Fix our economy, Part I

There is an unknown amount of earnings made by US companies abroad that is not brought home (like selling an iphone in Germany and putting the money in a German bank.). This is putting a huge crunch on the American economy.  My international economist says this is staggeringly significant but little-noted by the news media. Here’s what he says is happening.

            Obama rescinded a program whereby US companies who have paid taxes on foreign profits would not be double taxed upon bringing those earnings home in 2009.  The thought was “plugging this loophole” would glean more tax money.  Instead, it has just parked funds abroad as companies choked over paying 35% taxes on dollars brought home.  Consequently, profits that could be plowed into US expansion of the economy are being held in limbo overseas.  But the Dems aren’t about to lower or forego the taxes.  They want government revenue worse than a vibrant economy. Heck, a bad economy just drives everyone into the arms of government dole.

            Why would repatriation help the US economy and not simply sit in an American bank as it is now doing overseas?  Just watch the next episode of House Hunters International, my econ guy notes.  You will notice a lot of foreigners do a lot of chilling out and hanging around.  Indeed, in much of Europe, unemployment of twenty-somethings is so high that it has become standard practice for kids to return from a college or tech degree to live at home until they are 30-40 years old.  Or as one wag put it, “Jesus must have really been Italian.  He ate olives, drank wine, wore sandals and stayed at home until he was 30 years old.” Workers put under such duress, lose skills.  Workers under heavy regulations don’t create new things.  Hence attempts to move production abroad by US companies have often ended in disasters as the foreign workers couldn’t handle the tasks or technical aspects of the products. 

            An example.  Much of Apple’s manufacturing is now abroad, but the engineering and brains stays in USA. Only Americans seem to develop new designs and products.  France wants a 30 hour work week. India doesn’t do a lot of tinkering required of engineers.   If Apple could repatriate the dollars they would expand new product development here at home.  But why do that when the dollar was taxed at 10% in Ireland but now faces 35 cents grabbed by the US government?   

            How much money is at stake?  Estimates are $10-$20 trillion.  Think of it this way. That’s roughly the same as the US GDP of $16 T or 1/5 the net worth of America. 

            Err, suppose we were to hold a six month tax holiday: No taxes on any assets that could make it back to USA within six months.  The result would be an explosion of wealth itching for development in US companies.  But Obama hates this.  Not only does he get no revenue from this exercise but he then is faced with the political pressure to continue the moratorium—since it would be so wildly successful.  But a Republican congress could do it over his head or with a Republican President this could be enacted.

            Or, businesses will find a sly trick.  Costco had millions abroad.  Here’s what they did.  Suppose your company has, say $100 million, trapped abroad.  So you float a bond for $100 million here at home at say, 3% for say, 10 years.  Then you use your foreign money to be the sinking fund to pay off the bond.  Result: you get $100 million in quick cash in your US bank and pay 3% on it for ten years.  The foreign money simply disappears.  No 35% tax.  Obama hates your guts.  Obama demands a government agent be seated at your board meetings like he did to Apple.

            Meanwhile Obama is pressing for “growing the economy from the middle out” whatever that means.  Probably it is a fantasy of the middle class creating jobs or just a feel-good line of talk about how the middle class is important to him. Let me show why the middle class can’t create jobs.  Remember those guys in foreign places who spend a lot of time hanging out or living at home? Talk to many European middle class workers and they will tell you they are working 2 or 3 jobs in order to support their lifestyle.  That is what economists call an economic structural problem.  So many hurdles are put in place by government that businesses are finding ways around the rules—paying cash, hiring contract labor, hiring part time,etc. And the part time gang can’t create much in the way of new development. Here in USA, we know that unemployment is significantly education stratified.  Unemployment among less than high school degree folks is 12.6%  Among high school grads, it is 8.6%.  Among college associates degree folks it is 7.0%.  For bachelor’s degree workers it is 3.8%  The educated are virtually fully employed. Now you tell me how we are going to stimulate the 7-12.6% guys in some way so that they can “create jobs” among the already fully employed better-educated middle class.  The 7-12.6 guys struggling with part time employment don’t create new products.

            Germany is thriving today for a simple reason.  Under the unlikely Gerhardt Schroeder, they decided to lower mandatory job benefits.  The 2 year unemployment benefits (about like USA’s 99 weeks) was lowered to 5 months.  Under Merkel more changes.  Min wage was cut.  Prolonged health care after a layoff was cut considerably. This is the stuff that small businesses worry about.  (A Fortune 500 company doesn’t worry about healthcare.  They worry about repatriation of assets) And as a result, small business has blossomed, unemployment among the young is a quantum leap higher than the rest of Europe, and their economy soars while the rest of EU languishes. Are we to be Germany or Greece? I just pray for a Republican for change.