The jobs debate in America heated up considerably this month. And while no one seems to question whether ratcheting up the rhetoric on jobs is the right thing to do, I worry about it. I worry because America doesn’t have a jobs problem. We have a supply problem.
U.S. companies have excess capacity for producing goods and services compared to the current level of global demand. So before we can put significant numbers of unemployed Americans back to work, we have to deal with the root cause of our undersupply of jobs, which is oversupply in our economy.
Oversupply simply means we have too much inventory of goods compared to the demand. For example, General Motors had to resize to a smaller company with fewer brands, because not enough people were buying their cars. They are a healthier company without Saturn, Saab, Hummer, Pontiac and Oldsmobile. But as a smaller company, they will produce less.
The ugly but inescapable reality is that fixing that problem will take at least two to three years. And fixing it, I believe, means lowering corporate taxes so that they take the money they have parked overseas and invest it in the United States.
The U.S. Chamber of Commerce released a study earlier this month in support of a one-time tax break for U.S. corporations on foreign earnings. Various estimates say that there is at nearly $1.5 trillion parked overseas because U.S. tax laws make it too expensive to bring home. The study says that a tax holiday would result in about half of that money returning to the U.S. and becoming available for investment here, creating 2.9 million jobs over the next two years.
On September 8, President Obama made a jobs speech to both houses of Congress calling for payroll tax cuts and spending on infrastructure to get Americans back to work. The following Monday he delivered a nearly $450 billion jobs bill–a government stimulus package that the administration says will create 1.9 million jobs. (Former labor secretary, Robert Reich and others agreed with the need for another government stimulus, but suggest that $450 billion is not enough to make a difference. I agree.)
Two days later, on September 15, Speaker of the House John Boehner called the President’s job creation proposals a “poor substitute for pro-growth policies that are needed to remove barriers to job creation in America.” Translated, that means tax cuts and less regulation for U.S. corporations. The truth is the Obama jobs bill would create short-term jobs. Money can directly and immediately put Americans to work fixing our aging infrastructure–roads, bridges, schools and more. But short-term, government-funded jobs do not add up to a long-term fix. For that, we need sustained new job growth in the private sector. And it’s not at all clear that the bill’s provision lowering payroll taxes would be sufficient incentive for companies to start hiring again right away.
The proposal for a one-time corporate tax break enabling U.S. corporations to repatriate their foreign earnings has a greater chance of stimulating private sector job growth. The current tax rate is 35% and that explains why Apple has about $12 billion parked outside the U.S. right now; Google about $17 billion; Microsoft about $29 billion; and Cisco about $40 billion. The specific proposal is to temporarily lower the tax rate to about 5%.
Cisco’s CEO, John Chambers, made the point eloquently in an interview with CBS News that with all that money trapped overseas, Cisco will build plants and create jobs overseas instead of here in America. “I badly want to bring that money back,” he said.
A one-time tax break on foreign earnings would get us on the right road to private sector job growth because it would help companies squeeze the excess supply out of their industries. A quick infusion of capital back into U.S. corporations would be used in part to support a wave of mergers and acquisitions that began in 2010 and gained momentum this year. Fewer companies would mean less supply.
With the economy improving, market leaders are making strategic acquisitions geared toward growth. Their targets are established companies that are losing market share or smaller players that can no longer afford to compete.
An example of the former is Google’s proposed acquisition of Motorola Mobility, which could help Google in its head-to-head battle with Apple. An example of the latter is Arrow Electronics’ acquisitions of both Cross Telecom and Shared Technologies to expand its presence in unified communications and managed services.
The reason industry consolidation is important is because with fewer competitors in an industry, supply can be adjusted down more quickly. And only when supply is brought in line with demand can companies increase capacity–the key to growing payrolls.
So while elected officials on both sides of the aisle are talking about creating jobs, few are talking about the reality of how long it’s going to take. Government stimulus can create short-term jobs right away, but it does little to solve our long-term oversupply problem. Tax relief on U.S. foreign earnings would bring home capital that can be put to work to solve our long-term problem of oversupply, but it will not create jobs overnight.
The truth is we need both now–some type of federally funded jobs bill and a tax holiday on the foreign earnings of U.S. corporations. We also need to hear the truth from the people responsible for making these things happen.
We are years away from a strong economy that creates jobs. But the longer we wait to get started, the longer it will take us to get there.
[Image: Flickr user Mr. Wright]
Martin Wolf has directed more than 100
leading technology transactions during the last 13 years, and was directly
involved in the divestiture of several Fortune 500 divisions that include
GE, Johnson Controls, and Insight Enterprises. He received a bachelor’s degree from the Ross School of Business at the
University of Michigan, and is a FINRA registered broker.