|
|
|
|
 PART 3: The business
of
private security
By
Henry C K Liu
PART 1: The failed-state
cancer
PART 2: The privatization
wave
The prime function of a
sovereign state is the provision of security,
national and domestic. National security is
concerned with protection from external threats,
while domestic security is concerned with
maintaining social order. For the United States,
protected by two oceans, the line separating
external threats and homeland security had been
clearly delineated until September 11, 2001, after
which direct foreign threats on the US homeland
became a reality. Current US policy on the threat
of terrorism focuses on preemptive wars on foreign
soil and preventive measures within its borders.
Notwithstanding the current high-profile
concern with the "war on terrorism", it is useful
and necessary to remember that the central
political aim of terrorism is not to annihilate
its usually overwhelmingly powerful target, but
merely to draw the world's attention to what
terrorists consider legitimate grievances imposed
and sustained by the targeted polity and hitherto
ignored by the world. Terrorism by definition is a
limited reactive tactic in that it aims to make
its target cease and desist ongoing injurious
strategic policies and actions that have become
routine and normal. Even state terrorism, also
known conventionally as war, does not aim to
destroy an opponent country, merely to eliminate
its political resolve to resist the invader's
will. The political objective of the US "war on
terrorism" is to deny the legitimacy of the
grievances to which terrorists aim to draw
attention and to present terrorist attacks as
common criminal acts. "Terrorists hate us because
they hate freedom," proclaimed President George W
Bush. It is not a perspective that will reduce
threats to US security. The fallback tactic, then,
is preemptive strikes abroad and preventive
measures at home.
Such an intransigent
mindset grows out of the attitude that crime
should be fought with increased funding for the
police rather than by funding programs to
eradicate poverty. Refusal to link terrorism to
injustice comes from the same mentality as refusal
to link crime with poverty. Increasingly,
reflecting the proliferation of such a mentality,
the US seeks to meet increased national and
domestic security threats from terrorism by
exploiting the efficiency that allegedly can be
milked from privatizing state functions. It is
ironically a march toward failed statehood in its
acceptance of the superior effectiveness of the
private sector in performing state functions.
While security protection is outsourced to market
participants, little effort is devoted to
promoting policies that can reduce the need for
security protection. Moreover, there is clear
evidence that the global proliferation of
marketization of basic social services, with its
effect of denying needed services to the poor,
adds to the proliferation of security threats from
terrorism.
Social order and social
security
Social order is the main component
of domestic security. Social security is the
foundation of social order. Henry J Aaron of the
Brookings Institution calls the US Social Security
system "the great monument of 20th-century
liberalism". Privatization of social security is
not a solution; it is an oxymoron. It merely turns
social security into private security. Neo-liberal
economics theory promotes as scientific truth an
ideology that is irrationally hostile to
government responsibility for social programs.
Based on that ideology, neo-liberal economists
then construct a mechanical system of
rationalization to dismantle government and its
social programs in the name of efficiency through
privatization. Privatization of social security is
a road to government abdication, the cause of
failed statehood.
In 1935, the US Congress
passed the Social Security Act as part of the New
Deal, in response to inevitable market failures
under finance capitalism. Social Security benefit
payments not only helped recipients who were too
sick or too old to work, but such payments also
contributed to the stabilization of business
cycles that regularly wreaked havoc on the market
economy. Social security was a government program
that helped keep markets operational by providing
a baseline level of demand with a social safety
net. Starting in 1937, government receipts into
the Social Security trust funds have repeatedly
contributed to the reduction of the federal
deficit in an era when deficit financing was
indispensable to demand management, with
substantial socio-economic benefits to the whole
system.
The Social Security program, by
its very name, is not an investment program. It is
a protection program. It is not even an insurance
program, because all participants receive benefits
on retirement. Rates of return on investment in a
market economy are direct reflections of risk
levels. The concept of risk is inseparable from
the prospect of worst-case eventuality. The whole
purpose of Social Security is to eliminate market
risk for those citizens least able to afford to
risk their well-being in retirement.
The
fact that Social Security payments have gradually
fallen into mere supplemental support for the full
financial needs of retirees does not argue for
encouraging workers to taking market risks with
their retirement. One-third of America's retired
elderly receive 90% of their income from Social
Security payments, and two-thirds receive more
than 50%. This argues for increasing government
contribution to Social Security costs, to be paid
for by taxing unearned gains that sprang either
from private control of land and other natural
resources, or from the exercise of monopoly power
in all its subtle forms, including overreaching
intellectual property rights.
How work
is taxed
Journalist Jonathan Rowe and
economist Clifford Cobb conducted a study
highlighting the forgotten history of US income
tax by pointing out that the payroll tax, which
finances Social Security, is in essence a
regressive tax on work. It fell exclusively on
wages and salaries of working people on the first
US$90,000 of annual income in 2004. The payroll
tax constitutes more than half of the federal
taxes that the average US taxpayer pays. But
because of the ceiling on taxable payroll income,
those making more than $90,000 in 2004 paid no
additional payroll tax.
The Social
Security tax rate today is double the top
income-tax rate in 1913, when the income tax was
first introduced. In payroll taxes alone,
low-income workers today are paying twice the rate
that millionaires paid in the original version of
the tax that Congress first enacted. Obviously,
fairness demands that the income ceiling for
payroll tax should be removed and the fixed rate
reduced correspondingly. According to the Social
Security Administration's chief actuary, if the
limit on wages taxed for Social Security,
currently $90,000, were lifted altogether, the
system would be kept fully solvent until 2077.
In the 1920s, corporate income tax yielded
almost a third of US federal revenues. Today,
corporations pay just a little over one-ninth
despite widespread corporatization of almost every
aspect of life. The New Economy, a buzzword
describing the effect of new, astronomically
high-growth industries that are on the cutting
edge of technology and are expected to be the
driving force of new economic growth, consists of
industries such as the Internet dot-coms and
biotech. "New Economy" notwithstanding, a large
share of corporate income is still derived from
ownership of land and other natural resources,
from intellectual-property monopoly and from
financial manipulation. As of 1990, these
comprised more than 40% of the total assets of
almost a third of Fortune 500 companies. So the
decline of revenue share from corporate tax has
been part of the larger reversal of the basic
concept behind the original income tax. It is the
key venue for the sharp increase in the number of
millionaires and billionaires in the US economy
while more and more workers fall below the poverty
line to join the rank of the working poor. It is
obscene to accuse the poor of not saving enough
when they do not receive even a living wage. There
is no other way to reduce poverty except to give
the chronic poor money and the working poor more
income.
Today, the US federal tax system
is in essence a tax-on-work system. It falls
hardest upon income of workers and penalizes work
activities that an economy needs to encourage in
order to remain healthy. Capital is merely idle
assets without the opportunity to generate wealth
through increasing the financial value of work
provided by workers. Neo-liberal economics
ideology places wealth creation, as manifested in
asset appreciation, as the ultimate goal of
economic activities. Yet there are internal
structural contradictions in the economics of
wealth creation through asset appreciation, which
is achievable only by causing asset value to rise
faster than value of work as expressed through
income. When income from work rises faster than
asset appreciation, it is perceived by neo-liberal
monetarists as inflation, a wealth destroyer. Thus
wealth can only be created through ownership of
assets the value of which rises faster than the
value of work. But in reality, when asset value
rises faster than income from work, those who do
not own assets will fall behind into relative
poverty. Thus wealth creation through asset
appreciation actually produces systemic poverty.
Real aggregate wealth, or the wealth of nations as
Adam Smith coined it, is created only from raising
the value of work as expressed through rising
income from work done by the working population.
Neo-liberals betray Adam Smith, their ideology
guru, by usurping government's power to ensure
labor of its fair share of market power, by
kicking government out of its regulatory role in
maintaining a truly free market, by keeping the
value of work on par with the value of assets.
There is no economic logic in reducing the
monetary value of work by placing a tax on it.
Taxes should be derived exclusively from surplus
value, ie profits. When profit is taxed, it
creates incentives for management to allow wages
to rise to avoid excess profit. Taxing undervalued
labor values as expressed in low income from work
is similar to taking food from the hungry and the
undernourished. Not only is it unjust, it is also
uneconomic, since any arrangement that increases
poverty is bad economics. Falling value of work, a
path to systemic poverty, leads to perverse ways
of creating wealth, through finance manipulation
to generate financial bubbles camouflaged as
economic growth. This ideology of taxing the
wholesome (work) to feed the insalubrious
(manipulation) is aptly expressed by the chairman
of the US Federal Reserve, Alan Greenspan, when he
proclaims that it is better to create wealth by
thinking than working, in defense of neo-liberal
globalization that ships underpaying US jobs
overseas to still more underpaid workers. Such
economic growth produces no additional real
wealth, and in fact reduces global aggregate
wealth by universally reducing the value of work,
leading to the unsustainable phenomenon of
consumption supported by debt, primarily because
work is universally underpaid. This system of tax
on work burdens unfairly those already struggling
hardest to make ends meet because of a systemic
undervaluing of their work. When work is taxed and
thinking is not, wealth can only be created with
financial bubbles because all who are able will
avoid work. Yet ultimately, work is what produces
the goods and services that wealth commands.
Thinking not backed by adequate work, coupled with
overpaying thinking and underpaying work,
eventually leads to an erosion of the purchasing
power of money.
Yet mainstream economic
policy debate rarely acknowledges this fundamental
perversity. For all the partisan polemics and
chest-thumping about radical tax reform, there is
little debate on why the federal tax burden should
mainly fall on workers. Conservatives have a point
in arguing for letting taxpayers keep more of what
they earn, but they adamantly oppose taxation on
unearned gains arising from the mere ownership of
capital, land and other natural resources and
intellectual-property monopolies, the high value
of which are all derivatives of dysfunctionally
low wages. The US capital-gain tax is a revenue
sieve with a hole large enough for truckloads of
gold to pass through undetected since much wealth
nowadays is created by manipulating debt,
involving no capital at all.
Accounting
for an ethical society
It is useful to
realize that the problem with the US Social
Security system is not an economic issue. It is a
political/ethical issue with a financial
dimension. The economics of Social Security
remains structurally sound. The problem is one of
irrational and dishonest financial accounting. It
is an ethical verity that a civilized society
should assume responsibility for providing
institutional guarantee for its elderly citizens'
financial needs after retirement, particularly if
retirement is made mandatory by the socio-economic
system. In a sense, Social Security is inseparable
from US national security, because social
stability is a key component of national security.
If Social Security is viewed as part and partial
of national security, then privatization becomes
as ridiculous a notion as privatizing the
Department of Defense - which, incidentally, is
also occurring with deliberate speed.
On
November 11, 1999, the 80th anniversary of the
World War I armistice, Milton Friedman, the
leading guru of the Chicago School monetarists,
published an op-ed piece in The New York Times
titled "Social Security chimeras" in which he
pointed out, correctly, that the Social Security
trust funds and projected shortfalls and all the
sturm und drang noise surrounding them are,
in fact, mere accounting issues. He pointed out
that, in real economic terms, it doesn't matter
whether Americans save or not, whether there's a
shortfall or not, points that most economists
understand and agree. It is merely an accounting
problem.
As Fed chairman Greenspan
recently and repeatedly told Congress, funding
Social Security benefits with cash is not a
problem. The problem is maintaining the purchasing
power of the cash. But the purchasing power of
money is a systemic monetary issue, and not an
accounting issue of any particular social program.
Money enjoys more purchasing power when more goods
and service are produced by work and work is
created by strong demand for goods and services.
What Greenspan did not say was that such strong
demand comes only from high wages and full
employment.
Friedman went on to argue that
gradual, partial privatization of Social Security
is unnecessary, since gradualist solutions are
premised on attempts to "preserve" what amount to
fictional balances anyway. But then, following his
subjective ideology rather than his objective
analytical mind, Friedman proposed what is in
essence an ideological solution, one that is
antisocial, as are most of his ideological
positions in essence, crossing over from his
respected role as a competent economist to the
dubious role of a bungling political philosopher.
Why not, he concluded, go all the way? Full,
complete privatization right now. Let every
citizen swim or sink in the market, where those
not thoroughly initiated in its esoteric ways have
as much a chance of survival as babes in a forest
of dangerous beasts. What about today's Social
Security recipients? Give them a check
representing the present value of their promised
benefits and wash our hands of them.
But
Friedman did not explain why, if the shortfalls
are mere accounting problems (which they are), why
Social Security has a problem in the first place.
Why not drop the whole argument and reaffirm our
social commitment to a decent public pension
system for all citizens, along with universal
health care, the privatization of all of which is
ruining many families? This question is
particularly pertinent in a situation of
underutilized overcapacity due to inadequate
aggregate demand.
Faith and
inefficiency
There is a fallacy about the
magic of privatization. It is based on an
unjustified faith in the market's unerring ability
to generate wealth and growth and, more important,
in the market's ability to channel such wealth
fairly and to parties most in need for the good of
the nation and society. Increasingly, markets are
transfer mechanisms of wealth rather than creators
of wealth, merely taking wealth from underpaid
workers and handing it over to overpaid
speculators. The fact is that markets have also
been known to be generators of losses and economic
contraction, as demonstrated by the crashes of
1901 (45% drop), 1906 (48%), 1916 (40%), 1929
(47%), 1930 (86%), 1937 (49%), 1939 (40%), 1968
(46%), 1973 (46%), 1987 (23%) 1998 (36%) and 2000
(37%). The data suggest that even exempting the
big crash of 1929-30 in which the market lost
nearly 90% of its peak value, the average crash
can routinely lose 40% of its peak value. Such
losses are often not borne by speculators, who can
profit in both rising and falling markets, but
mostly by the general investing public, whose
portfolios are usually not hedged against
systemwide declines. And even in cycles of growth,
the market has a tendency to channel wealth to
those who already have substantial wealth and
least need more. The average investor seldom
benefits fully even from a rising bull market.
In this era of instant electronic
transactions and computerized program trading,
eliminating market "inefficiencies", more than
risk commensuration, produces most of the profits
on Wall Street. Theoretically, under free-market
principles, it should be unnecessary to have to
choose the smart investment because all
instruments are "priced" the Hayekian way to make
return on investment come out equal in the long
run, risk being always fairly compensated for with
commensurate returns. When they do not come out
equal, the situations are called market
inefficiencies, which are in fact disjointed minor
market failures. So, by definition, all
opportunities for profit reside exclusively on
correcting market inefficiencies and reducing risk
by socializing it. This is what justifies the
existence and proliferation of hedge funds and
derivatives. They make the market more efficient
and are richly compensated for it.
With
increasing sophistication and complexity of new
marketable financial instruments, be they
securitized debt or equity or derivatives, the
astute and legally qualified risk takers have a
distinct advantage over the unaware and
unqualified general public. This advantage
constitutes a massive, systemic transfer of wealth
to those who are rich enough to qualify for
high-net-worth entrance requirements of hedge
funds and private equity markets to a game of
taking technical risks that are really not risky
because of sophisticated hedging, to reap enviable
and often obscene gains of up to 40% on
investment. This systemic market transfer of
wealth to the rich is greater than any government
social-entitlement transfer to the poor. That is
how millionaires are made into billionaires in the
market, not by luck, not by skill, but by
membership in the private club of the rich in what
investment bankers call the private-equity sector.
It is a blatant institutionalization of the "rich
get richer" syndrome. It is the new feudalism.
Yet unlike the old feudal lords who
provided order and security, or inventors or
captains of industry who actually performed some
positive economic function, these groups of the
financially astute contribute not at all to
economic production, only to financial expansion,
a euphemism for finance-induced economic bubbles.
The sad part is that in the US, this market is
attracting the best and brightest of the nation's
young minds, who are individually moral and
ethical, but collectively are pushed by the system
into the role of terrifying horsemen of financial
apocalypse. They destroy because the name of the
game is "creative destruction" and the highest
reward goes to the one who destroys the most -
jobs, companies, even whole industries. It is as
if firemen were to get a handsome bonus several
hundredfold of their salary every time they put
out a fire, and if it were not illegal to start a
controlled fire, all firemen would double as
controlled arsonists. Controlled arson can be
rationalized as economically expansionist, as it
leads to constant rebuilding when it is most
profitable, albeit not always where it is most
needed by society. But then Margaret Thatcher
insisted that there is no such thing as society.
This is the equivalent of what Wall Street
traders do, in equity, debts, commodities,
currencies, even weather derivatives. Whenever
they can, they purposely create market
inefficiencies in order to capture profit by
removing the very "inefficiencies" they created.
Citigroup, the world's largest financial-services
company, is being investigated by German
prosecutors and the Financial Services Authority
for a manipulative multibillion-euro trade in
euro-zone government bonds last August when it
sold and then bought billions of euros' worth of
debt in quick succession, making millions of euros
in profit. According to news reports, a Citibank
internal memo dated July 20 explained how the bank
could "very profitably" destabilize the market.
The current normal daily volatility of
stock prices represents ongoing examples of these
manipulated inefficiencies. A whole science of
technical analysis of market movements has grown
up around the phenomenon. Others are less directly
visible, such as the inverted interest-rate curves
reflecting abnormal lower rates for longer terms
that generally signals recessions ahead. It is a
short-term inefficiency in the credit market
imposed by Federal Reserve interest-rate policy.
The Fed controls the supply of money but the
market determines the growth of debt. As yields
stay low, investors are pushed to seek higher
yields by taking more risk, buying debts with low
credit ratings. Since 2003, the Fed has been
raising the Fed Funds Rate at a "measured pace",
but the debt market has continued to expand, with
yields on both sovereign and corporate bonds
declining. Low-rated bonds now make up 20% of the
outstanding supply of speculative bonds, more than
twice the 1998 level when the Asian financial
crisis and the Russian default abruptly ended the
debt bubble. Consumer spending has been largely
supported not by income, but by home-equity loans,
particularly cash-out refinancing, at
below-inflation interest rates.
The
current Social Security proposals in the United
States only highlight these pervasive
manipulations that have gone on for a decade.
Ironically, the Social Security privatization
proposals are really sub-optimization measures,
because, like the debacle of Long Term Capital
Management (LTCM) that almost led to a massive
collapse of the market, which required Federal
Reserve intervention to prevent, when massive
Social Security funds go into the equity market,
it will be deemed too big to fail even if the
market turns against it. So there is an
anticipated implicit guarantee by the US
Treasury/Federal Reserve that with Social Security
funds in it, the market will not be allowed to
crash, which is why Wall Street will embrace
privatization proposals with open arms. It is a
game where profits are privatized, and losses are
socialized. In that sense, the US economy is
already half-socialistic: the loss half. The
question is: when is it going to socialize the
profit half for balance?
The most
significant factor of the booming war economy in
the US during World War II was that about 10
million able and productive men, 25% of the
workforce, were taken out of economically
productive work and had to be supported at a high
level of military consumption. In fact, another
way of looking at it is that these soldiers were
assigned the job of consumption. The lesson is
that by a deliberate collective effort, an
enormous expansion of production was effectuated
through a planned war economy of full employment
for a reduced pool of workers. Ironically, the new
high-tech wars of today of minimizing manpower
will reduce even the economic bonus of war on
employment and the effectiveness of war as an
anti-depression economic measure.
With a
policy of full employment and rising wages, there
is no reason the US economy cannot support its
expanding population of retirees at a decent
living level of consumption even with a shrinking
pool of workers. Changing demographics, while
factual, is not the cause of the problem in Social
Security. Faulty ideology is. Young workers should
be reminded that it is their parents' retirement
consumption that will allow them to keep their own
jobs with high pay.
Evolution of
taxation
The first permanent US corporate
income tax was enacted in 1909, four years before
the introduction of the modern version of the
personal income tax. The initial rate was 1% of
net income. Both revenue and rate increased
steadily until 1943, when it peaked at 7.1% of
gross domestic product (GDP). But corporate income
taxes have contributed a declining portion of
federal revenue over the past six decades. This
decline has been made up by the increasing share
of revenue from social-insurance contributions,
primarily the Social Security payroll tax. In
1943, corporate taxes comprised 39.8% of total
federal revenues; social-insurance contributions
contributed 12.7%. By 1996, the situation was
nearly reversed; social-insurance contributions
provided 35.1% of federal revenues, while
corporate income taxes provided 11.8%. The Tax
Reform Act of 1986 reduced corporate income tax
from 46% to 34%, well below the 42% average rate
of developed countries in the Organization of
Economic Cooperation and Development. In the US,
state corporate tax rates made up most of the
difference.
The US economy grew faster
than OECD economies, but the income of the lower
quartile in the US declined in the past six
decades. US prosperity had been paid for by making
the poor poorer in the US and around the world.
The US corporate tax rate stayed at 34% until the
Clinton administration's first budget raised it to
35%. Meanwhile, with neo-liberal globalization
promoted by Third Way politicians such as Bill
Clinton and Tony Blair, tax competition among
developed economies was driving worldwide
corporate tax rates toward a downward spiral in a
race toward the bottom, leaving the tax burden
mainly on the working poor everywhere. Together
with the race-to-the-bottom effect on wages from
cross-border wage arbitrage, the global downward
spiral of corporate tax rates causes a decline in
government revenue and distress in government
fiscal budgets, creating temptation for selling
off public assets in a massive wave.
By
1994, the United States' 35% corporate tax rate
was above the average OECD statutory rate of 29%.
That meant that US-based trans-nationals would
keep their profits overseas and save 6% in tax
liabilities. In 1994, US corporate tax revenues
amounted to just 2.5% of US GDP, a sharp drop from
its 7.1% peak in 1943. The Tax Reform Act of 1986
eliminated many corporate tax preferences,
including the investment tax credit enacted during
the administration of president John Kennedy.
However, preferential tax treatment is still
provided for expenditures on research and
development.
But while the creation of
intellectual property is financed by tax
deductions, the consuming public is not given any
break on exorbitant patent royalties. This
injustice is most glaring in the US drug sector,
where high costs of drugs have driven many elderly
patients into financial distress, drugs that their
own tax dollars helped create earlier.
The
payroll taxes that finance Social Security and
Medicare are levied at a flat rate. For Social
Security, the tax is 12.4%, half of which is
remitted by workers and half by their employers.
For Medicare hospital insurance, the tax is 2.9%
divided equally between workers and employers.
Workers earning more than the $90,000 threshold in
2005 will pay no Social Security tax on amounts
over that, but the ceiling does not apply to the
Medicare portion of the payroll tax.
The
Social Security tax is highly regressive. Those
earning $10 million a year pay the same Social
Security tax as workers earning up to $90,000, and
the rich receive a greater share of their income
from investment earnings that are not subject to
the payroll tax. And the person with a $10 million
retirement nest egg receives the same benefit
payment as the person with no nest egg.
Arguments for and against progressive
taxation generally focus on income taxes, which
can be easily manipulated to shift burdens among
households with different levels and types of
income. Advocates of progressive schedules argue
that families should be taxed according to their
ability to pay. The ability-to-pay principle
states that each dollar paid in tax is a greater
sacrifice for a poor family than a wealthy one, so
the wealthy should pay a higher percentage to
equalize the sacrifice. Moreover, a progressive
income tax is needed to counteract the effects of
the other flat federal taxes that weigh more
heavily on the poor. The poor pay most of their
taxes in payroll taxes, thus income-tax reform has
little real meaning to the poor.
Many
economists also argue for progressive scheduling
as a way to counteract the increasingly structural
inequality distribution of income in the US
economy. The share of income received by the top
quintile increased from 47% to 51% of all income
in the US over the 1977-90 period, while the share
going to everyone below declined. One-fifth of the
working population commanded more than half of the
income in the economy. Take-home wages have been
declining as a share of total personal income, to
a historical low of only 55%, because the cost of
benefits, particularly health care, and payroll
taxes have taken larger shares of total income of
workers. Higher-income families also increased
their real incomes substantially over this period,
while families in the bottom 40% of the income
distribution saw their incomes decline in real
terms. In other words, those with the lowest
incomes not only received an increasingly small
share of the total income relative to the wealthy
over this period, but the purchasing power of
their incomes declined as well.
According
to the "ability-to-pay argument", the dramatic
increase in income inequality in the US in recent
years indicates a need for more progressive tax
scheduling, because the rich have become more able
to pay relative to the poor. According to this
argument, if "the problem is flat wages, then the
solution is not flat taxes". Compliance rates are
highest for wage and salary income, because these
taxes are withheld by employers and forwarded
directly to the Internal Revenue Service (IRS). On
the other hand, compliance rates for
self-employment, partnership, and sub-chapter S
corporation income, which are not subject to
withholding or reporting requirements, are
estimated to be below 50% due to difficulty and
complexity of audit. Because companies can deduct
interest payments, the US tax code is strongly
skewed toward encouraging firms to raise funds
through the issuance of debt rather than equity.
The tax-paying general public is in effect
subsidizing corporate debt.
Another issue
related to corporate taxation is the wide
variation in tax liability from industry to
industry. The effective tax rates in the oil, gas,
and mineral-extraction industries, for example,
are much lower than the rate for corporate
investments generally. The commercial real-estate
boom of the mid-1980s and subsequent bust was
largely the result of preferential tax treatment.
One of the main causes of the 1987 crash as
explained by tax economists was a threat by the
House Ways and Means Committee to eliminate the
tax deduction for interest expenses incurred in
leverage buyouts. These tax variations can be
inefficient from a societal perspective, even
though they were intended to address specific
needs, because the resources used to build
unneeded office space, drill dry holes in the
ground, and merge companies to lay off workers
could have been used more productively. The Tax
Reform Act of 1986 eliminated some of the
provisions that led to these types of distortions,
but many still remain.
For the three-year
period from 1996-98, Alcoa, the chief executive
officer of which, Paul O'Neill, was secretary of
the Treasury briefly under President George W
Bush, paid an effective tax rate of only 15.9% on
$1.7 billion in profits - less than half the
statutory rate of 35%. A US worker making up to
$58,100 is taxed at 15%, after which the rates
rises progressively to 35% for income over
$319,100.
The outsourcing
question
Despite widespread perception of
massive job loss to low-wage economies, there are
no official figures on the total number of US jobs
that have gone overseas. Domestic plant closures
to be relocated overseas are no longer reported in
the media as they are no longer news. Last May,
the Labor Department made its first-ever report on
the portion of "mass layoffs" attributable to
"overseas relocation" of factories, which showed
that only 2.5% of major layoffs in the first three
months of 2004 were a result of outsourcing
abroad. That survey only covered companies that
laid off 50 or more workers at one time for 30
days or longer, and so admittedly may not be
representative of all companies and all job loss.
Veteran Democratic economist Charles
Schultze, senior fellow emeritus at the Brookings
Institution, former budget director under
president Lyndon Johnson in the 1960s, and former
chairman of president Jimmy Carter's Council of
Economic Advisers in the late 1970s, noticing that
imports relative to the GDP had leveled off since
2000, concluded that "there is nothing in the data
to suggest that large increases in ... offshoring
could have played a major role in explaining
America's job performance in recent years", and
that offshoring has had a relatively modest impact
on unemployment when compared with all the other
economic factors that create and destroy jobs in
the normal cycles in the US economy. But Schultze
failed to point out that US GDP growth is caused
in no small way by a persistent capital account
surplus that is financing the massive US trade
deficit. In other words, the US economy is
creating new jobs to replace those lost to
overseas outsourcing by borrowing from the
low-wage workers overseas.
There is clear
evidence that the US is trading low-paying jobs
that it ships overseas for new higher-paying jobs
at home. This explains the widening income
disparity in the US economy and in the world
economy. Offshore outsourcing has contributed to
the stagnant wages and declining benefits in the
US labor market.
Ben Bernanke, chairman of
the economics department at Princeton University
and also a governor of the Federal Reserve,
estimated that over the past decade the US economy
lost an overall total of about 15 million jobs
each year for all kinds of reasons, while creating
an average of about 17 million new jobs each year.
Of that 15 million annual gross job loss, the
portion due to outsourcing is less than 1%.
Bernanke cited a 2003 study by the Wall Street
firm of Goldman, Sachs & Co that estimated
outsourcing abroad had averaged between 100,000
and 167,000 jobs per year since 2000. And he said
offshoring would remain a minor factor even if the
figure grew larger. Of course the study did not
mention that by 2000, most of the manufacturing
jobs that could be relocated overseas had been
relocated, with the US having lost in essence the
entire manufacturing sector.
When
companies move some jobs abroad, the savings from
low wages stimulate job creation at home. Matthew
Slaughter, a Dartmouth economist, looked at
foreign and domestic job growth in multinational
corporations from 1991 to 2001 and found foreign
affiliates of US companies added 2.9 million
workers to their payrolls overseas, but at the
same time those companies added 5.5 million US
employees at home to their payrolls. And a study
supervised by Lawrence Klein, a Nobel laureate and
professor emeritus at the University of
Pennsylvania's Wharton School of Business, and
released by the private economic consulting firm
Global Insight last March, looked at outsourcing
in the information-technology (IT) sector and
found that outsourcing generated a net gain of
90,000 jobs during 2003, in both IT and non-IT
sectors.
Notwithstanding such findings,
the question of why US unemployment stays so high
remains unanswered. There are few job seekers in
the United States who will challenge the general
feeling that the job market has become
increasingly gloomy, with wages low and benefits
meager if offered at all. Still, the Klein study
found that the cost savings of IT outsourcing
lowered inflation throughout the US economy,
increased consumer spending, and "contributed
significantly" to the overall growth of US GDP. It
claimed that by 2008, "real GDP is expected to be
$124 billion higher than it would be in an
environment in which offshore IT... outsourcing
does not occur". Klein seemed uninterested in
which segment of the population would get the
projected additional GDP growth - surely not the
workers whose jobs had been outsourced.
Democratic presidential candidate John
Kerry pointed out correctly during his
unsuccessful 2004 campaign that the US tax code
creates an incentive for US companies to move jobs
overseas. He tried unconvincingly to pin the fault
on Bush. But tax experts know that the incentive
has been there for decades, embedded even in the
first version of the corporate income tax. The
incentive exists because the US has been taxing
corporations at rates higher than most other
countries. This was possible before trade and
finance globalization, when the huge US market
could only be tapped by operations within US
borders. Companies that wanted access to the huge
US domestic market had no choice but to pay high
US corporate taxes. The fault of tax-induced job
loss lies with globalization, which the Clinton
administration did much to promote. It allows
trans-national companies to locate in low-tax
regimes around the globe.
The Institute
for International Economics reported that the
effective rate for US corporations was more than
30% in 2002, while Britain's corporate rate was
18.2%, Mexico's 15.1%, China's 11.3%, and
Indonesia's a minuscule 0.2%. In tax havens such
as Hong Kong, the concept of residence has no
applicability to Hong Kong tax law. Only Hong Kong
source income is subject to Hong Kong tax. For
this reason, Hong Kong is a suitable base from
which to administer an offshore company without
tax consequence provided that the company does not
do business with other Hong Kong residents. This
is one of the reasons the use of offshore
companies by Hong Kong residents has proliferated
to such a great extent. Offshore companies can
conveniently have Hong Kong-based directors, a
Hong Kong bank account and a Hong Kong office
address without being brought into the Hong Kong
tax net.
Most other countries of the world
operate a residency-based tax system, and care
therefore needs to be taken to ensure that the
offshore company does not establish a permanent
place of business within those countries or is
managed and controlled from those countries. For
example, an offshore company that had UK-based
directors or that established a place of business
within the United Kingdom might become liable to
UK tax on its worldwide income. A Hong Kong
company does not have to state its registered
office address or place of incorporation on its
letterhead. This would give the non-Hong Kong
offshore company the added respectability of a
Hong Kong persona combined with the added
flexibility and ease of administration of an
offshore company. There is a capital duty of 0.6%
and an annual fee of HK$75 (just under US$10).
There are no double tax treaties and no
restrictions on dealings in currencies. Bearer
shares are not permitted, registration takes three
weeks, but shelf corporations are readily
available.
The United States taxes
US-based company earnings in other countries only
when profits are brought back to the US. That
means profits that remain overseas, perhaps
invested in new factories in low-tax regimes,
never get taxed at the higher US rates. And that's
been true through both Democratic and Republican
administrations. To fix the tax problem, Kerry
came up with a proposal to tax businesses on their
foreign income right away. Corporations would
still get a credit for any taxes paid to other
countries, as they do now, but would no longer be
able to defer the US taxes indefinitely. At the
same time, Kerry would have cut the corporate tax
rate by 1.75 percentage points, to a top corporate
rate of 33.25%. He also would have offered a
one-year "tax holiday" to businesses that
repatriated earnings that had been parked overseas
for years, avoiding all US taxes. And he proposed
a tax credit to companies when their US hiring
exceeded previous levels. But Kerry did not win
the election.
The Bush administration
proposes giving US-based multinationals a larger
tax credit on their overseas income. Democrats
argue that this would only increase the incentive
to move jobs overseas; the Bush administration
argues that it would help US firms compete
globally with foreign firms that avoid US taxes
altogether. Yet companies argue that the main
reasons they locate plants in other countries are
lower wages and proximity to foreign markets, not
taxes.
High US corporate tax rates
discourage US companies from repatriating
foreign-earned profits and reinvesting them into
the US economy. A study produced by economists at
JPMorgan Securities Inc estimates that the promise
of a temporary window of a 5.25% corporate tax
rate on overseas earnings could prompt US
companies to bring home as much as $300 billion in
foreign-earned profits, now sitting offshore. Thus
a more equitable tax regime domestically, ie
making corporations pay their fair share of taxes,
harms the US economy as a whole. In other words,
globalization forces the US economy to be a less
equitable system. To put it another way, domestic
income disparity is explained as a necessary
condition for national survival in a competitive
international arena.
If allowed by the
absence of government regulations, trade tends to
shift resources to industries where worker
productivity relative to wages is greatest and
return on investment highest. The same goes for
technology. In the past, the limited and temporary
dislocation caused by import competition had been
outweighed by lasting long-term benefits that
competition creates because superior imports
forced complacent domestic industries to shape up,
as evident by the US auto industry in the 1980s.
Also, a substantial majority of US non-farm
workers, about 85%, are employed in service
industries, construction, and government, sectors
where import competition was minimal and
restriction on immigration and tradition of
unionization foiled effective wage wars among
competing workers. To such workers, imports were
unambiguous blessings that spurred domestic
innovation, expanded consumer choice, and lowered
consumer prices.
Even in the more tradable
sector of manufacturing, import penetration was
low in most industries where domestic assembly was
necessary. By 1994, however, 2.2 million US
workers worked in manufacturing industries with an
import penetration of 30% or more, most in the
assembly of imported parts. Even so, workers in
trade-sensitive manufacturing industries accounted
for only 12% of total manufacturing workers and
less than 2% of total non-farm workers.
Technological change and other non-trade factors
account for most of the workers displaced from
their jobs each year. In the three-year period
from 1995 through 1997, three-quarters of the 8
million US workers displaced from their jobs were
in sectors that by their nature are relatively
insulated from import competition. Only 23% were
in manufacturing, and 2% in mining and
agriculture.
But while the figures seem
insignificant in national terms, job loss was
significantly concentrated in terms of location to
affect economic stability drastically in several
regions, such as the rust belt in the Midwest and
miracle growth areas such as Silicon Valley.
Surging imports created demands in freight
transportation, but hourly wages fell 0.8%
nationwide. Retail jobs increased but weekly wages
in the retail sector ($376), already 30% less than
the national average, fell more than 11% in 2004,
while corporate profit rose by 20%.
But
outsourcing is a new and fast-growing phenomenon
and is rapidly changing the dynamics of growth.
With instant and low-cost communication,
non-import-related service jobs are being lost at
alarming rates in the name of a quest for
productivity relative to wages. US customers of
domestic sales now place their orders with US
companies through employees halfway across the
world for goods produced in low-wage economies and
often shipped directly from foreign soil. In other
words, jobs were going to offshore workers only
because their wages were lower, not because they
were better workers. That is rational only if the
economic objective is to increase productivity
relative to wage levels. What if the economic
objective is to increase wages? The market will
never by itself allow wages to increase unless
government policy forces it to do so. And each
government cannot do so within its own borders
under a globalized regime of racing to the bottom
with regard to wage competition. Thus a global
contagion of failed statehood is in full swing in
which governments are forced to abdicate their
responsibility to protect the wage level and job
security of their citizens, lest jobs would move
to another country. Sovereign governments have
become comprador governments.
A two-year
study by the United Nations' labor organization
produced a report that identified globalization as
creating a growing divide between rich and poor
countries, as well as a growing divide within
every country. The report found that the current
trading regime, including the World Trade
Organization, is failing to speed the growth of
global gross national product (GGNP), which is
lagging behind the economic performance of
previous decades. Titled "A Fair Globalization",
the study was commissioned by the International
Labor Organization and prepared by 20 officials
and experts, including Joseph E Stiglitz, the
newly reformed US economist who won the 2001 Nobel
Prize in economics (see Globalizing poverty, IMF
style, November 16, 2002). The report
found that 188 million willing and able workers
are unemployed worldwide, or 6.2% of the labor
force; that the gap between rich and poor nations
has widened, with countries representing 14% of
the world's population accounting for half the
world's trade and foreign investment; and that
women have been harmed more than men by
globalization in the developing world. The report
also said that women's traditional livelihoods as
subsistence farmers or small producers have been
undermined by foreign subsidized agriculture or
foreign imports but, as women, they face cultural
barriers when looking for alternative occupations.
These are the economic manifestation of failed
statehood.
The gap between rich and poor
has grown wider in rich countries as well, such as
Britain, Canada and the United States. The United
States posted the greatest gap between rich and
poor, with the top 1% earning 17% of the gross
income, "a level last seen in the 1920s". The
report says that globalization has also affected
the rate of taxes collected by countries. In the
world's 30 wealthiest nations, the average level
of corporate tax fell from 37.6% in 1996 to 30.8%
in 2003. These rich nations may be rich but they
are nevertheless infested with failed-state
syndrome with their widening wealth disparity. The
report argues that globalization is at a turning
point and international institutions need to
address social inequities as well as other
consequences of open borders, which render
sovereign states powerless to protect their
citizens from economic and financial exploitation,
both foreign and domestic.
During the
seven years from 1995 through 2002, US
manufacturing employment fell by 11%. Globally,
manufacturing jobs fell by 11%. China lost 15% of
its manufacturing jobs, and Brazil lost 20%.
Globally, manufacturing output rose by 30% during
the same period. Technological progress was the
primary cause of the decrease in manufacturing
jobs. Yet wages have not risen to reflect the rise
in productivity. Most of the saving in wages for
the same amount of production went to financing
the cost of capital goods and higher return on
capital. US workers are targeting the wrong enemy
when they complain about Third World workers
taking their jobs. The real enemies are their own
pension funds, whose quest for high returns has
kept global wages low and shipped US jobs
overseas, and their government's failed statehood.
That same principle applies when
outsourcing serves as the engine for
not-so-creative destruction. Daniel W Drezner,
assistant professor of political science at the
University of Chicago, defending outsourcing in
"The outsourcing bogeyman" (Foreign Affairs,
May/June 2004), reports that for every dollar
spent on outsourcing to India, the US economy
reaps between $1.12 and $1.14 in financial
benefits. US firms save money on wages and become
more profitable, benefiting shareholders and
increasing returns on investment. In the process,
some US workers are reallocated to more
competitive, mostly better-paying jobs, albeit
seldom the same workers who were unfortunate
enough to have lost their jobs. They are left as
collateral damage of creative destruction
concentrated in pockets of poverty in the land of
milk and honey.
On February 9, 2004, US
presidential chief economic adviser N Gregory
Mankiw, who resigned just last month to return to
his faculty post at Harvard, released the annual
Economic Report of the President, praising
offshoring of US service jobs as a "good thing".
He told reporters that "outsourcing is just a new
way of doing international trade". Government may
try to protect you from incoming missiles, but
don't expect government to protect your job.
Globalization and instability
In
the era of financial globalization, nations are
faced with the problem of protecting their
economies from financial threats. The recurring
financial crises around the world in recent
decades clearly demonstrated that most governments
have failed in this critical state responsibility.
The economic benefits associated with the
unregulated transfer of financial assets, such as
cash, stocks and bonds, across national borders
are frequently not worth the risks, as has been
amply demonstrated in many countries whose
economies have been ravaged by external financial
forces. Cross-border capital flows have become an
increasingly significant part of the globalized
economy over recent decades. The US depends on it
to finance its huge and growing trade deficit.
More than $2.5 trillion of capital flowed around
the world in 2004, with more than $1 trillion
flowing into just the US. Different types of
capital flows, such as foreign direct investment,
portfolio investment, and bank lending, are driven
by different investor motivations and country
characteristics, but one objective stands out more
than any other: capital seeks highest return
through lowest wages. The United States is not
only losing jobs to lower-wage economies, the
inflow of capital also forces stagnant US wages to
fall in relation to rising asset values.
Countries that permit free capital flows
must choose between the stability provided by
fixed exchange rates and the flexibility afforded
by an independent monetary policy to stimulate
economic growth. In countries with weak financial
and legal institutions, poorly regulated banking
systems or high levels of corruption, capital
inflows may not be channeled to their most
productive uses. One approach to limiting the
risks from excessive capital flows when legal and
financial institutions are inadequate is to
restrict foreign capital inflows. Even in the US,
which claims to have a sound banking system,
massive capital inflow has caused overinvestment
in telecommunication, Internet start-ups and real
estate.
Next: Failed
statehood, militarism and mercenaries
Henry C K Liu is chairman of the
New York-based Liu Investment Group.
(Copyright 2005 Asia Times Online Ltd. All
rights reserved. Please contact us for information
on sales, syndication and republishing.) |
|
|
|
|
|
|
|
 |
|
|
|
|
|
All material on this
website is copyright and may not be republished in any form without written
permission.
© Copyright 1999 - 2005 Asia Times
Online Ltd.
|
|
Head
Office: Rm 202, Hau Fook Mansion, No. 8 Hau Fook St., Kowloon, Hong
Kong
Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
|
Asian Sex Gazette Asian Sex News
|
|
|
