The U.S. jobs market is broken. The causes of the breakdown are readily identifiable, and there are simple cures that would go a long way towards fixing them without undermining the general benefits of a free market. The Shared Economic Growth proposal (explained below and further at www.sharedeconomicgrowth.org) would be particularly helpful. As with antitrust enforcement, product safety regulation, and other facilitators of an efficient market, these steps would increase wealth for everyone, but particularly for middle class and working class people, helping our nation to deliver on the promise of the American dream. Further, like those other basic underpinnings of the success of the U.S. economy, they do not require “Big Government” interference, but rather just some simple common sense changes to address basic problems.
There is plenty of data showing that the growth in the U.S. economy over the last 30 years has flowed almost exclusively to the top few percent of the population. That is an unfortunate thing in a democratic society, for wealth translates into power and human nature is such that those with power tend to use it to help entrench themselves, their children and their friends. It is also inefficient. It has been a very long time since the U.S. was a capital constrained economy. Our growth is limited primarily by consumer demand. The wealthy do not spend all of their money, or even close to it. The middle class and working class, on the other hand, pretty much spend what they get – and often more. Thus, an American economy with income concentrated at the top has less consumer demand, and hence less growth and strength, that an economy with better income distribution. No very good purpose is served by having a group of people with more money than they can ever spend, so this inefficiency in income distribution is a bad thing overall.
What produces it? It’s hard to believe that the top 1% of the population really drives all the value creation in our economy. It feeds the vanity of those at the top to think so, but speaking as a corporate manager I can state with confidence that such a view is not consistent with the facts. I am good at my job, but I couldn’t do much without the 43 other people who report to me. Any time we have a poor hire at any level it’s a big drain on the group. If I can’t trust the judgment of those below me and I have to look over their shoulders, then my ability to spend time and energy on cutting edge thinking falls to zero. I have lived through repeated examples of all of this, and am absolutely convinced of the value of the contributions of every member of the group. The same holds true at the level of the CEO and top officers. If they could not rely on the people below them, they would not accomplish anything. Special talent is important and logically commands a premium. But special talent does not explain the skewed distribution of income in America today. Something is wrong.
It’s not hard to figure out where the problem lies. Despite having a relatively high employment rate, and certain fields that are going begging for employees, we have an effective oversupply of labor. This flows from several sources. The increase in women entering the workforce, whether voluntarily or out of perceived economic necessity, has added competition. Increases in employee productivity through automation, the information technology revolution, and – let’s face it – just working people harder has increased supply and reduced demand. But layered on top of these developments are the effects of globalization, which hit on two levels.
At the low end of the spectrum, we have had the huge and unceasing influx of unskilled immigrants, mostly illegal, desperate for even minimum wage or lower work. (Read on, immigration backers. My point here is not nationalistic, it’s just structural, and the solution would help everybody.) Defenders say that they do the work “that Americans are unwilling to do”, but this is just code for saying that such immigrants can be hired for a wage that native born Americans are unwilling to accept. But this undercuts the market power of unskilled Americans. There will always be someone willing to take that unskilled job for minimum wage or less, so why should an employer pay more?
This problem is greatly aggravated by the other side of globalization, job export. The tradition blunt instrument that America uses to deal with over-competition among unskilled workers is minimum wage laws. The problem with such legislation is that it fails to distinguish between two very different classes of jobs – mobile and inherently local. Many jobs, such as manufacturing or any type of service than can be provided over the internet, are mobile. If the government raises the minimum wage for those, they really do move to some other country where wages are lower, assuming that labor costs are a major concern for the employer. This movement may be direct – a decision to put a plant elsewhere – or indirect, through a company being forced out of business by a lower cost foreign rival. In any event, it happens, leaving the former employees looking for other unskilled jobs. The result of this is that minimum wage tends to become target wage for mobile jobs.
There are many jobs that are inherently local – food service, child care, nursing, public security, harvesting crops, brick and mortar retail, etc. Minimum wage laws work for such jobs, within limits, because they cannot be shipped away. But with competition from unskilled immigrants and from unskilled native-borns who have lost jobs in mobile industries, it becomes difficult to drive wage increases in these jobs above the statutory minimum. And, again, because raising the minimum for mobile jobs creates more unemployed workers, minimum wage tends to become target wage for the unskilled segment of these inherently local jobs as well.
OK, but we have all be told ad nauseum that globalization was going to fix this problem by replacing the low-skill, low-wage jobs exported to developing countries with high-wage, high skill jobs here in America. We’re told that all the U.S. employees who lose jobs will get new training and move happily up the scale. But that’s not happening for the most part. Why? That brings us to the second flaw.
The U.S. tax system pushes corporations – the primary source, directly or indirectly, of high paying jobs – to move their best operations abroad. U.S. law currently provides that most income earned abroad is only taxed by the U.S. when you bring the cash home. So, if you make $100 in America you only keep $65 after the U.S. 35% corporate tax, but you keep the full $100 if you earn it in the Dominican Republic. When you reinvest that $100 of D.R. cash you can use the full $100 if you invest abroad, but only $65 if you invest in America, due to the U.S. tax bite. So you invest in new foreign operations, not American ones. This effect is strongest for the highest value operations, because they have the highest taxable profit margins. The U.S. became a net importer of high technology goods for the first time in 2002, and that deficit has increased each year since. So, the set of operations that would NOT more jobs abroad to chase cheap labor – the operations that have a high profit ratio relative to labor costs – flee abroad for tax reasons, and once they flee they become subject to an addictive need to reinvest their earnings outside of America.
This is not a theoretical problem. I am the head of tax for a large U.S. multinational. It is my job to advise that high value manufacturing and research should, from a tax point of view, be located outside of this country. I advise that it is better to invest cash in foreign operations than in American ones. If the recent tax proposal of House Ways and Means Committee Chairman Rangel becomes law, I will advise that good administrative jobs should be moved out of the U.S. I don’t like giving that advice, but under current law that’s what the numbers dictate. I want to change that.
This flaw also has indirect effects. Those of us who work for multinationals are now used to moving things abroad. Allow me to explain how this has affected my own function. There is a shortage of good accountants in this country. That is partly because no child says “gee, when I grow up I want to be an accountant and decide how to book things properly!” It is also partly because the infamous Sarbanes Oxley legislation and several unfathomable recent dictates by the accounting authorities have created a huge amount of new, mostly totally useless, work for accountants. That should make salaries rise, right? Not so fast. The first response has been to get rid of most of the less skilled jobs. Companies outsource these all over the world. My company moved them to Costa Rica, where there were plenty of bright, hard working, conscientious people happy to get the work. That increased the effective supply of accountants in the U.S., but there is still a shortage. Now what?
Well, we have the same problem in Tax, and I can tell you what I am doing. Good tax people are in even shorter supply, but companies are not offering us 20% budget increases to address that problem. What can I do? Well, I found that we could hire good people pretty easily in our European office, so I did. Last year, one of my managers went out on maternity leave, and the only person on the planet who knew enough to backfill her job is a former international intern of ours now based back home in Argentina. I tried to bring her in temporarily, but U.S. Immigration blocked it, declaring (wrongly) that she was not unique. So we had her do the work in Argentina, and it went just fine. So now I am looking to source employees in various foreign locations, where I will get reasonable cost, good language skills, geographic convenience, and diverse talents. And I am not raising average U.S. salaries by more than inflation for my highly skilled workers. I am pleased for my non-U.S. employees, who are quite good and are happy to have this opportunity to have exciting, highly development roles in a U.S. multinational, but at the same time I realize that this is not a good thing for America.
And it is going to get worse. The U.S. government has been trying to attack companies that shift U.S. developed technology abroad. What’s the response? The companies, not surprisingly, are rapidly shifting their R&D operations abroad, so that they do not have to worry about U.S. developed technology. There are plenty of well qualified foreign researchers out there, so why not? The IRS has issued new regulations seeking to increase the tax on U.S. administrative activities, and Chairman Rangel has proposed a law that would substantially boost the tax on U.S. administrative jobs connected to foreign operations. Guess what the response will be? I will certainly have to advise my employer to push administrative jobs to a foreign holding company. Those direct effects have indirect effects. Similar to my tax hires in our foreign offices, lots of skilled jobs will flow abroad in response to these issues, undercutting the market power of middle class Americans. They may not be thrown out on the street, but good luck to them in negotiation for salary increases above inflation, no matter how quickly corporate profits grow.
Now factor in the other issues in our economy, such as our foreign debt of over $9,000,000,000,000, our maximally indebted consumers, our rising unfunded entitlements that have just caused Moody’s to issue a caution on the triple A credit rating for U.S. government debt, the rise of foreign engineers, etc., and a bleak picture emerges. Our economy will inevitably slow, and all of the usual government tricks for trying to boost it are tapped out. The government is already running a huge deficit, low interest rates and the falling dollar are causing the foreign investors who have been propping up our credit markets to start pulling out, the phantom consumer funds from unsustainable mortgage debts are gone – we’re out of gas on government stimulus. If middle class wages have been struggling to rise in good times, what will they do as our consumer economy fades? If wages fall towards developing country levels, what kind of a spiral will we enter as our consumer economy contracts? Keynes was no dope. In the modern world, economies feed on themselves, for good or ill. As ours shrinks, everyone will suffer.
So what’s the cure? Start with the Shared Economic Growth proposal, explained in detail with lots more background at www.sharedeconomicgrowth.org . Shared Economic Growth would allow corporations a deduction for the dividends they pay out, but otherwise would leave the current corporate tax in place at current rates. This means that corporate operations conducted in the U.S. could be effectively tax free, creating a huge incentive to move high value operations to America. This would overnight become the best place to conduct R&D, headquarters operations, high tech manufacturing, and everything else that tends to provide high value jobs. As corporations responded to those incentives, they would need to hire employees. This would give employees market power, effectively eliminating foreign competitive pressure until U.S. wages reached an equilibrium level offsetting the tax benefit of being here.
Would this be a corporate giveaway ladling cash out to the wealthy and boosting the deficit? No. Corporations would only get a benefit to the extent that they paid out their cash within 2 years after earning it. (If you are naturally inclined to dislike corporate power, think about the implications of corporations having to cough up their cash and ask investors to give it back again.) Since corporations currently hoard most of their cash, if they instead maximized this tax benefit (as their shareholders would surely press them to do) the proposal would be largely self funding, since the incremental dividends would be taxed at the individual level. Some incremental offset would be needed, and I recommend two particular things, though others would be possible. First, I would eliminate the special tax rates for capital gains and dividends. This would take a huge amount of game playing out of the tax system that causes billionaires to be taxed at lower effective rates than their secretaries, and would reinforce the intended operation of the proposal in important ways.
That in itself would be the only necessary offset if it wasn’t for the fact that much stock is held by non-taxable pension funds and charities. Most people do not realize it, but a primary effect of the corporate tax is to impose a hidden 35% tax on their IRAs, 401(k)s, and other supposedly tax free investment vehicles, and Shared Economic Growth would eliminate that hidden tax. To offset the lost revenue on dividends flowing to such nontaxable holders, I would impose a 7.5% incremental tax on individual income in excess of $500,000 a year. That would still leave individuals in that bracket with a marginal rate well under 50%, it would do much to address our looming retirement problems without gimmicks, and it would help to ensure that the flow of direct benefit from lifting the corporate tax wouldn’t flow too heavily to the group of fortunate individuals that hold most of the stock outside of pension savings.
That’s it. Simple, easy to enact, easy to administer, doesn’t open up new loopholes, but the benefit to America and American workers would be huge.
Proposal number two is on the immigration side. The argument that keeps being raised for not just stopping illegal immigration by really going after employers (you don’t need a fence if illegal immigrants can’t find a job – they will just go home) is that America needs them to “do the jobs that Americans won’t do”. So, let’s test that proposition by allowing guest workers for jobs (not requiring a college degree) where the sponsoring employer agrees to pay them at least three times the U.S. minimum wage. If we really want those jobs done that “nobody will do”, surely we can pay three times the minimum wage to make it happen. And if you, dear reader, wouldn’t do that job at that price, then I suggest that you should not object to paying someone else that much to do it. What’s the effect of that change? Suddenly, there would no longer be a race to the bottom for inherently local jobs. Employers would desperately try to recruit native-born Americans to replace the guest workers at somewhat lower wages. But, unlike a minimum wage change, this would have no impact on wage-intensive mobile manufacturing or service jobs, other than through the general increase in demand for labor. If a U.S. manufacturing job moves abroad because all its workers were attracted to above-minimum wage jobs at another company, that’s OK. This would not be a panacea for the low-skill part of the job market, but it would be a well tailored, free-market friendly big step in the right direction.
Shared Economic Growth and smart immigration would make a huge difference at a time when America really needs it, but neither one will happen unless people help to spread the work and force such proposals into the public conversation. The Powers That Be won’t do it. Neither political party will do it. It has to come from Americans who care about reforming our country for the sake of all Americans and our children. Be part of that awakening to the possibilities for real, simple, effective change. Spread the word.
Matt Lykken is the Vice President, Tax for a Fortune 250 multinational and the Director of SharedEconomicGrowth.org.