies are applied, it is not that someone stole that job, it is that the learning curve of lowering production costs always removes labor. Always. If a US manufacturer does not respond, he is done. (cont)
May '10
Re: That Giant Sucking Sound
The key is that in the process, labor costs become a smaller and smaller piece of the sale price, so affecting competitiveness then turns on other efficiencies and cost factors- that's the part George is talking about. And those costs are the ones that the US government is deliberately and inexorably trying to increase right when the competition, no fools, is keeping those non-labor costs low as well. No matter how well a company runs its business, if the government does you in, you are helplessly killed.
Interestingly, the only industry right now that still has not addressed labor content very much is health care- they are still trying to sell higher prices for higher quality products, plus a nasty and punitive tort system.
Clearly, some industries we should carefully nurture in infancy for national security reasons- the problem is, once you do that, every non-essential industry tries to do the same thing. And what you then get is mercantilism and MITI, Chinese tech transfer extortion, etc.
My first econ professor in college was Walter Heller, Pres. Kennedy's chief economic adviser, an unapologetic Dem Keynesian. His view? Find someplace you can compete, do not make barriers.
Dec '10
Re: That Giant Sucking Sound
Troy Senik: Karl,
May I ask by what standard you judge the fitness of various industries to participate in the American economy?
Will Lord:
Government doesn't know enough to decide which industries are worth keeping and which are not.
Some industries contribute more to economic growth than others. Ones that do not compete totally on price and can absorb lots and lots of investment are the ones we should endeavor to nurture and protect. I am not-- as I'm sure you already know, Troy-- suggesting anyone should be prevented from participating in the American economy.
For example, there is no more chopstick innovation. Innovation may tinker at the margins of productivity of chopsticks, but those innovations will simply result in driving down the price meaning less jobs at lower wages. Having a competitive advantage in an industry like this may be good in the short term, but is bad in the long term. See Ricardo's classic example: Portugal was good at wine, England at textiles. But textiles meant growth in other industries like machining, steam engines, etc.
By sticking to their competitive advantage Portugal went over time from a leading European economy to a backwater.
Dec '10
Re: That Giant Sucking Sound
LowcountryJoe
Amount of hours worked to purchase things.
KarlUB:
...while our trade deficits unsurprisingly increased with each as well.
What is wrong with a current account deficit when...we have a capital account surplus?
...[H]ow does one ensure competitiveness in these [good] industries?
###
Good points. In order:
1) Are you saying our productivity has increased? Could you explain how this is due to NAFTA?
2) It is a short-term good when foreigners invest in our major companies, and open plants here. But the letter to which you link is not thinking strategically: A nation, like a household, that indefinitely spends more than it earns (in national terms, a trade deficit) will go bankrupt. It is good that BMW opened a plant in South Carolina. I would prefer it be an American company, though.
3) I am the first to admit I am a little hazy on solutions. Mostly I envision government R&D investment in high-value industries, restricting foreign access to our domestic market in those industries, and restricting the export of production in these industries. I think.
Dec '10
Re: That Giant Sucking Sound
George Savage:
My company, by the way, is Proteus Biomedical. · Jun 25 at 5:36pm
Ah, biopharma! One of our nation's strongest industries. Also one in which I happen to work as well.
Thank the good Lord for all that government subsidized R&D, eh?
But, on the flip side, talk about government regulation! My entire job exists because of the irrational and overbearing restrictions on speech inflicted on this industry. I have to cover my you-know-what eight ways 'till Sunday to get a marketing piece approved, but some darned supplement or cereal can make a claim regarding its health benefits and it goes from creative to deployment in a nanosecond.
So here we have an example of both good government intervention (R&D investment) and bad (pretty much the entire way DDMAC is designed and functions.)
Dec '10
Re: That Giant Sucking Sound
Man, it's exhausting when my only dependable ally on this stuff leaves me hangin'. Where you at, Xennady!
Aug '10
Re: That Giant Sucking Sound
KarlUB
...a competitive advantage... See Ricardo...
Karl, I don't mean to nitpick, just clarify terms. What I remember about Ricardo is comparative advantage, not competitive advantage.
I suspect I'm not the only one who'd like you to give us your definition of competitive advantage. I think it would make discussion easier. (I think someone asked you about this once before, and I don't recall seeing an answer.)