From the January 2011 issue of Research Magazine • Subscribe!

January 1, 2011

Abandoning America

Big companies are giving up on the U.S.

The U.S. government is broke, heavily in debt and over the past two fiscal years it has run up $2.7 trillion of red ink. It is on track for another trillion dollar deficit in fiscal 2011. You don’t have to be an economist to see that these are signposts to financial ruin.

Since the 2010 midterm election, several authoritative commissions have released recommendations on how to restore fiscal health. While prescriptions differ, they all list hard — even impossible — choices. Raising taxes or cutting spending will be painful, suicidal for politicians and deadly for the economy, which remains stagnant even though federal deficits are providing nearly 10 percent of GDP. But neither higher taxes nor lower spending will work. The only way out of the fiscal hole is to return the economy to growth. The question is how.

Myths About Government

Americans believe that they’re heavily taxed. Yet, we pay less in taxes than citizens in other rich countries — while spending more on defense than the next dozen nations combined. In 2009, our tax burden measured 9.2 percent of personal income, versus an average of some 12 percent over the past half-century. Our taxes have not been this low since 1950.

The current anti-government ethos is rooted in myth. The public sector may not be efficient, but it provides goods and services which the private sector, driven as it is by the profit motive, simply doesn’t. Over the past 70 years, the federal government fought and defeated Germany and Japan, created the postwar global economic system and built history’s most formidable military. In science, federal programs harnessed nuclear energy and developed the space program. The government created the Internet and its military contracts gave a leg up to the high-tech sector, from Silicon Valley to Boeing.

Federal and local authorities constructed interstate highways, underpinned the world’s best academic research establishment and defeated the crime wave of the 1970s and 1980s, to list a few examples.

These successes have been vital for U.S. business at all levels. Without them, businesses large and small would never have prospered. In fact, throughout postwar history, the greatest American achievements have all been public-private partnerships, with Washington taking the initiative and harnessing the ingenuity, expertise and managerial talent of the private sector. It stands to reason that if we are to overcome current challenges, we should rely on a model that has worked so well in the past.

In November, Google gave a 10 percent raise and a bonus to its employees in order to prevent defections. With the jobless rate nearing 10 percent, this validates the claim by businesses that they have trouble finding qualified personnel to fill job openings. As part of unemployment benefits, the government and the high-tech sector should be teaming up to provide training to workers who lost their jobs in manufacturing and construction. If the U.S. doesn’t spend money to upgrade its workers’ skills, those jobs will migrate to countries that do.

What’s Good for GM

But big business doesn’t seem interested in this kind of partnership.  The 2010 campaign was the most expensive midterm election ever, costing nearly $4 billion. Conservatives outspent liberals by around 2-to-1. Corporate donors, taking advantage of the Supreme Court ruling last January protecting their donations, have been a major factor in this disparity. Businesses often fund both parties on issues of practical importance, but by some estimates in last year’s elections at least $300 million of corporate money went to purely ideological anti-tax, anti-spending causes.

More than anybody else, corporate executives understand that to make money you need to invest. It stands to reason that the U.S. needs to invest in education, science, technology and infrastructure in order to prosper. If big business has a stake in American prosperity, then it is shooting itself in the foot.

The problem is it doesn’t have any such stake.

Take General Motors. You would think that its hugely successful IPO signaled a rebound of U.S. industrial capitalism. Not only does GM make money, but most of its $2.28 billion third quarter operating profit came from North America. It is profitable even though U.S. car sales remain at sluggish levels, down nearly a third from their peak.

Profitability has resulted from ruthless cost cutting. By going through bankruptcy, GM was able to get out of unfavorable contracts and reduce its obligations, most notably retirement benefits. It also shut down plants and eliminated tens of thousands of jobs.

There have been some positive results. Chevys have become competitive with Toyotas and Hyundais — especially since a weak dollar pushed import prices higher.

But GM’s U.S. business is stagnant. Expansion is taking place elsewhere, notably in the BRIC countries, Brazil, Russia, India and China. Auto sales in the BRICs are forecast to increase by 14 million in the next five years. While GM performed poorly in the U.S., losing market share and reputation, it did very well abroad, holding a 13 percent market share in BRIC countries and beating out Volkswagen and Toyota.

Motor vehicle sales in China, the world’s largest market, are set to expand from 13 million in 2009 to 17 million in 2010 and 20 million in 2011. GM, like Volkswagen, has become a China market leader. Sales growth and high profits in China mitigated GM’s poor U.S. performance, limiting its losses in 2005-2008 to just $60 billion. GM now sells some 2 million vehicles in China, at least as many as in its home market.

China is also where GM is investing and expanding.  It plans to compete with Chinese automakers at the lower end of the market and has announced its intention to export its Chinese-made cars around the world, including the U.S. Its joint venture with SAIC, the largest Chinese automaker, is taking on India, the next automotive El Dorado.

In fact, SAIC took a 1 percent stake in GM at its IPO, spending $500 million. It is a small step for a Chinese company, but a huge one for the Chinese automotive industry. It is highly symbolic that a company owned by the Chinese Communist state is starting to replace the U.S. government as the principal owner of America’s once most formidable corporation.

GM is just one example — admittedly, an extreme one — of what is going on among U.S. multinational corporations with a vast global footprint and internationally recognized brand names. They have long been producing in China, Mexico and Brazil and outsourcing service jobs to India. Now, they are seeing their sales and profits growth, as well as the most exciting business opportunities, occurring outside the U.S. 

To understand this, follow the money trail. U.S. businesses are holding some $2 trillion in cash on their balance sheets. They are not investing that money in the U.S. economy, to build production capacity and create American jobs. Clearly they don’t believe in this market. Instead, whatever business investment goes on is taking place overseas — in China, India, Mexico, Indonesia, Brazil and other countries.

Meanwhile, corporate contributions in the 2010 election give a hint of what corporate executives want the U.S. to become: a massive tax haven, both for themselves and for their companies. Rather than tax and spend, their recommendation to politicians in Washington is “tax not and spend nothing” until the credit line runs out.

Back in the early 1950s, a former GM chairman famously suggested that what’s good for GM is good for the country. This no longer seems to be the case. Today, what’s good for multinational corporations is not good at all for the United States.

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