August 09, 2010

It’s Time to Invest in America

Originally posted on the New York Times DealBook Blog on Monday, August 9, 2010

You don’t have to be an economist to recognize America’s economy is in trouble.

Ten years ago, America’s economy was booming. American business was the envy of the world. Stock prices were soaring. Dozens of new companies were created every day. Private sector investments were at an all-time peak. Most importantly, the federal government had generated budget surpluses for three consecutive years.

What happened?

Two successive administrations and the Federal Reserve shifted the focus from investment to stimulating consumer spending with low interest rates, easy money, high leverage, low personal tax rates and increased government spending. The result? The federal deficit will hit $1.4 trillion this year, with cumulative debt reaching $18 trillion by 2015. That’s $60,000 for every American.

Since early 2009, economists have promised economic growth of 3 to 4 percent, saying that job growth — “a lagging indicator” — will surely follow. Eighteen months later, things have not improved. Estimates of growth in the gross domestic product continue to decline, as do durable goods orders. Twenty-six million Americans (16 percent of the work force) cannot find full-time jobs. After its 2009 rebound, stock prices are declining, reflecting growing pessimism.

While the fundamentals are awry for the United States, leading American companies are doing well. Second-quarter corporate earnings consistently exceeded expectations, as companies reported solid productivity gains. Corporate coffers have $1.8 trillion in cash. Yet companies are not investing — at least, not in America.

In talking with dozens of chief executives, I hear pragmatic managers focused on building their businesses and earning fair returns for shareholders, yet extremely concerned about government policy. Here are the real reasons they are not investing in America:

  1. They expect no real domestic growth for the foreseeable future. In contrast, they foresee emerging markets sustaining double-digit growth. As a chief executive at a large consumer products company told me: “Half our revenues already come from Asia; within 10 years it will be 70 percent. Naturally, we are shifting more operations there.”
  2. To compete with local companies, global companies are investing overseas in factories and sales and marketing personnel. Foreign governments like China and Singapore make investments very attractive. One chief executive noted that he chose China for his $62 million factory because local subsidies reduced his investment to only $13 million.
  3. Companies are also moving infrastructure support from the United States to lower-cost areas in Asia. Unable to obtain visas for its Indian employees, a major computer software company moved most of its software operations to India, where well-educated employees enjoy higher standards of living at one-quarter of the cost.
  4. Without domestic growth, there is no need for additional employees. Instead, companies are achieving productivity gains by running lean. Mounting costs of doing business and increased benefit costs have created so much uncertainty that chief executives are reluctant to hire, especially small business owners.
  5. Chief executives feel they have access in Washington, but limited influence. Without any business people in the Obama administration, there are no advocates for sound business policies. A successful commercial banker described how open the president appeared to his concerns, yet the next day — without any consultation — the administration announced a new $50 billion bank tax.

Ask yourself: if you were faced with these conditions, would you be investing in America and hiring more people? Unless the climate in Washington changes dramatically, this no-growth, no-jobs environment will continue indefinitely.

How can the administration reverse this economic malaise?

To get the country growing and Americans back to work, the government must shift course to invest in America. Tax policies and incentives should stimulate private sector companies to invest domestically in research, innovation, manufacturing, infrastructure and exports.

Here are six specific ways to accomplish this shift:

  1. Double the investment tax credit for new tangible assets to encourage investment.
  2. Double tax credits for increases in research and development to stimulate research and innovation.
  3. Introduce a graduated capital gains tax based on length of time assets are held, with rates declining to zero after 10 years.
  4. Offer a capital gains tax holiday the first time companies are sold to encourage investment in start-ups.
  5. Grant special loans and job credits for small businesses, where 70 percent of jobs are created.
  6. Offer export tax credits for the next two years to reinvigorate export growth and rebalance trade.

This set of pro-investment, pro-growth policies would supercharge American investment, rekindle innovation, create millions of sustainable jobs and restore continued economic growth. This would result in increasing tax receipts that would pay back these tax credits many times over.

Most important of all, this would make America competitive once again, focusing on our strengths of entrepreneurship, innovation and creativity.

It’s time to invest in America once again.