Wednesday, February 27, 2008

Obama is NOT listening to his economic advisors

Hence, the job-killing Patriot Employer Act he is sponsoring:

Mr. Obama's proposal would designate certain companies as "patriot employers" and favor them over other, presumably not so patriotic, businesses.

The legislation takes four pages to define "patriotic" companies as those that: "pay at least 60 percent of each employee's health care premiums"; have a position of "neutrality in employee [union] organizing drives"; "maintain or increase the number of full-time workers in the United States relative to the number of full-time workers outside of the United States"; pay a salary to each employee "not less than an amount equal to the federal poverty level"; and provide a pension plan.

In other words, a patriotic employer is one which fulfills the fondest Big Labor agenda, regardless of the competitive implications. The proposal ignores the marketplace reality that businesses hire a work force they can afford to pay and still make money. Coercing companies into raising wages and benefits above market rates may only lead to fewer workers getting hired in the first place.

Under Mr. Obama's plan, "patriot employers" qualify for a 1% tax credit on their profits. To finance this tax break, American companies with subsidiaries abroad would have to pay the U.S. corporate tax on profits earned abroad, rather than the corporate tax of the host country where they are earned. Since the U.S. corporate tax rate is 35%, while most of the world has a lower rate, this amounts to a big tax increase on earnings owned abroad.

Put another way, U.S. companies would suddenly have to pay a higher tax rate than their Chinese, Japanese and European competitors. According to research by Peter Merrill, an international tax expert at PriceWaterhouseCoopers, this change would "raise the cost of capital of U.S. multinationals and cause them to lose market share to foreign rivals." Apparently Mr. Obama believes that by making U.S. companies less profitable and less competitive world-wide, they will somehow be able to create more jobs in America.

He has it backwards: The offshore activities of U.S. companies tend to increase rather than reduce domestic business. A 2005 National Bureau of Economic Research study by economists from Harvard and the University of Michigan found that more foreign investment by U.S. companies leads to greater domestic investment, and that U.S. firms' hiring of more offshore workers is positively, not negatively, associated with the number of American workers they hire. That's in part because often what is produced overseas by subsidiaries are component parts to final, higher-value-added products manufactured here.

It's all about Ohio in this election; if the Democrats can take this state they will have the election nearly locked up. Bush similarly pandered with his steel tariffs. The distortions of democracy in America (e.g. subsidizing corn ethanol ahead of the Iowa caucuses) lead to job destruction, ironically in the name of job protection.

UPDATE: Greg Mankiw, William Buiter, and Anne Sibert hate it, too.

UPDATE: Don Boudreaux notes Obama's deaf ear to his economic advisors as well, and invokes the concept of Consumer Sovereignty (hear ye, those of you who are "pro-choice"):

There are countless distressing facets of this anti-trade nonsense. One of these is the weaselly "I'm for free trade as long as it's fair trade" refrain. Such a claim (now as familiar in political campaigns as Dunkin' Donuts) is a cowardly attempt by the candidate to stand on both sides of the issue by invoking a word ("fair") loaded with emotion but devoid, in this context, of meaning. No one, as far as I know, favors unfair trade -- but by slapping the label "unfair" on any trade that a candidate's favorite constituents dislike, that candidate can oppose free trade while claiming still to support free trade.

Such a rhetorical gimmick is unfair.

Also distressing is the fact that Austan Goolsbee, the fine economist who is a close adviser to Obama, apparently is ignored by the would-be President of the USA on this front. Of course, I have no knowledge of what Goolsbee says and doesn't say to Obama, but I presume that Goolsbee isn't in the anti-trade camp. Consider that just this past June Goolsbee had this excellent column in the New York Times, with this key passage:

We [Americans] hate experiencing major adjustments and industry transformations that force people to look for new jobs. That experience has made many skeptical about the future of the United States in the world economy. Yet the evidence seems to show that for all our dissatisfaction, we are the most flexible economy around and may be best poised to take advantage of the coming changes on a global scale precisely because we are so good at adjusting.

A related source of distress is Alan Blinder's recent skepticism of trade -- his lending his good name and the prestige of the economics profession to protectionists.

Trade is just one manifestation of consumer sovereignty. Just as there are, by Blinder's calculus, winners and losers from consumers shifting their expenditures from goods made in America to goods made abroad, there are winners and losers from consumers shifting their expenditures from goods made in Illinois to goods made in Arizona - and from consumers shifting their expenditures from donuts, beef, cigarettes, whiskey, and train travel to bagels, fish, yoga lessons, wine, and air travel. Trade plays no unique, or uniquely important, role as an avenue of economic change spurred in part by consumer sovereignty. The only practical way to rid the economy of such "loses" is to try to freeze it, a futile step that will in the long-run only make losers of everyone.
UPDATE: Jagdish Bhagwati supports Obama yet says:
On NAFTA, he is dead wrong.
UPDATE: He needs some constitutional advisors, too. This pretty much takes away my perceived edge that Obama and Clinton each had over McCain. We haven't even voted, and I'm already depressed.

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