Barack Obama: His Economic Blind Spot

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Robert of NE, have you noticed how US companies have passed on the massively reduced costs of production by using $1 a day slave laborers in China, Bangladesh, Honduras, etc.? Have you noticed that the Ralph Lauren shirt you're wearing that was made in the third world for a production cost of no more than $1.75 cost you $145? Companies do not charge based on production costs unless they are selling steel or commodities or something. Companies sell based on what the market will bear. What the market will bear in the United States has to do with a complex of factors including how much total credit card credit lines "consumers" have, whether they have some home equity left, or can at least get a fraudulent appraisal saying they do so that they can get a HELOC or 2nd mortgage to refinance their credit card debt (and get a tax write off on that great Coach bag that cost $12 to produce and for which the wise consumer paid $350 and has financed it at 16% over two years to get frequent flier miles!).
It's not a question of companies being evil. It's a question of where the tax money is going to come from. It's got to come from somewhere -- although maybe not as Mr. Bernanke formally announced his new campaign has begun to simply print money by purchasing mortgage bonds and securitized car loans and credit card loans as well as Treasury debt.
Right now the payroll tax which takes 6% each from employer and employee up to about $100,000 and zero after that makes it so that people making $150,000 a year and less pay a higher percentage of income in taxes than people making a lot more. But this is social security which is a retirement fund, so it's not the same, right? Wrong, there isn't money in the Social Security Trust Fund. The Feds took almost $3 trillion from there and replaced it with IOUs that they will presumably repay by taxing the same person again to pay back the squandered money that was already taken from him.
The tax situation is much more complex than many "Duh, why tax corporations when they make jobs and make things and provide us with shopping malls, etc." people think. The public thinks taxes redistribute money from the rich to the poor, but nothing could be further from the truth. In reality, it appears that taxes redistribute wealth from politically unconnected groups to politically connected ones.

Sean of CA 6:01AM December 08, 2008

This proposal reminds me of the scene in "Blazing Saddles" when a new black sheriff rides into town and is confronted by angry townspeople, who were expecting a white man. He unholsters his revolver, puts it to his head, and says
"Anybody make a move, the n----- get it!"
Even if it was good economics, which it isn't, the passage of such a bill is about as likely as a snowball's safe passage through the hottest corner of the fires of hell.

mp of IL 4:07AM December 07, 2008

DG in IL,
Thanks for clearing up the misdirection.
Jack in MN,
1. Measuring the success or failure of the economic policy of the past 25 years based solely on the amount of debt accumulated is a joke. It is a negative, to be sure, but hardly proof of economic disaster. (Good catch on the 2003 start date for Reaganomics; I meant 1983, which is when the Reagan tax cuts took effect. Anything before that is pre-Reganomics.)
2. Lowering corporate taxes would increase ROI and prompt increased risk taking on the margin. Corporations are not going to alter their current, risk-averse behavior and expand their operations based on a manufactured inflation of the Demand Curve by the government. Consumers could beat down their doors all day long with government money, but that doesn't mean they'd hire even one more worker, and that's what it's all about in the end for nearly every American - employment. A healthy economy is dependent on vibrant, risk-taking corporations.
3. Ireland has experienced an economic renaissance, primarily because of their capital friendly tax policies. Tax rates matter.
Interestingly, as Pethokoukis points out, one of Obama's economic advisors, Christina Romer, is highly conscious of the effects that tax policy have on output. James refers to Obama's economic blind spot but misses the tax cutter in our next president's midst. He neeeds to read his own blog...

Dean of MN 1:39AM December 01, 2008

Reich is a moron. Why, in a country that is the poster child for entrepreneurship, the little guy working toward his dream and prosperous hard work for free men do we hate people who are rich? I sure don't and I'm far from rich. I'm also not very greedy nor am I a jealous person. So if a guy busts his a** making himslef wealthy why does everybody point their finger at him and say: "There he is, take his! Take his!" Insanity. I'll tell you this, I have never gotten a job from a poor man. And corporations that are prosperous create jobs and drive investment portfolios. You'd think that the first job of government would be to keep these people and entities here on our shores (creating jobs and investment) instead of driving them to other countries. But instead we watch our elected "leaders" do the class warfare game and then the stupid and greedy buy into the program. Well I don't.
It's Econ 101 kiddies. Giving a dollar to Washington DC, letting them skim off 50 or 60 percent and then releasing the remainder to the favored group (who was the biggest donor?) as a job or grant or whatever is the worst thing you can do (just a fraction of its buying power is gone to say nothing of the wrong place) but we have guys like Reich, Krugman (they gave that guy a Nobel!?) calling for this as a way to save the economy! What!?
The only problem with Capitalism is the role Washington DC regulation has played in it. Half baked regulation (CSR, SarBox, two tier CAFE, Brown, etc., the list is loooooongggg), excessive taxation, the shirking of what regulating they SHOULD be doing and bending to the tort bar special interests are killing Capitalism. Hell a list like that would kill any economic model you want to name.
A bloated corrupt Washington DC is the enemy folks, not the rich or corporations.

G Jiggy of WA 1:03AM December 01, 2008

The current acct. balance would be greatly improved if foreign oil imports are reduced. The new diesel engine to be built in Europe would help. If we would add these fuel efficient cars to our existing fleet we would soon not need the mid-east oil. Just lower diesel taxes and raise gasoline road taxes to equal same tax revenue as now and everyone would want one. If the gov. wants to help Detroit this engine would be the trigger to a new standard for fuel effieciency.

Jay of Kansas of KS 8:13PM November 30, 2008

Yes we could give corporations tax cut while making the heads of corporations gov't employee in order to have more control over what corporations are doing. I like trade offs where you give something and you get something. Right now there is complete corporate freedom and the heads are using it as there piggy bank. There is a need for corporate reform and starting at the top would be a good beginning.

Arthur Gittleman of AR 5:18PM November 29, 2008

That post should have been addressed to Jack of MN

DG of IL 4:05PM November 29, 2008

Dean,
1. How in the world does "classical economics" become a failure because the Congress (that known bastion of classical economists, to be sure) refused to rein in spending while the economy was growing all those years? Without "classical economics" underlying our policies, that deficit would have been what? 15 trillion? 30 trillion? One only need compare our growth rates with the growth rates of Europe over the past quarter century to get a sense of how much lower tax revenues could have been during that time.
2. If you put in place a corporate tax holiday, I'm pretty sure companies would then lower their prices, which would enable consumers to spend less money for the same amount of goods. Or are demand curves too "classical economics"-esque for you?
3. You contradict yourself by saying "Corporate taxes have nothing to do with outsourcing" and then saying that corporations transfer "profits from US operations to foreign subsidiaries with much reduced tax rates". Are you implying that these companies just pick a foreign subsidiary at random to transfer their US profits to or do they actually look at the implications of their tax bill in doing so? Also, I've been studying public corporate income statements (primarily Fortune 500) for nearly a decade and I've yet to see any corporations that pay less than a 20-25% tax rate when they actually have positive income. My understanding is that GAO study didn't take into account that most corporations are S Corps and pay individual income taxes on their profits. I could be wrong about that (although of course, I won't just take your word for it, I'd need a link), but that's my recollection and I remember clicking through to the underlying analysis precisely because it contradicted my own experience as a reader of income statements, which I spend plenty of time doing for my job.

DG of IL 3:57PM November 29, 2008

Dean from Minnesota
1) Since the advent of Reaganomics in 1981 (not 2003) the national debt has gone from negligable to $10+ trillion, $3 trillion of which was added by Bush BEFORE the current credit crunch and bailout mania. If your numbers are correct, they can be entirely accounted for by the borrowing we have done from China and elsewhere. Not much to crow about there?
2) According to standard macroeconomic theory, you can do either of two things with a dollar earned, you can spend it or you can save it. Buying stocks and bonds is considered savings because it is simply a conversion of money from one form (cash) to another (investment). No economic benefit accrues from such investments until corporations actually use them for capital investments which is precisely what they are NOT doing right now. Reich is absolutely correct. Businesses will continue to conserve their capital until consumers again have both the means and the will to buy their products.
3) Corporate taxes have next to nothing to do with the reasons for outsourcing. As a recent GAO study concluded, 60% of U.S. businesses pay no taxes at all. Current federal tax policy encourages corporations to legally dodge taxes by incorporating in nations that have no income tax as well as by transferring profits from U.S. operations to foreign subsidiaries with much reduced tax rates. And who knows how much the Treasury loses to illegal tax dodges and unreported tax liabilities?
Bottom line is: you have been swallowing whole way too many Republican sound bites.

Jack of MN 11:06AM November 29, 2008

phoenician lady,
One big reason that US corporation move operations overseas is because the US corporate income tax rate is one of the highest, if not the highest, in the world. The cost of doing business in the USA is increasingly uncompetitive. Lower the rate and investment in the US will increase and job creation along with it.
jeebus,
Thanks for the use of not one, not two, but three exclamation points. Makes your cogent argument that much more powerful.

Dean of MN 9:12AM November 29, 2008