When firms don’t invest in job-creation and higher wages, everyone
suffers.
GDP for the first quarter of 2016 came in at a paltry one-half of 1
percent. That sorry showing follows growth of 1.4 percent and 2 percent
in the previous two quarters. If such a thing is possible, the already
anemic economy is actually getting worse.
But even worse than that, the latest GDP numbers reveal a collapse in
business investment, the real driver of the economy.
When businesses don’t spend and invest, they don’t hire and cannot offer
better-paying jobs. Business investment and wages are two sides of the
same mirror. If a company purchases five trucks rather than ten, there
are five fewer trucking jobs.
If employers don’t invest in more
computers, there are fewer programming jobs. If businesses don’t
purchase more jackhammers and cranes, fewer construction workers are
hired.
Business investment hasn’t grown for two years. Over the past two
quarters, total business fixed investment has fallen by an annualized
average of 4 percent. Business equipment and software has dropped by
more than 5 percent. Non-residential structures — like commercial office
space, shopping malls, factories, and hotels — have dropped by nearly 8
percent.
But let’s go further back. For the entire 32-quarter economic recovery,
business fixed investment has averaged just 1.1 percent at an annual
rate. Since 1960, however, business fixed investment has averaged 4.4
percent at an annual rate. So the present expansion in business
investment is roughly one-quarter of the 55-year average.
Why? One key factor is tax policy, especially business tax policy.
At 40 percent for combined federal and state business tax rates, the
U.S. has the largest corporate tax burden in the developed world. We
double-tax corporate profits earned overseas, as virtually no other
country does. Our depreciation rates for investment tax expensing are
among the worst in the world. And despite all the talk about corporate
tax reform, nothing gets done — even under a Republican Congress.
What’s more, the Obama administration has raised tax rates on capital
gains, dividends, and income (paid by small-business pass-throughs). So,
as the tax cost of capital has gone up, business investment has come
down.
Arthur Laffer has taught us that “if you tax something, you get less of
it.” That’s why firms are moving offshore in droves. It’s not about
being unpatriotic. It’s that it doesn’t pay, after-tax, to invest in the
United States.
A second key reason for the business-investment slump is monetary
policy. While this may not be the right time for rate hikes, ultra-low
interest rates have led to financial engineering rather than the
deployment of excess corporate cash for productivity-enhancing
investment.
Rather than invest in job-creation and higher wages, firms are buying
back stocks to boost price-earnings ratios. In many cases, they are even
borrowing money they don’t need to buy back stocks.
A third key reason for the business-investment collapse is
over-regulation. Obamacare rules and mandates are job-killers.
Dodd-Frank red-tape costs have held back lending to such an extent that
business start-ups have practically come to a halt. And community banks
have drastically pulled back loans to existing small businesses.
Then we have the Obama EPA’s new rules, which amount to a war on fossil
fuel. The president pushes for climate-change regulations instead of a
massive build-out of energy infrastructure, including pipelines,
liquid-natural-gas terminals, and new refineries.
Want more manufacturing? The energy business, and the potential for
North American energy independence, is the key. Hillary Clinton, and her
promise to end oil and gas fracking, will pull us further in the wrong
direction.
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Many people do not to understand that business investment is a critical
prosperity-booster, leading to more jobs, higher wages, and stronger
family income. Put another way, rising tax and regulatory burdens that
penalize investors and businesses also punish middle-income wage
earners.
And it’s these wage earners who would benefit most from business tax
reforms, such as a 15 percent corporate rate for large C-corps and small
S-corps. This should be accompanied by immediate tax-deduction
expensing for new investment and a territorial tax regime that would
stop double-taxing profits earned abroad.
Study after study shows that corporate tax reform is a middle-class tax
cut, not a tax cut for the rich. You see, corporations don’t really pay
taxes. They simply collect them and pass the cost along in the form of
lower wages and benefits, higher consumer prices, and reduced
shareholder value.
The overarching theme of this election is an angry revolt by the middle
class over the fact that jobs and wages have barely increased in the
past decade. They blame Washington, China, immigration, power elites,
and almost everything else. So be it. There is a lot of work to be done
on all these fronts. But without radical tax, regulatory, and currency
reform, business investment will never fully recover.
And neither will the economy.
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