What Can Be Done to Change this Downward Direction?
I will not discuss here the usual suggestions about better education and more R&D. Proposals of this sort about education and R&D can be helpful. They can only be harmful if they create the mistaken belief that these measures alone can deal with the problem.
The main thrust of this testimony, however, points to the divergence of company goals, focused almost exclusively on profit, and the broader goals of greater GDP and less inequality in the United States. Therefore, we need to turn our attention not only to the familiar suggestions I have just listed, but also to the issue of better aligning corporate and national goals.
Aligning Country and Company
We need to consider a U.S. national economic strategy that includes incentives for companies to have high value-added jobs in the United States. If we want high value-added jobs, let us reward our companies for producing such jobs – whether they do that through R & D and advanced technology, or by just plain American ingenuity applied in any setting whatsoever.
The Asian countries have attracted companies by individual deals with individual companies. We do not have either the tradition or the knowledge or the inclination in the U.S. government to do that. An approach that is better suited to what the United States can do is to use the corporate income tax. We have already used the corporate income tax to spur R&D, so let us use it to directly reward what we are aiming at: High value-added jobs.
One way to do this is to give a corporate tax deduction proportioned to the value added created in the U.S. by a company. Consider two equal size companies, one chooses to send half its work overseas; the other keeps the work in the U.S. The second company will receive double the deduction on its income tax that the offshoring one receives. The effect can be made as strong or as weak as is desired.
Clearly this is only one possibility, if we think in this direction we will find many others.
Balancing Trade – Controlling our own Destiny
If the imbalance of trade continues there is nothing to stop the current trend of transferring ever more wealth and power to foreign governments to balance the import of underpriced foreign goods. On the other hand, if trade is balanced, the value of goods imported is matched to the value of goods exported from the country; and those goods and services are provided by jobs in the U.S.
Balanced trade is necessary if we are to control our own economic destiny. Without it China or other countries can simply pick the productive industries they want to have as their own country and take them over through the usual mercantilist tactics of subsidies, special tax concessions, etc. while accumulating the resulting flow of currency for future use.
What the trade model alluded to earlier also shows is that the ideal position for a country is in fact to be the producer in the most productive industries, while leaving a certain proportion of others to its trading partner. This provides a high standard of living for the country that succeeds in doing this and a much lower one for its trading partner. At present China is the country headed in that dominating direction with its five-year plan, and we are the candidate to be the poorer trading partner with our laissez faire policies. This outcome can be avoided if we prevent these takeovers and keep a substantial proportion of productive activities for ourselves. But this requires balanced trade.
There is of course a litany of approaches to balancing trade ranging from jawboning to tariffs. Tariffs are often dismissed out of hand by economists because of the possibility of retaliatory tariffs from other countries. I only observe here that the approach well described by Warren Buffet (Reference 5) has the remarkable attribute that, if adopted by others as a retaliatory measure, the result is not the destruction of trade, but only balanced trade.[3]
Balanced trade is essential, it can be attained, but at present it is not a recognized goal of either Congress or the Administration.
On Departing from the Status Quo
Changing the direction we are now headed in will be difficult. Wealthy and powerful segments of our society benefit from the status quo and that includes the leadership of our major corporations, much of Wall Street and many others to whom the both the Federal legislature and the Administration turn for advice and political contributions..
Conclusion
To deal successfully with the effect on this country of the rapid industrialization of China, our government needs to take steps to better align the goals of our corporations with the aspirations of our people.
In a globalizing world where nations such as China advance their national interests with well thought out mercantilist policies, it becomes essential to balance trade if we are to control our own destiny. This too calls for new government policies.
I am grateful to the members of the China Commission for inviting me to contribute to their thinking on these matters.
References
[1] Ralph E. Gomory and William J. Baumol, Global Trade and Conflicting National Interests, MIT Press, 2000
[2] Pisano, Gary P., and Willy C. Shih. “Restoring American Competitiveness.” Harvard Business Review 87, nos. 7-8 (July – August 2009).
[3] Spence, Michael, “Globalization and Unemployment”, Foreign Affairs, June 2011
[4] Edward N. Wolff,” Recent Trends in Household Wealth in the United States: Rising Debt and the Middle-Class Squeeze – An Update to 2007”, Working Paper No. 589. Levy Economics Institute of Bard College
[5] Buffett Warren and Loomis Carol J., “The Nation’s Growing Trade Deficit is Selling the Nation Out From Under Us”, Fortune Magazine, November 10, 2003
[6] Grove, Andy, “How America Can Create Jobs”, Bloomberg Businessweek, July 1, 2010
[7] Samuelson, Paul, “Where Ricardo and Mill Rebut and Confirm Arguments of Mainstream Economists Supporting Globalization”, Journal of Economic Perspectives, Volume 18, Number3, Summer 2004
[8] Ralph. E. Gomory and William J. Baumol, “A Linear Ricardo Model With Varying Parameters,” Proceedings of the National Academy of Sciences, U.S.A., 1995, Vol. 92, pp. 1205-1207.
