Just Who's the Real Outsourcer-in-Chief? (UPDATED)

Over the last few weeks, the Obama and Romney campaigns have waged a massive multimedia war over who is the biggest "outsourcer."  Perhaps unsurprisingly, the majority of this political debate is depressingly nonsensical - each side accusing the other of supporting supposedly-awful policies that "ship American jobs overseas" without ever acknowledging the fundamental and repeatedly-proven economic and moral truths about outsourcing and offshoring in America.  I will not waste your time repeating those truths tonight (you can go here and spend a few days reading up, if you'd like) and instead want to look at one aspect of this debate that's been mostly overlooked but, unlike the pablum referenced above, actually does affect private companies' decisions to move certain business activities offshore: whether the economic policies of President Obama and his fellow Democrats have made the United States a more or less attractive place to do business, relative to other countries.

The Washington Examiner's Conn Carroll today picks up on this important point in a great new article.  After warning against wallowing in protectionist ignorance about outsourcing, Carroll notes:

Romney should make the case that Obama ships jobs overseas not just with clumsy green energy investments, but by keeping the U.S. corporate tax rate as the highest rate in the world. His impending Environmental Protection Agency global warming regulations are not helping either. Neither is Obama’s impending tax hike, which is more than double the size of President Clinton’s 1993 tax hike.

This is exactly right, and it's something I'd like to expand upon tonight.  Whether Obama's policies have increased the cost of doing business in the United States is far more important than, for example, whether Bain Capital helped a few companies outsource certain business operations to other countries or whether some stimulus dollars were spent in foreign countries, because such policies actually can encourage - or even force - businesses to locate certain operations and jobs in more hospitable jurisdictions.  And, unlike biased, misinformed pieces from supposedly unbiased newspapers or the campaigns themselves, there are actually two independent, annual studies - one from the World Bank and the other from the World Economic Forum - that measure the relative burdens of business regulations on job creators in pretty much every country in the world.

The evidence from these two reports is abundantly clear: since President Obama and congressional Democrats took charge in 2009, the United States has become an increasingly hostile business environment.  The US government has increased a wide range of tax and regulatory burdens, thereby causing the United States to decline relative to other countries in terms of its ability to attract and retain companies and jobs.  Thus, it appears that President Obama, not Governor Romney, more aptly deserves the title of "outsourcer-in-chief."

That's a pretty significant accusation, so let's dig into the studies.  First up is the World Economic Forum's Global Competitiveness Index, which describes itself as follows:

The GCI comprises 12 categories – the pillars of competitiveness – which together provide a comprehensive picture of a country’s competitiveness landscape. The pillars are: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labour market efficiency, financial market development, technological readiness, market size, business sophistication and innovation.  The rankings are calculated from both publicly available data and the Executive Opinion Survey, a comprehensive annual survey conducted by the World Economic Forum with its network of Partner Institutes. This year, over 14,000 business leaders were polled in a record 142 economies. The survey is designed to capture a broad range of factors affecting an economy’s business climate.

The latest GCI is a depressing read for the United States.  It finds that America's overall global "competitiveness landscape" dropped from 2nd in 2009-10 (reflecting policies from the previous year), to 4th in 2010-11 to 5th this year.  According to the country fact sheet accompanying the latest GCI (emphasis mine):

The United States continues the decline that began three years ago, falling one more position to 5th place. While many structural features continue to make its economy extremely productive, a number of escalating weaknesses have lowered the US ranking in recent years. US companies are highly sophisticated and innovative, supported by an excellent university system that collaborates admirably with the business sector in R&D. Combined with flexible labor markets and the scale opportunities afforded by the sheer size of its domestic economy—the largest in the world by far—these qualities continue to make the United States very competitive. 

On the other hand, there are some weaknesses in particular areas that have deepened since past assessments.  The business community continues to be critical toward public and private institutions (39th). In particular, its trust in politicians is not strong (50th), it remains concerned about the government’s ability to maintain arms-length relationships with the private sector (50th), and it considers that the government spends its resources relatively wastefully (66th). In comparison with last year, policymaking is assessed as less transparent (50th) and regulation as more burdensome (58th). A lack of macroeconomic stability continues to be the United States’ greatest area of weakness (90th). Over the past decade, the country has been running repeated fiscal deficits, leading to burgeoning levels of public indebtedness that are likely to weigh heavily on the country’s future growth. On a more positive note, after having declined for two years in a row, measures of financial market development are showing a hesitant recovery, improving from 31st last year to 22nd overall this year in that pillar.

In short, the US government's dramatic and widespread fiscal mismanagement and heightened regulatory burdens have caused a significant drop in America's business environment, and only certain systemic, non-governmental factors prevent us from falling even further.  Moreover, according to the surveyed CEOs, four of the top five "most problematic factors for doing business" in the United States are directly related to the government's fiscal policy: Tax rates (14.8% of respondents); Inefficient government bureaucracy (13.2%); Tax regulations (10.9%); and Inflation (9.8%).  (Access to financing (12.9%) was the other major concern.)

Unfortunately, the World Bank's Doing Business Report tells a similar story.  I described the Report's methodology in an earlier blog post as follows:

[The Report] ranks 183 national economies on their ease of doing business based on an analysis of ten economic factors: Starting a Business, Dealing with Construction Permits, Getting Electricity, Registering Property, Getting Credit, Protecting Investors, Paying Taxes, Trading Across Borders, Enforcing Contracts, and Resolving Insolvency. As the Bank explains, "a high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm." In short, the higher a country is on the list, the better its business environment.

The World Bank Report only started doing relative rankings in 2011.  This year's version - which covers regulations measured from June 2010 through May 2011 - showed that the United States stayed steady in fourth place overall between 2009-10 and 2010-11 - President Obama's first two years in office.  However, the breakdown of the US score reveals that we dropped in five of the ten economic categories listed above, didn't improve in any category, and rank in the top ten globally in only three:

TOPIC RANKINGS	DB 2012 Rank	DB 2011 Rank	Change in Rank
Starting a Business	13	11	-2
Dealing with Construction Permits	17	17	No change
Getting Electricity	17	16	-1
Registering Property	16	11	-5
Getting Credit	4	4	No change
Protecting Investors	5	5	No change
Paying Taxes	72	70	-2
Trading Across Borders	20	20	No change
Enforcing Contracts	7	7	No change
Resolving Insolvency	15	14	-1

As with the World Bank, the things that the United States does well - enforcing contracts, getting credit and protecting investors - aren't really affected fiscal policies and instead relate to longstanding systemic and legal matters.  On the other hand, one issue that has been in the news a lot recently and most definitely is a fiscal policy matter is the United States' dismal, and dropping, 72nd place ranking in "paying taxes," which the Bank defines as "the taxes and mandatory contributions that a medium-size company must pay in a given year as well as... the administrative burden of paying taxes and contributions."  I explained at the time the ranking came out that--

Basically, US companies pay higher taxes - and have a more difficult time paying them - than 71 other countries. Such a tax burden has a crippling effect on American companies global competitiveness, and the World Bank study is further proof of just how desperately the current US tax system needs a fundamental overhaul.

As Carroll notes above, the United States now has the industrialized world's highest statutory corporate tax rate.  It also has one of the highest effective rates, and the complexity of our existing tax system further increases the immense burden on American businesses.  For example, according to the World Bank's breakdown, the average business located in New York City (the only city surveyed) makes 11 different tax payments, costing 187 hours of preparation time and a whopping 46.7% of its profits (over 25% in federal taxes).  Assuming a 40-hour workweek, this means that the typical New York businessman must dedicate a little under 5 weeks and almost half of his profits to meeting his annual tax obligations.

Yet when they had total control of the US government in 2009 and 2010, President Obama and Congressional Democrats did nothing to reform these long-term tax burdens and instead fought tooth and nail to increase them, most notably through the myriad new taxes in Obamacare.

And just this past week, the President and his fellow Democrats have sought to make things even worse by seeking to raise taxes on over 900,000 small businessmen who pay taxes at the individual level (while maintaining current rates for all others) and to pass short-term extensions of piecemeal tax breaks for certain small businesses.  The latter measures are intended to "help" small businesses but, as most economists will tell you, don't improve America's business climate because (i) prohibit long-term business planning; (ii) increase tax complexity (which disproportionately hurts small businesses that can't afford armies of lawyers and accountants); and (iii) encourage system-gaming and outright fraud, while discouraging business growth (i.e., small businesses becoming larger businesses and thus outgrowing their eligibility for the tax breaks).

We rank 72nd in the world – 72nd – in terms of total business tax burden, yet this is President Obama's latest plan?  But I digress...

As I've repeatedly explained here, a private company's decision to move certain business activities offshore is a complex determination of whether the total cost of doing business - including things like labor costs, transportation, and regulatory burdens - is higher in a foreign jurisdiction or in the United States.  When these costs become unbearable here, the company is faced with two choices: end the business activity or move offshore to a more hospitable environment.  Two detailed, independent and well-regarded studies show unequivocally that, over the last three years, the tax and other regulatory policies of President Obama and his fellow congressional Democrats have significantly increased the cost of doing business in the United States, thereby creating a job-killing riptide that pulls US companies offshore.  It's simply beyond the pale for them to now condemn any private company for going with the flow.

UPDATE 1:  In an amazing coincidence, Cato's Dan Ikenson this morning (Thurs) publishes an epic rant about this very same issue and, in the process, takes a fun jab at one of my favorite protectionist punching bags - the Economic Policy Institute.  I highly recommend you check Ikenson's article out.

UPDATE 2:  Also today, the Washington Post's wonkbook notes the publication of a new study on manufacturing offshoring in the United States.  Main conclusion:

[T]he researchers found that increasing offshore jobs by 1 percent is linked to a 1.72 percent increase in overall U.S. employment of native workers, though they describe the effect as neutral overall because the 0.72 percent difference is too small to be statistically significant. Offshoring also tends to push native U.S. workers toward more complex jobs, while offshore workers tend to specialize in less-skilled employment.

This, of course, is consistent with every other reputable study out there on the subject (sorry, EPI).  My only question: when will the wonkbook folks talk with their WaPo colleagues who ignorantly published this nonsense about the supposed harms of outsourcing?