It’s not politics, it’s business

The recession the US is facing is the direct result of political choices we made over many years. While it is simplistic to claim that any single decision of the federal government is the point cause of our economic woes, the collection of legislation certainly caused the economic results we face.

Companies make operating decisions based on both what consumers want (market forces) and what regulations will permit (government control). We have not built an oil processing plant to make gasoline in something like 20 years. Was this because there was no market for product or because the government created regulations that made it too costly to open a new plant? We have curtailed oil drilling in the US not because the oil companies don’t see a market but because the regulations make the costs of drilling too high to allow a satisfactory return on the companies investment.

We use regulations to “adjust” public behavior routinely. No smoking laws are the most obvious case of blocking your legal behavior to accommodate your neighbor’s preferences. While the case for smoking as a health risk is clear, the case against second hand smoke is less clear. Still, we enacted legislation that defines where and under what conditions individuals can smoke in public. Debating if this is good or bad public policy is not the point of this article, the point is that legislation creates the environment that business operates within.

Another example is foreign trade agreements. The US routinely makes deals with other governments to allow US business low tariff access to foreign markets by allowing those countries businesses low tariff access to US markets. Some of those agreements made it cost effective to ship a lot of jobs out of the US.

When I was taught to analyze information, I was taught to speak not of what was certain to result, but of what was more or less likely.

Anyone who has managed their own small business (as I have) predicted as one obvious results of free or nearly free trade with Mexico (the most well known example) that Mexico will, most likely, sell a lot of inexpensive good to us while we will, most likely, sell fewer expensive goods to Mexico.

We have a huge trade deficit because we buy a lot more cheap stuff than we sell expensive stuff. The legislation that makes this possible was touted as “good for the country” when passed. Once again common wisdom was right and the expert analysis was wrong. We aren’t selling more than we’re buying and we are shedding jobs a an alarming rate.

If I’m right, how did a not very smart guy like me expect the results that we now have and the super smart experts miss it? Too much theory and not enough common sense. We’ve got far too many people making decisions who’ve never had to produce a product other than conversation.

The key to economic growth is not businesses making money, its workers making money and buying products made by other workers. The lessons you learned as a kid from your allowance still apply. Your allowance (income) is fixed and if you don’t have enough income to buy the things you want, you do without. If a candy bar is $1 and you only have 99 cents, you don’t buy. The store doesn’t sell and the manufacturer doesn’t produce. The key to economic growth is workers with money who buy things.

So, again if I’m right, how do we fix it? We use the same tools that got us into this position, we legislate - but we change our focus. We give incentives to companies that create jobs into the US and put disincentives on companies that rely on foreign labor. And if situations like Toyota who has big manufacturing plants in the US confuse you about who is a US company, try this - a US company is one that has its headquarters in the US, pays US taxes, and reports the bulk of their profits on their US tax returns.

When a company is bought by a foreign company it looses it status as a US company. Chrysler was a US company until it was bought by Daimler Benz then it became a foreign company. A foreign company because the profits (if any) go to a company that reports the income in a country other than the US. As with most things the simple answer is the most accurate.

The problem, truly, is not that the profits accrue to a foreign company, it’s that the cash goes out of the US and is then spent elsewhere. The Marshall Plan of post World War Two shipped boatloads of money to Europe and Japan but most of that money came back to the US to buy American products. The manufacturing base of most of these countries had been destroyed while America had a huge excess capacity.

So, what is that common sense answer? Give the companies an incentive to spend their profits in the US! The government should give incentives for spending in the US, generally in the form of tax or tariff reductions. The rules should also apply disincentives for taking profits out of the US economy, again in the form of higher taxes or tariffs.

For better or worse, we are part of a highly integrated global economy and there is no way to isolate the US economy from the rest of the world. With a little thought we should be able to create a system that rewards companies that keep their jobs (and purchasing power) at home.