There’s No There There Yet

Economist.com | Searching for John Kerry’s economic policy: Is there a there, there?: In his opening efforts at developing an economic policy, John Kerry is all fiddle and not much thrust.
In fairness to Kerry, it’s early yet and he hasn’t developed a coherent economic policy. Most of his statements to date have been bashing Bush over jobs — though that will get more difficult if the recent job growth is sustained.

The most disappointing aspect of Kerry’s plan to date is his singular focus on corporate tax reform — not a bad thing in and of itself — with the implication that offshoring is to blame for the “jobless recovery” and the tax code should be used to encourage companies to invest their profits back in this country. The problem with this is that it isn’t the real problem. We haven’t had weak job growth because companies have been investing overseas. It’s been because of business investment in general and the over-investment of the late 1990s. It takes time for those investments to depreciate — actually lose value, not accounting depreciation — hence the sluggish growth in business spending.

Another thing that The Economist points out is that the U.S. is the only major industrialized country that taxes foreign profits on domestic corporations. That would seem to be the best place to start.

The other problem is that the U.S. is a huge recipient of foreign investment. If other countries undertook policies to prevent foreign investment — and they actually worked — the U.S. would suffer. In spite of our high labor costs, the U.S. is seen as a great place to invest. When companies sell products here they frequently leave the profits here which has been abetted by our strong dollar policy of recent years.

In short, I don’t think Kerry has found his sea legs yet. He’s responding to events — high gas prices, the non-issue of offshoring (for the economy as a whole) — and it comes across as political opportunism rather than a coherent plan.

On March 26th, Mr Kerry delivered what he hoped would be seen as the most definitive economic speech of his candidacy thus far, the chief part of which is a “plan” to create 10m jobs during his first term. A few days later, he moved on to energy policy. More utterances on the economy are expected over the next few weeks. How is Mr Kerry’s vision, such as it is, stacking up?

The symbolism of his jobs speech was not hard to miss. For his venue, Mr Kerry chose Detroit, where Bill Clinton, 12 years earlier, memorably steered the Democratic Party away from its disastrous old obsessions with class and redistribution, and laid out a creed that became known as “Clintonomics”: a mix of fiscal discipline, a limited but responsive government, and an economic populism that stressed jobs and growth over class war.

Mr Clinton’s chief speechwriter in 1992, David Kusnet, now at the Economic Policy Institute in Washington, DC, points to the parallels in the way Mr Kerry has laid out his goods. Where Mr Clinton promised to “put people first”, Mr Kerry promises to “put jobs first”. Both men remember Franklin Roosevelt’s call for “bold, persistent experimentation” on the part of government. And Mr Kerry, like Mr Clinton before him, pointedly seeks the centre ground—in this case by proposing a cut in the rate of tax that most American companies pay.

“Some may be surprised to hear a Democrat calling for lower corporate tax rates,” said Mr Kerry in Detroit. “The fact is, I don’t care about the old debates. I care about getting the job done and creating jobs in America.” Such centrism, Mr Kusnet contends, covers Mr Kerry’s fire as he attempts to narrow the tax debate with Republicans down to the least publicly defensible of Mr Bush’s tax cuts: those on inheritance, dividends and capital gains that benefit the filthy rich.

The politics of the proposals certainly seem canny. For Mr Kerry addresses full-square the widespread perception, albeit a false one, that jobs outsourced overseas are at the root of America’s “jobless recovery”. His answer is to end the preferential tax treatment of overseas earnings that at the margin encourages American companies to base production overseas rather than at home. And with the money thus saved, he will be able to cut the corporate-tax rate on the great bulk of American companies, from 35% to 33.25%. Cutting company taxes: not even Mr Bush has dared do that. Mr Kerry has stolen some Republican ground.

[….]

Mr Kerry proposes to bring that money home, by offering a one-year moratorium (another Republican idea) during which companies that repatriate profits pay only a 10% tax on money that is reinvested at home. Thereafter, tax on profits overseas must be paid immediately. The scheme, it is reckoned, will raise an extra $12 billion a year. The money will be spent lowering the overall corporate tax rate, as well as providing a tax credit to companies that take on new workers in industries, both in manufacturing and services, that are losing jobs to outsourcing.

This is the nub of Mr Kerry’s vision, and it aims to play well in swing industrial states, such as Michigan, Pennsylvania and Ohio, that have been losing jobs. But is it really clever for the economy as a whole?

This newspaper has advocated getting rid of corporate taxation altogether (on the grounds that it is easy to evade, inefficient and bad for growth—and thus jobs). That, admittedly, would be a big step for a Democrat. All the same, the Kerry plan looks dangerously complicated and dirigiste—no small thing when the Republicans spend half their time claiming he is really French.

By offering tax credits at home to selected industries, he is asking bureaucrats to judge which industries to back. Even if you think this is a good thing, it will be fiendishly difficult to administer. How on earth can you measure, in the general fog of job creation and destruction, which industries are seeing jobs outsourced? And how do you discriminate between an overseas subsidiary producing for local consumption (which is still eligible for tax deferrals under the Kerry plan) and one producing for export (which is not)?

In the end Mr Kerry is simply tinkering with an already fiendishly complex tax code. His utterances this week on high oil prices—hastily wrapped up as a “policy”—had the same sort of opportunism about them. He promised somehow to put pressure on oil-exporting nations to increase output. He called for the impossible goal of energy independence for America. And he criticised Mr Bush for continuing to add to the country’s Strategic Petroleum Reserve, even though such purchases have only a marginal impact on oil prices.

Kerry’s call for changes in the tax code, as he’s laid them out, sound an awful lot like industrial planning light. Not something that would appeal to me and would be of most benefit to the bureaucrats that select the favored industries

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