Thursday, February 16, 2012

Is The Obama Administration Really This Clueless About US Companies' Global Competitiveness? (UDATED)

In Sunday's Chicago Tribune, Caterpillar CEO Doug Oberhelman explained why his manufacturing powerhouse has no plans to expand business operations in its home state of Illinois.  The whole op-ed is worth reading, but here are the money grafs:
Despite the fact that we announced plans for dozens of new factories in the last few years and our United States workforce increased by more than 14,500 in the past 10 years, we haven't opened a new factory in Illinois in decades. Our Illinois workforce is at the same level it was 10 years ago. Caterpillar recently informed several Illinois communities that they are not in the running for a new factory we will build in the U.S., ultimately adding 1,400 jobs — work that's now done in Japan. In that case, logistics was a key factor, but even if it were not the case, when Caterpillar and most other companies look to locate a new factory in the U.S., Illinois is not in the running.

It doesn't have to be that way.

About 10 months ago I wrote a letter to Illinois political leaders expressing my hope that the state would undertake long-term, fundamental reforms so Illinois could compete for jobs and long-term business investment that drives growth.

To date, we haven't seen much change.

The governor's recent three-year projection of state revenue and spending proves that even with the income tax increase, Illinois has not done what is necessary to balance its budget. Major credit agencies have downgraded the state's bond rating. The state passed some changes to workers' compensation last spring, but it wasn't enough. Illinois will still be among the most expensive states in the nation for workers' compensation insurance. Our own comparison of workers' compensation costs showed Illinois was far more costly than neighboring Indiana, which is consistent with a comparative study by Oregon, which also shows Illinois is much more expensive than Indiana, Iowa and Kansas in workers' compensation insurance rates.

What's the solution? For starters, Illinois needs to adopt a long-term sustainable state budget that relieves pressures on taxpayers. Unlike some, I do not favor an early rollback of the temporary tax increases in Illinois; but they should expire as planned. Keeping the temporary tax increases in place for now gives the state time to develop a multiyear plan that balances the state budget. In addition, the state needs to dramatically lower workers' compensation costs. Some say these changes are not politically possible in Illinois. But if Illinoisans put pressure on both parties to make these types of improvements, I think the state can become a place that can successfully compete for business growth and new jobs.

Let me be clear. Caterpillar is not threatening to leave Illinois. Rather, we want to grow our presence here. For Illinois to really compete for new business investment and growth, the state must address these matters.
In short, high taxes, fiscal profligacy and bad regulation - not the absence of state subsidies or other taxpayer-funded "incentives" - prohibit Caterpillar from both locating new business operations in Illinois and remaining globally competitive (a critical issue for the export-dependent company).  Mr. Oberhelman was speaking about state-level policies, but the principles he describes apply equally to national policy.

Unfortunately, the Obama administration does not appear to understand these principles and is instead cluelessly pursuing the exact opposite course.  I've already explained repeatedly how existing US regulations - and new ones like ObamaCare - are doing a number on American businesses' ability to compete on the global stage, so I won't get into that again tonight. [UPDATEBrand new - and totally depressing - stuff from The Economist on how the United States "is being suffocated by excessive and badly written regulation."]  Instead, I'd like to review the administration's brand new budget plans and their impact on American corporate competitiveness.

In short, it ain't pretty.

On tax policy, the budget keeps the United States' corporate tax rate at one of the highest levels in the world, even though pretty much every other industrialized economy has lowered their rates (charts courtesy of AEI's Jim Pethokoukis):

Pethokoukis cites to studies showing how high corporate tax rates lead to lower growth, and then explains that President Obama's budget not only retains our sky-high 35% stautory rate but also "raise the corporate tax burden by some $350 billion over ten years."  This insanity includes $30 billion in new taxes on oil & gas companies, even though they are fueling (pun intended) the current economic recovery and already pay a much higher effective tax rate than other US manufacturers:

Smart.  Meanwhile, our northern neighbor (and a major global competitor) Canada lowered its corporate tax rate again to a jealousy-inducing 15% on January 1, 2012, making Canada the #1 country in the world to do business, according to Forbes Magazine.  Congrats, Canada.  You big jerks.  (As I said, I'm jealous.)

Ok, well, sure, that's just tax policy.  I'm sure that those taxes are being well spent in the Obama budget and making sure that the United States house is totally in order, right?  Wrong (again via Pethokoukis, who's clearly been on a roll this week):

Pethokoukis concludes that the President's Budget "makes no effort to deal with Medicare, Medicaid, and Social Security — the long-term drivers of U.S. federal debt. The debt curve never gets bent, as the above White House(!) chart shows. It just goes up and up and up — until the heat death of the universe or the economy is struck by a Greek-style debt crisis."  Holy souvlaki, Jim!

So the Obama budget kills US companies on regulations, taxes and debt, but how does the administration propose to help them?  Targeted subsidies for US manufacturing, of course.  The administration's "Blueprint to Support U.S. Manufacturing Jobs, Discourage Outsourcing, and Encourage Insourcing" pays lip service to broader tax reform, but never once actually provides even a hint as to what such reform would look like. Instead, it just provides a laundry list of new tax subsidies for US manufacturers - including expanding "domestic production incentives," a new "Manufacturing Communities Tax Credit," and temporary tax credits for "domestic clean energy manufacturing."  (The plan also proposes - in tellingly vague fashion - to eliminate tax breaks for "shipping jobs overseas," but we all know what a political joke that is.)

Unfortunately, the administration's manufacturing blueprint - which continues the President's long-held preference for manufacturing - is just as misguided as their broader tax and fiscal plans.  As I've repeatedly noted, the prioritization and subsidization of US manufacturing over other sectors of the domestic economy (like our expanding and globally dominant services sector) is completely misguided, especially as some sort of "plan" to solve the country's high unemployment.

But, hey, don't take my word for it.  The former Chair of President Obama’s Council of Economic Advisers (Christina Romer) thinks the same thing, recently arguing in the New York Times that Obama's "singling out of manufacturing for special tax breaks and support" was wrongheaded because none of the primary rationales for subsidizing the American manufacturing sector - market failures, jobs or income distribution - actually holds any water.  She concludes:
AS an economic historian, I appreciate what manufacturing has contributed to the United States. It was the engine of growth that allowed us to win two world wars and provided millions of families with a ticket to the middle class. But public policy needs to go beyond sentiment and history. It should be based on hard evidence of market failures, and reliable data on the proposals’ impact on jobs and income inequality. So far, a persuasive case for a manufacturing policy remains to be made, while that for many other economic policies is well established.
As I noted when Romer's op-ed first came out, smart people on the right and left might disagree about the solutions to our current mess, but at least we they all can agree that the solutions do not involve targeted subsidies for the US manufacturing sector.  If only Dr. Romer had explained this obvious fact to President Obama when his office was a just few doors down the hall.

When Caterpillar realizes that Illinois' tax, spending and regulatory policies prevent it from competing in the global economy, it can - and often does - choose to simply move its operations to a state with a better business environment.  Indeed, the migration of American companies from poorly-managed, debt-ridden states like Illinois and California to leaner, meaner states like Texas is well-established.  Unfortunately, those migrating businesses won't escape bad federal policies so easily.  And if President Obama and his team don't soon get their fiscal and regulatory acts together quickly, Caterpillar and others might not be moving South to Texas but instead heading North to Canada and thus out of the country altogether.

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