Tax and Spend

Lowering corporate taxes and building infrastructure could lead us to recovery

By Fareed Zakaria

The most troubling aspect of June’s job numbers—only 80,000 jobs were created last month—is that they are part of a new normal. Over the past two decades, U.S. economic recoveries have tended to be slow and jobless. In every recession from 1945 to 1990, jobs came back to prerecession levels six months after the economy returned to its prerecession level. But after the recession of the early 1990s, jobs came back 15 months later—though then employment grew vigorously. After the slowdown of the early 2000s, jobs took 39 months to come back. And this time, it may take about 60 months—five years!—for employment to return to prerecession levels, according to an analysis by McKinsey.

What happened? Over the past quarter-century, two large forces have swept the world: globalization and the information revolution. They have produced economic growth and innovation that has lifted tens of millions of people out of poverty in countries like China and India. They have helped make American businesses bigger, more global and more productive. They have given us consumer goods and services that were unimaginable at cheap prices. But these forces make it much easier to produce economic growth by using machines or workers in lower-wage countries. Hiring high-wage workers—that is, workers in Western countries—becomes a last resort.

While one can’t disagree with the data, there is furious disagreement over everything else. On one side are those—mostly liberals—who say the economy is suffering from insufficient demand. That is, people and businesses are not buying things, and the only cure is for the government to step in, spend money and create demand.

On the other side, conservatives argue that the problem is not weak demand but obstacles on the supply side. Businesses and people would spend, this argument goes, if they were in an environment that encouraged them to do so. That means lowering taxes and reducing regulations.

In general, I accept the notion that a country needs to have a structure of taxes and incentives that reward growth. But what, specifically, would help? U.S. tax rates are relatively low, compared with what they were in the past or with those of other rich countries. Regulations haven’t changed much in the past few years, so that can’t explain the current slowdown. The crucial question is, rhetoric aside, What specific changes on the supply side would make a difference?

One of America’s best businessmen has an answer. Fred Smith, the founder of Federal Express, argues that the key to job growth is stimulating private spending on capital goods and services. “There is only one statistic that is almost 100% correlated with job creation,” he says, “and it is private investment in –equipment and software.” But what makes companies spend on equipment and software? More orders from customers or a better climate for business? The two are related. Sometimes businesses will simply create products, which then creates demand. Nobody asked for the iPad; Apple just created it. But most of the time, businesses hire workers once they see that customers are ordering their products again.

Smith argues that businesses could be given many more incentives to invest and create products. “Our tax code favors the financial sector, speculation and leverage at the expense of the capital-intensive or the industrial sector,” he says. Smith advocates lowering U.S. corporate tax rates, which are the second highest in the industrialized world. The corporate tax brings in only 8% of federal tax revenue anyway, Smith points out. He also calls for a “territorial tax system,” which would tax only domestic, rather than worldwide, income, bringing U.S. practice in line with most other rich countries’. And Smith supports more incentives for businesses to spend on equipment and software. Right now, because of tax and other policies, Smith notes, “if you have a dollar to invest, you are better off investing that dollar someplace other than the United States.”

These are all good ideas—and the Obama Administration has acted on many of them already. (In fact, both Obama and Romney favor reducing the corporate tax rate.)

But if the investment produces jobs, why not also increase government investment? President Obama should announce a growth agenda that combines incentives for businesses to spend with policies that also get the government back in the business of investing—in bridges, highways, airports and other aspects of the U.S.’s aging infrastructure. If the goal is jobs and growth, it can’t hurt to try all the best ideas, no matter where they come from.

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