Something I should have mentioned in my previous post on Obama's "Patriot Employers" plan is the possibility, indeed the likelihood, that the arrangements he's proposing are at odds with US treaty obligations under the WTO. Of course I understand that this only makes the idea even more attractive to hardline anti-trade types, Democrat and Republican alike. But I keep being told that one of the reasons for supporting Obama is that he would improve and even transform relations with America's friends abroad. If he hopes to do that, picking an immediate fight over existing trade agreements might not be the best way to start. (I thank a European diplomat who would doubtless prefer to remain nameless for drawing this to my attention.)
International legality aside, why is the idea such a bad one? The plan appears to have two parts: cut taxes for companies that meet some tests of good behavior, and (to make good the revenue shortfall) raise the tax that US-based companies have to pay on profits earned abroad. The first is the kind of leaden-handed intervention that I had hoped Obama would avoid. The second reprises a discredited idea of John Kerry from 2004.
Let me refresh your memory about that earlier debate. At the moment, foreign investments by US-based companies are usually taxed at a lower rate than would apply to profits earned at home. Why? Because America's corporate tax rates are higher than the rates typically levied by other countries. Making the US-based company pay the full US domestic rate (ie, the foreign tax, plus a margin to make up the difference) on overseas profits would, it is true, eliminate the tax incentive to invest those profits abroad. But it would also encourage US-based companies to divest their foreign activities outright, and it would put US companies that did continue to operate abroad at a significant disadvantage to their foreign competitors. Realistically, tax avoidance is only one factor, and usually not the main one, in investment decisions of this kind, so the effect of this change on jobs and wages might not be great either way--but I'd guess it more likely to be negative than positive.
Here is a good analysis of the Kerry proposal by Gary Hufbauer of the Peterson Institute for International Economics. On the broader issue of outsourcing--what to do about it, and how much of a probelm it is in the first place--I recommend this paper by Greg Mankiw and Phillip Swagel.
Yes, of course Mr. Crook, recommend Greg Mankiw, the Ex-Bush chief economic advisor who famously claimed “outsourcing” American jobs as a good thing. Now there’s economic theorist working families can count on. Even John Maynard Keynes reversed his option of Free Trade orthodoxy: “Defense of free trade theory is, I submit, the result of pure intellectual error.” Keynes “favorite remedy” was to subsidize domestic investment, increase domestic output and reduce foreign investment. Reducing domestic employer taxes while increasing the transnational corporate taxes is not only Patriotic but seems to fit a Keynesian model.
Yes, of course Mr. Crook, recommend Greg Mankiw, the Ex-Bush chief economic advisor who famously claimed “outsourcing” American jobs as a good thing. Now there’s economic theorist working families can count on. Even John Maynard Keynes reversed his option of Free Trade orthodoxy: “Defense of free trade theory is, I submit, the result of pure intellectual error.” Keynes “favorite remedy” was to subsidize domestic investment, increase domestic output and reduce foreign investment. Reducing domestic employer taxes while increasing the transnational corporate taxes is not only Patriotic but seems to fit a Keynesian model.
If I've understood the proposal correctly (and I admit there's a good chance that I haven't), companies would only be motivated to divest if they don't meet the good behavior standard, whatever that turns out to be. So the precise wording of the standard would be fairly important to know.
Yet I think it would be effective to threaten to defy trade agreements for a few months, then back off when you believe that foreign businesses are in fact listening.
I think this proposal by Obama provides more insight into his diagnosis of the problem, than represents a worrying suspension of belief in the laws of supply and demand than CC expresses.
My sense is that Obama believes that establishing trust with workers who have been hurt more than helped by globalization is priority number one. Once that trust is established, harder conversations and, more importantly, harder decisions can follow.
It fits with Obama's general approach to difficult issues, e.g., criminal justice in Illinois, where he first earned the trust of prosecutors and police officers before getting across the board support for legislation requiring that all confessions be videotaped. Without that trust, such productive conversations and legislation are nearly impossible.
As a financial economist, I completely agree with the maxim "protect the worker, not the job". But if the worker doesn't FEEL that s/he is being protected, no amount of well-designed safety net programs will build the trust necessary to get the public behind free trade. Out on the campaign trail, this may exert a stronger impression than we realize.
A similar set of worries about Obama's stance towards Israel have been expressed by some, i.e., that he caved to the Israel lobby in his speech to AIPAC some months ago. I see a similar dynamic there, however. Obama's experience and instincts tell him that building trust with Israelis (who expressed a lot of doubt) is an absolutely necessary prerequisite to a productive dialogue and, in the end, a robust and sustainable peace outcome.
The risk, of course, is that Obama loses his bearings, forgets why he is building trust in the first place, and goes native (eg, populist, in the case of the Economic Patriot Act). With other politicians, this is a genuine concern. For some reason with Obama, however, I feel this risk is low. He has demonstrated thoughtfulness and a steady internal compass in his books, speeches, and legislative efforts. Should his authenticity waver, that is the point at which I would begin to worry; not for an aspirational, if infeasible, proposal.
Mike's point about Obama's trust-building exercise is well taken, but what to do if the tactic is so transparent as to render the candidate... untrustworthy?
Something tells me Israelis and Palestinians will not swoon over the American Messiah quite as readily as rust belt populists feeling disenfranchised by globalization.