For a large part of the 20th century, the fate and fortune of American big business and its “average citizens” were intertwined. In the 21st century, they are almost completely disconnected.
Among the primary reasons for this disconnection are major corporations:
- offshoring millions of what were good paying American jobs through a process euphemistically called “globalization.”
- reducing the size of their incumbent workforce significantly through means such as organizational streamlining, downsizing, lay-offs, staff reductions, and plant closings.
- restructuring the nature of jobs from full time employment into temporary and contract employment.
Let’s look at offshoring first. A 2015 A.T. Kearney study disclosed that in spite of attempts to reverse this trend in recent years, it continues at a steady pace with “offshore manufactured good imports poised to grow by 6.5 percent in 2015, nearly matching the 6.9 percent growth rate from 2014.”
David Autor of the Massachusetts Institute of Technology along with other academic colleagues has documented the negative consequences that offshore imports have both on the pocketbooks and the psyche of American workers.
In 2014, Autor et. al., issued a paper which showed that the entry of China into the World Trade Organization trade deals after 2001 “significantly suppressed overall U.S. job growth” with an estimate of “net job losses of 2.0 to 2.4. million (in the U.S.) stemming from the rise in import competition from China over the period from 1999 to 2011.”
Autor et. al., have just released a new paper which discloses that where these jobs are lost matters in terms of polarizing workers’ ideologies and votes in elections. They report, “Trade exposed districts initially in Republican hands become substantially more likely to elect a conservative Republican, while trade exposed districts in Democratic hands become more likely to elect a liberal Democrat or a conservative Republican.”
In summary, off-shoring has economic, psychological and political consequences. So too do workforce reductions – no matter what their nature.
At the end of last year and in the first quarter of this year, big businesses of all types such as John Deere, Caterpillar, Boeing, Intel and 21st Century Fox have announced substantial workforce reductions.
These reductions are not a current or 21st century phenomena. There has been a steady and almost continuous stream of organizational restructuring and downsizing by big businesses dating back to the 1980’s and ‘90’s.
These cuts were not just by troubled companies. In many instances, they were done “by healthy companies hoping to reduce costs and boost earnings by reducing head count.” Various studies have shown that for many companies the cuts did not produce the desired results nor eliminate the need for further downsizing.
Nonetheless, in 2016, captains of industry still engage in workforce reduction as a primary practice for increasing profitability and productivity. The other practice that has become more much more prevalent for them over the past decade has been converting the permanent workforce to a temporary and contracted one.
In a New York Times article, Neil Irwin reports that “…the number of Americans using alternative work arrangements rose 9.4 million from 2005 to 2015. That was greater than the rise in overall employment, meaning there was a small net decline in the number of workers with conventional jobs.”
The economic and human cost of this transition in the nature of employment is enormous. It eliminates benefits and transfers the full cost for providing social insurance from the employer to the part-time, lower-wage employee. (For an excellent analysis and discussion of this, read Steven Hills “Benefits for the Rest of Us” in Washington Monthly.)
Offshoring, workforce reductions, and job restructuring: That’s three strikes. Big business should be called out.
Wait! You ain’t seen nothing yet. Let’s take a quick look at three more reasons for the disconnection between American big business and working class Americans: Corporate welfare, corporate compensation, and corporate inversions.
Corporate welfare occurs when large businesses have rigged the system so it rewards their businesses disproportionately. In a recent opinion piece for the New York Times, Nicholas Kristoff states, “One academic study found that tax dodging by major corporations cost the U.S. Treasury up to $111 billion per year.” Drawing on a new study by Oxfam America, Kristoff further notes that “…each $1 the biggest companies spent on lobbying was associated with $130 in tax breaks and more than $4,000 in federal loans, loan guarantees and bailouts.”
That’s not a bad return on investment. An even better one is what corporate CEOs pay themselves for the time they spend on the job.
We addressed that topic in our Huffington Post blog published in April of last year titled, “Profits Without Honor: The Sad Truth About CEO Compensation” so we won’t go into detail here. Let us just highlight a few factoids: In 2012, the 500 highest paid executives in U.S. public companies received an average $30.3 million each. In 2012, the ratio between the average pay of American CEOs to the average pay of American workers was 354:1. In Germany, the executive to worker ratio was 147:1 and in Japan it was 67:1.
Given this pay differential, we are certain that the U.S. CEO’s would not want to trade places with their foreign counterparts. Several of them, however, have tried and some have succeeded in using the corporate inversion ploy of merging their business with a foreign business and moving their corporate headquarters to the country in which that business is located so that it would be subject to lower corporate tax rates there.
A study by the Congressional Research Service in 2014 disclosed that since 1983, 75 U.S. corporations have moved their tax domiciles outside the U.S. to avoid paying U.S. taxes and 47 have done an inversion within the past decade. At the beginning of April, the Obama administration introduced new tax rules which make doing inversions tougher.
Those rules caused Pfizer Inc and Allergan PLC (Ireland) to terminate their merger discussions. Other companies, however, such as Johnson Controls and Coca Cola Enterprises are continuing with their pending merger discussions.
To sum it up, there are practices in which many American big businesses engage that harm the American economy and its workers. That’s not to say that they all act this way.
But, unfortunately, a number of them do. As a result, the conclusion must be that while all “American” big business is present not all big business is accounted for.
What can be done to rectify the current situation? We believe the answer is to create a “true sharing economy” in contrast to the misnomer “sharing economy” that is being applied to the activities of businesses such as Airbnb, Lyft and Snapgoods.
A true sharing economy would be one in which resources and rewards would be distributed appropriately, opportunity would be maximized, inequality would be minimized, the middle class would grow, and there would be no working poor.
There are three fundamental requirements to be addressed to enable big businesses to be leaders in driving the development of a true sharing economy in the United States:
- Corporate executives dedicated to building virtuous organizations
- A fair and balanced tax code
- Targeted and robust fiscal policy
We have written about virtuous organizations before and the roles that business leaders need to play to establish them. A virtuous organization, as we define it, is one that has a strong moral compass and a compelling mission that creates value for customers, employees, shareholders and the community.
The virtuous organization is built from the big business leader out. Her or his vision and values shape and define the company’s culture. If those values include concern, caring, compassion, and commitment to making a positive difference and contribution to society – they are reflected in everything that the business does – from the manner in which it operates, treats employees and customers, to its community involvement and philanthropic initiatives.
Given today’s big business climate, it might seem that there are no leaders who meet those criteria. That is not true.
The most recent example of executives who practice “virtuous” leadership was provided by Chobani founder Hamdi Ulukaya who gave 10% of his company’s stock to its approximately 2,000 employees. Other exemplars who come to mind are Howard Schultz of Starbucks, Jeffrey Brotman of Costco, Dan Gilbert of Quicken Loans, and J. W. “Bill” Marriott of Marriott, International.
There are other big business leaders out there who fit the virtuous organizational leader mold and believe there would be many more if the United States had a “fair and balanced” tax system. As we discussed earlier, the current system is anything but that.
It encourages big business to: take advantage of tax loopholes to minimize taxes paid here; shift profits to subsidiaries in countries that are “tax havens”; and, keep foreign earnings and profits outside the United States to avoid their being taxed upon repatriation.
What needs to be done to change these circumstances? As we wrote earlier, “The answer is simple – the United States needs to be made the tax payment place of choice for large corporations. The process for accomplishing this is not. That will require a blend of incentives, restrictions and eventually full-blown tax reform.”
Congressman Dave Camp, Chair of the House Committee on Ways and Means Committee introduced a comprehensive tax reform proposal, the Tax Reform Act of 2014 in December of 2014. Other tax reform proposal such as replacing the current system altogether and moving to a retail sales tax at the federal level or a flat tax have been advanced during the 114th Congress.
The Obama administration put forward a tax code reform proposal at the beginning of 2015. All of the candidates for President in both the Republican and Democratic contests had some tax reform recommendations.
The pot is being stirred. But, full-blown tax reform will not take place during this presidential election year.
It will be absolutely essential, however, as soon as this election cycle is over, to begin the process that will result in a responsible approach to tax reform that brings the power of big business front and center as a primary driver of growth for the American economy and job creation again.
Full-fledged tax reform will not be achieved overnight. In the interim, we would recommend giving serious consideration to allowing big businesses to repatriate their foreign earnings in a manner that contributes to growth and job creation.
In our book, Working the Pivot Points: to Make America Work Again, we advocated that companies be allowed to repatriate their profits at a tax rate below the current marginal tax rate of 35 percent. We recommended that these profits be taxed at a modest rate – say something like 15% and that they pay a much lower rate or nothing if they took actions such as investing those dollars in job creation in their own companies and supply chains or in supporting governmental infrastructure projects.
This brings us to the third leg of the stool for creating a true sharing economy: a targeted and robust fiscal policy.
If all of big business has been present but not all accounted for in addressing the issues confronting the needs of the American economy and its workers, the same can be said – and even more-so – for the U.S. Congress in general.
One of the primary responsibilities of the Congress is to develop fiscal policy. Fiscal policy is the “means by which a government adjusts its spending and tax rates to monitor and influence a nation’s economy.”
It is the sister to monetary policy which is administered through the Federal Reserve Board. As the Fed notes on its website, monetary policy is a term used to refer to the actions of central banks to achieve macroeconomic policy objectives such as price stability, full employment, and stable economic growth. In the United States, the Congress established maximum employment and price stability as the macroeconomic objectives for the Federal Reserve.
After the Great Recession began, then Fed Chair Ben Bernanke and the Federal Reserve did a yeomen’s job in stepping up to the plate and swinging for the fences by putting lots money into the economy and keeping interest rates low to try to achieve those objectives. The results were not perfect yielding greater
returns in the stock market and purchasing of homes than were “under water” than in employment increases. The conclusion must be, however, is that this intervention, helped keep the economy afloat during very tough times.
In stark contrast to the Fed, after the great recession began, in 2009 the U.S. Congress stepped up to the plate and laid down a bunt by passing the American Recovery and Reinvestment Act – a modest stimulus bill of $787 billion dollars. Even though the Act was grossly insufficient to address the magnitude of the need there is substantial evidence that it had positive and beneficial effect on the economy and achieved its targeted ends. More importantly, the Act provides a positive example of the Congress doing its job and crafting “fiscal policy.”
Since 2009, with the Tea Party victories in 2010, 2012, and 2014 and the emergence of the Freedom Caucus in the U.S. House, the Congress has become increasingly ideological and dysfunctional. As a result, development of a responsive, coherent and fiscal policy has been put on a back burner.
That’s actually the good news. The bad news is that the pilot light is off.
The emergence and importance of the populists in both parties during this presidential election cycle demonstrate that the workers of America have had a enough and that it is time to turn that light back on and get the economy cooking again. That’s why when the members of Congress return to the Beltway, their job one must be to act as responsible fiscal policy-makers by passing legislation directed at stimulating the economy and creating good paying jobs.
What to do to accomplish this might seem like a big challenge. But, it isn’t, it’s a no-brainer.
The fact that America’s infrastructure is crumbling and destroying the country’s competitive advantage is irrefutable. Since the Great Recession, there has been a raft of proposals to address this situation through both government investment and private sector money. We proposed an idea ourselves – establishing a national Industry, Innovation and Infrastructure Bank (3-I Bank).
The problem has been defined. The answer is there. It is infrastructure legislation.
That legislation does not need to be perfect. But, it must be passed. To not do so, would be a dereliction of duty and a disservice to the average citizens who are crying out for a government that is more responsive and responsible to them.
In conclusion, as we have illustrated throughout this blog, the fate and future of America’s big businesses and its “average citizens” at this point in time are almost completely disconnected. By taking the actions required to build a true sharing economy, we can reunite and intertwine them again. As the United States has proven in the past, that combination would be unbeatable.
It would make America and its citizens’ winners. Winning would be a good thing. In fact, as Donald Trump might say, “It would be huge.”