Liberal, Irreverent

Tuesday, April 26, 2011

The new corporate business model: higher

Update) The new corporate business model: higher profits, fewer jobs

Posted: 25 Apr 2011 11:42 AM PDT

Posted by AzBlueMeanie:

In a story I did not get to last week while the Tea-Publican Arizona legislature was laying waste to our state, the Wall Street Journal reported Big U.S. Firms Shift Hiring Abroad (subscription) summarized at the Huffington PostU.S Multinationals Increasingly Hiring Abroad, Firing At Home:

In the last decade, American multinational corporations, which together employ one-fifth of all U.S. workers, decreased domestic employment by 2.9 million workers while adding 2.4 million jobs overseas, the Commerce Department reported on Monday.

In 2009, a devastating year for the global economy, U.S. multinational companies' worldwide employment shrunk by 4.1 percent to 31.3 million workers. But the cuts were much sharper at home than abroad. Domestic employment by the same companies shrunk by 5.3 percent, leaving 21.1 million with jobs, while their overseas counterparts lost 1.5 percent of their workforce, with 10.3 million still employed.

"Emerging markets [are] growing at two-and-a-half times the speed of industrialized countries, which has made it imperative for companies to look abroad for opportunities," said Lynn Reaser, chief economist at Point Loma Nazarene University in San Diego.

For large American multinationals, the geopraphical calculus is simple: Follow the money.

"[The report] is not surprising at all. It is harder and harder for companies in the U.S. to find the right skilled labor at the right price point," said Dave Niles, president of SSA &Co, a global operations consulting firm.

Because for multinational corporations it's always about exploiting "cheap labor." They, of course, deny this:

General Electric Chief Executive Jeffrey Immelt [the company that paid no U.S. income taxes] also told the WSJ moving abroad was less about cheap labor than about deploying resources in countries with growing demand for their products. In 2000, GE conducted 30 percent of its business in other countries; today, that figure reaches 60 percent.

This is true, but how exactly does this help Americans who are unemployed?

The Commerce Department's report cuts to the heart of a crucial question about the state of the American economy, economists say. Can growth abroad for U.S. corporations be good for both companies and consumers?

MonopolybSome argue the trend toward hiring workers abroad benefits both groups. Firms enjoy lowered manufacturing costs and an increased access to foreign markets, while consumers can purchase cheaper goods.

"It's good for companies and its also in someways the unfortunate reality of our economy. Is it good for consumers? Yeah. Because you're getting higher quality product at a lower price," Niles said.

Wait for it, here comes the "Obvious Man" moment of "Doh!":

But other economists point out an apparent Catch 22. Even if some goods become more affordable, consumers' spending power is undercut when jobs disappear from the American economy.

"The long point of all of this is that those jobs that were generating solid wages are very few and far between in the United States now. You look around and ask yourself, where is the middle class? Where are they working and how much are they making?" asked Ken Perkins, president of the RetailMetrics LLC research firm. "The middle class is really what led to the boom of the retail industry ... Where is the American consumer going to get money to spend more?"

And here is the cold hard reality of the new corporate business model: higher profits, fewer jobs:

"One of the things that's generating the huge rebound in profits in the United States -- a rebound that is so astonishing that profits exceed what we saw at the peak of the last economic expansion -- is that the profits of these companies are more and more divorced from their actual operations here in the United States," said Gary Burtless, a economist at the Brookings Institute. "So now we can this situation where companies' profits are going gangbusters even though the U.S. economy has 8.8 percent unemployment."

* * *

"Most of the [new] employment that we will be seeing will be multinationals hiring in developing economies. That's where we'll see the most dynamic activity; that's where economic momentum will remain very strong."

Which begs the question, "why are we giving tax breaks to multinational corporations?" Lower corporate taxes won't create more jobs - Fortune Finance:

One of [Paul Ryan's] key proposals is to lower the income tax rate paid by corporations, from 35% to 25%, by eliminating several tax loopholes and deductions. Simplifying the tax code would certainly remove a lot of uncertainties from today's highly complex tax system. Executives have often complained that one of the reasons they've been holding off on new investments and more hiring is the unpredictable tax environment. But how will lowering the tax burden for companies that are already flushed with record levels of cash really going to make the average American better off?

Compared with other advanced economies, companies doing business in the U.S. already pay low taxes. It's true that at 35% the corporate tax rate is technicallyhigher than most major economies. But because of loopholes and other deductions, most companies pay significantly less – so the effective rate (or the percentage of corporate profits that is paid in federal corporate taxes) is about 13% to 15%, which is relatively low even by international standards. [And less than the rate you pay.]

* * *

[W]hat will lowering the corporate tax do?

For one, it likely won't create much more investment or create many more jobs, says Robert Lynch, economics professor at Washington College, who has done extensive research into taxation and economic development. In a 2004 study, Lynch found that firms don't necessarily relocate or expand to an area more just because it has lower taxes. What's more, while a lower tax rate reduces costs for companies and creates some positive effects on local economies, it doesn't necessarily create substantial jobs.

* * *

What worries the economist is that any cuts to corporate taxes would take funding away from other public services such as education, new roads and infrastructure projects that companies and the overall economy might gain more from. [The short-sighted approach the Tea-Publican Arizona legislature just adopted,]

"Companies aren't suffering from a lack of investment funds," Lynch says, pointing to record cash levels held by America's biggest companies. "What they're suffering from is lack of profitable investment opportunities."

Even as many non-financial companies sit on an estimated $2 trillion at a time when interest rates have remained at nearly 0%, executives still aren't hiring much. Indeed, much of that capital is sitting overseas and there's a coordinated push among some of America's biggest companies to bring those funds home at lower costs. Cisco (CSCO), Apple (AAPL), Duke Energy (DUK) and Pfizer (PFE) are leading an effort for a one-year tax holiday on foreign earnings that would allow companies to repatriate money at a much lower tax rate of about 5%.

Wait for it, here comes the next "Obvious Man" moment of "Doh!":

But while the idea of bringing more capital into the domestic economy sounds like a good thing, it won't likely mean much for the average American. In 2004, Congress approved a one-year tax holiday as part of a jobs package, resulting in companies bringing back $362 billion. But, as Fortune's Tory Newmyer pointed out in February, studies have shown that most of the funds went to shareholders. Even while Congress passed several rules to make sure the funds would get invested back into the companies, not very much went to research, investment or hiring.

* * *

If history tells us anything, [increased wages are] unlikely. The effective corporate tax rate has been steadily declining for decades. Corporations paid more than 49% of their profits in federal taxes in the 1950s, 38% in the 1960s, 33% in the 1970s and 25% in the 1980s. All the while, U.S. wages have been stagnant for years even as productivity has risen. Between 1989 and 2010, U.S. productivity grew by 62.5% -- far outpacing wages, which grew by only 12% during the same period, according to a March 2011 study by the Economic Policy Institute.

So what will a lower corporate tax rate do?

It will make the ├╝ber-rich even richer and usher in the new order of corporatocracy and serfdom for the rest of us. If we don't reverse the tide now, it may be too late.

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