"Bring in wild and wooly outsiders. E-x-p-a-n-d the box." Tom Peters
Congress' Wishful Thinking
The refrain in a mid-1960s song goes like this: "Those were the days my friends, we thought they'd never end." Congress and the Administration can still be heard humming this tune at both ends of Pennsylvania Avenue. Major bills dealing with tax reform, farm aid and trade constitute a revisionist effort, more consistent with Pax Americana of 1946 - 1973 than with today's altered world order.
The tax bill. There are many attractive features in the tax bill such as the end of numerous obscene tax shelters. But in an effort to produce "revenue neutral" tax reforms, about $120 billion over five years is being transferred from the backs of individuals to businesses.
Many people argue that it's about time companies pay their share. Fine enough in bygone days. Business readily could pass the burden to the consumer, whose robust annual wage increases could easily absorb the price rise. It worked beautifully through the mid 1960s, when Japanese auto imports ran but one-tenth of one percent. But in today's violently competitive market, what goes around, comes around.
Today business has two sorry choices. If it passes along the tax hike by raising prices, you and I will look even harder at foreign products. Korea, for instance, doesn't tax the goods its industries produce for the export market. Or business can keep on the price lid and instead cut investment.
Tax reformers are retracting recent favorable capital-gains tax cuts. So much for our economy's brightest light -- the burst of venture capital-funded businesses that those earlier tax cuts kindled. The move may well drag us further behind Japan, which doesn't tax capital gains at all.
As usual, incentives are conspicuously stingy for training and retraining for our work force, which is so out of sync with newly needed skills. In fiscal 1986 the government provided $80 billion of special tax incentives for capital contrasted with $25 million in training incentives, according to TRW's highly regarded Pat Choate.
So we are handicapping business and still failing to spur exports at this critical juncture. Worse yet, we are stuffing the budget with huge and counterproductive farm supports.
The farm bill. The psychological tie to the yeoman farmer remains strong, especially among farm-belt Republican senators looking to the elections. The great farm fiasco act of 1985 will cost taxpayers about $35 billion this year (twice the projections when the bill was passed).
The problem: we still have far too many farmers. On the supply side, everything from the microprocessor to genetic engineering is drastically reducing the land required to feed the stable and weight-conscious U.S. population. On the demand side, we are no longer required to feed the world -- even India now runs a grain surplus. And debt-strapped, impoverished nations are using every trick in the book to push farm products our way (we'll run our first farm trade deficit in decades this year).
However, they'd be hard-pressed to top the U.S. in the guile department. As the New Republic recently reported, "Paraguay, with a foreign debt of almost $5 billion, finds that the United States is selling beef to Brazil at 30 cents a pound, half of what Paraguay can charge. [We do] this because the government has millions of pounds of excess beef on its hands. And why is that? Because we paid dairy farmers to slaughter their cattle under a $1.8 billion plan to prop up U.S. milk prices. ... The word for this is 'dumping' -- which we're happy to use when accusing the Japanese ... of practicing it."
The trade bill. HR 4800 is a disgraceful trade bill that will soon lead Congress' pre-election, let's-blame-somebody-else- for-our-nagging-problems agenda. (I call it IPA86, the Incompetents Protection Act of 1986. Congress' razor's edge failure to overturn the textile bill veto suggests that it will pass some form of new protective legislation, leading us one more step down the slippery path to world economic constriction through restrained trade.
In addition to agriculture, the prime beneficiaries of protection in the last dozen years have been steel, textiles and automobiles. As usual, they have used their consumer-financed "breathing space" either to move away from the business or as an excuse to continue to under-spend on modernization.
The recent negotiation by the harried Administration of a pledged 20 percent share of the Japanese market for U.S. semiconductor makers underscores the hypocrisy of the trade debate. Several U.S. manufacturers reacted to the move by that they now look forward to immediately starting operations in Japan. Why? Those U.S. firms that do already operate in Japan produce the highest quality "American" chips.
This is bizarre. First, internationalist U.S. chip makers such as Texas Instruments are already thriving in Japan, proof positive that the market is not so closed as the whiners claim. Second, if, as the execs say, the reason for our shaky performance relative to Japan is the poor quality of U.S. factories' output, can you really call wholesale movement of their production to Japan a solution to the U.S. industry's woes? Third, if we do get up to our 20 percent share mainly via new U.S. production in Japan, it doesn't go on the books as a reduction of our trade deficit anyway!
The three vital bills and the mania surrounding them add up to a poisonous dose of wishful thinking. Policymakers should stop humming and wake up to the fact that we are unprepared to compete against others who (1) pointedly spur business investment at the expense of marginal personal consumption, (2) don't treat the export market as a pox, and (3) have the audacity to make products that work.
(c) TPG Communications.
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