Is Insourcing Coming Back to the U.S.?

OK, now I am impressed. Senator Hillary Clinton—who hasn’t really done much to catch my attention so far—has come up with an “insourcing” agenda for American business in the 21st Century. I am glad to see that someone is actually talking about this issue. It is refreshing to say the least, considering the record of her opponents.
 

In 2003, Sen. McCain authored an amendment that undermined long-standing rules requiring the U.S. military to only purchase equipment, defense systems and components manufactured in the United States. This set the stage for the Air Force’s decision to outsource the production of refueling tankers for the American military to Airbus. Had Boeing won the contract, over 44,000 new jobs would have been created here in the U.S. As for Obama, at a campaign stop in Iowa back in 2007, he stated his support for using taxes to reign-in companies that send jobs overseas as well as enlisting education and infrastructure improvements to the cause of developing and retaining jobs here in the U.S. That is nice, as far as it goes, but we are well beyond the stage where vague platitudes mean much. Still, Obama at least is talking, and that is all to the good, but only Hillary has articulated a clear vision of how, step-by-step, she proposes to deal with this problem.

I am not sure if this is all campaign hot air or a sincere position that she would vigorously push for if elected, but the mere fact that the subject is on table and being discussed at all gives me some reason to hope that the decades-long hemorrhage of American jobs overseas might finally receive the critical attention that it is due. According to BlogHillary at HillaryClinton.com, the plan is as follows:

 

HILLARY CLINTON’S INSOURCING AGENDA

To maintain our competitive edge in the global economy, Senator Clinton has laid out a comprehensive economic plan to lower healthcare costs, restore fiscal discipline, rebuild our infrastructure and create at least five million green collar green jobs. Today, she announced a new set of initiatives to spur innovation and reward companies that are creating good, high-paying jobs in the United States:

  • Enacting the Largest Expansion of Tax Benefits for Research and Job Growth in a Generation: Increase the existing R&D credit by 50% and create a new 40% R&D credit for basic research. These steps will reward high-wage job growth in the U.S. and help make U.S. manufacturers and research companies more globally competitive.
  • Creating New High Tech Jobs With at Least 15 New Innovation and Research Clusters Across the U.S.
  • Launching a New Insourcing Markets Tax Credit to Spur Business Investment in Communities Facing Global Competition.
  • Catalyzing a 21st Century Manufacturing Sector with a New MARPA-Research Program , a Green-Manufacturing Extension Program and Made Green in America Fund : These initiatives will help small- and medium-sized manufacturers prosper, including in new renewable and clean energy markets.

ELIMINATE TAX INCENTIVES TO MOVE JOBS AND CAPITAL OVERSEAS: Senator Clinton will eliminate the tax incentives and lax enforcement that make it easier to ship jobs and capital overseas:

  • Ending Deferral that Rewards Moving Jobs Overseas: Reform the practice currently known as “deferral,” which allows companies to defer paying U.S. taxes on income earned by their foreign subsidiaries.
  • Closing Abusive Tax Loopholes: Prevent companies from using approaches like transfer-pricing and cross-crediting to shift assets, production or profits to low-tax jurisdictions. Eliminate the unfair advantage that foreign insurers located in tax havens have against U.S. insurers.

1. Enact the Largest Expansion of Tax Incentives for Research and Job Growth in a Generation: If the US wants to remain as the global leader for cutting edge research, innovation and high-wage job growth, we must update our tools for rewarding these activities. The R&D tax credit has proved to be a successful, cost-effective tool to increase investment in research jobs in the United States and to make the U.S. a more attractive venue for global R&D. [Atkinson, 2007]. In fact, every dollar spent on the credit leverages more than $2.00 in private research spending. [Gupta, Hwang, and Schmidt, 2006]. And the “R&D” credit is actually a “U.S. jobs” credit because 75% of the credit – and 90% in certain industries – goes to reward the wages of workers performing U.S. based research.

Two decades ago, the U.S. offered the most generous R&D tax benefits in the world. Today, we have fallen to 17th – below even Mexico. At a time of increased global competition and increasing pressure on U.S. wages and jobs, this decline provides further incentive for companies to look overseas when making investment decisions. We need to update this tax credit to respond to the needs of our 21st century economy. Hillary Clinton has already called for making the existing credit permanent to remove uncertainty for U.S. businesses. Today, she proposed the largest expansion in the R&D tax credit in a generation. She will:

  • Increase the R&D credit by 50% to give companies a clear strong incentive to invest in research jobs in the U.S. Senator Clinton will increase the existing R&D tax credit from 20% to 30% -- the largest single increase singe the credit was created in 1981. She will also increase the Alternative Simplified Credit from 12% to 20%
  • Create a 40% Basic Research Credit that will reward collaborative research done to help drive innovation and job growth. Basic research is a vital driver of productivity and job growth in the U.S. economy, but businesses often under-invest in basic research because they cannot always capture that research’s full benefits. To help spur jobs in basic research and encourage collaborative research between universities, federal research institutions and private firms, Senator Clinton would create a 40% incremental credit on all qualified investments in basic research.
  • Create a new Start Up Research Jobs Credit, which will give companies with no prior research expenses access to tax incentives. Because the existing R&D tax credit rewards increased investment in research-related jobs, firms that have no prior expenses and therefore no baseline investment amount are not eligible. Senator Clinton would create a new 10% credit for all qualifying R&D spending for start-up firms.

2. Creating New High Tech Jobs Across the U.S. With at Least 15 New Innovation and Research Clusters across the U.S. “Clusters” or “innovation hot spots” are hubs of economic activity that exhibit superior growth rates of investment, productivity, and wage gains for local communities. [Center for American Progress, 2007]. While most people are familiar with Silicon Valley in California, clusters are powerful drivers of regional economies in other places too, such as Central Florida’s modeling and simulation cluster and Pittsburgh’s ICT (information and communications technology) hub. The ICT hub is a tremendous source of innovation and collaboration, involving the work of PennStateUniversity’s Electro-OpticsCenter, Carnegie Mellon’s Software Engineering Institute, a non-profit Technology Collaborative, and 1,500 ICT companies.

Senator Clinton believes we should be aggressively supporting regional clusters that leverage local assets, drive economic growth and create high-wage jobs. In addition to offering her new 40% credit for basic research, Senator Clinton will launch a new program of tax exempt bonds for states and local governments to build research parks. And she will catalyze the creation of at least 15 major research clusters during her first term:

  • New Cluster Innovation Grants: Under this program, state and local governments will apply to the federal government with plans for stimulating their regional economies by building on place-specific assets. The federal government will disburse up $500 million a year in competitive federal matching grants for state and local governments to stimulate their regional economies. In 2003, Governor Ed Rendel launched a similar initiative called “Keystone Innovation Zones” in Pennsylvania which as already leveraged over $400 million of new investments and led to the formation of nearly 200 new companies.

3. A new Insourcing Markets Tax Credit to spur business investment in communities facing global competition. Building off the success of the New Markets Tax Credit Program, Senator Clinton will launch a new public/private partnership to bring new investment and jobs to communities that are vulnerable to global competition, and provide them with the tools to become leaders in our economy. While the NMTC has played a crucial role in bringing investment and job growth to poor and underserved areas, many communities impacted by globalization have acute needs: requiring large and fast-acting infusions of capital to diversify and modernize in the wake of job losses and unemployment.

In addition to reauthorizing the NMTC, Senator Clinton will create a new $5 billion Insourcing Markets Tax Credit dedicated to communities impacted by global competition, trade and technological change. The Secretary of Treasury – in consultation with the Secretary of Labor and Commerce – will determine eligible trade-impacted communities, using relevant economic data and workforce data. Given the goals of modernization and economic diversification in these areas, Treasury will require the community development groups selected to solicit private IMTC investors to put particular emphasis on projects that bring in new industries and companies into these communities as well as create high-quality long term employment. Eligibility for IMTCs will also be expanded to Small Business Investment Corporations (SBICs) that have expertise in trade-impacted industries, such as manufacturing. SBICs have invested more than $4.3 billion in small manufacturing companies during the past decade, even during a challenging time for the industry.

4. Catalyzing a 21st Century Manufacturing Sector with a new MARPA-research program, a Green-Manufacturing Extension Program and Made Green in America Fund . Hillary believes that we cannot remain a great country with a strong economy without a strong, vibrant manufacturing sector. Today, she announced three new initiatives to help catalyze manufacturing research and ensure that the U.S. becomes a leader in clean energy manufacturing.

  • A Manufacturing Advanced Research Projects Agency (MARPA): This new agency would manage and direct basic and applied R&D projects for the manufacturing sector, and pursue research and technology where risk and returns are very high and where success may provide dramatic advances for traditional manufacturing processes.
  • A “Made Green In America” Fund: Hillary will invest $500 million annually in a “Made Green in America” fund to encourage the creation of high-wage jobs in clean energy manufacturing technologies.  Today, there are manufacturing firms all over the country that want to transition to building the infrastructure to create new, clean energy sources but do not have the capital to make the change. Under this proposal, domestic facilities that manufacture qualifying clean energy technologies, such as wind and solar, or the components of such technologies, would be eligible to receive awards of up to 30 percent of the costs of engineering, retooling or construction of facilities to manufacture qualifying clean energy technologies.  States would have flexibility in implementing the program, but would be directed to give preference to projects that maximize the use of domestically-sourced parts, return idled manufacturing facilities to productive use, re-employ laid off manufacturing workers, provide above-average pay, benefits, and productivity and demonstrate a high-probability of commercial success.  In addition to helping established manufacturers move to producing clean energy sources, the Made Green In America Fund will invest in creating business “ecubators” – small firms that are developing and testing early-stage ideas with the potential to transform our energy sources to be cleaner and more sustainable.  Pennsylvania would receive at least $20 million per year under this new program to invest in clean energy technology manufacturing.
  • A Green-Manufacturing Extension Partnership (G-MEP): The Manufacturing Extension Partnership (MEP) is a highly effective program that provides technical and business assistance to small and medium-sized manufacturers to help them improve productivity and create and grow the number of good-paying jobs in this country. Hillary has already called for doubling the MEP to support a more vibrant 21st century manufacturing sector.  As President, Hillary will create a new G-MEP program as part of the Manufacturing Extension Partnership that will focus on green energy. This new initiative will provide a broad range of tools and technical assistance, and serve as a repository of shared best practices by being linked to G-MEP centers all around the country, for small and medium sized manufacturers who are working to create sustainable energy sources.

5. Close loopholes in our tax code that encourage companies to ship jobs overseas. As President, Senator Clinton will overhaul our international tax system to remove incentives for companies to locate jobs and capital overseas and to crack down on abusive offshore tax havens.

  • First, Senator Clinton will reform the practice currently known as “deferral,” which allows companies to defer paying U.S. taxes on income earned by their foreign subsidiaries until or unless that income is repatriated to the U.S. This provision gives a company trying to decide between locating production in the United States or in a foreign low-tax haven an affirmative tax incentive to locate – and continue re-investing profits – overseas. In 2007, Exxon Mobil has $56 billion parked overseas, while Pfizer had $60 billion.” [USA Today, 3/20/08]. Deferral not only encourages offshoring, but is economically inefficient. As the Congressional Research Service explained, deferral “reduces economic welfare by encouraging firms to undertake overseas investments that are less productive — before taxes are considered — than alternative investments in the United States.” [“Tax Exemption for Repatriated Foreign Earnings,” 10/22/2003]. Senator Clinton will reform this provision to remove the incentive for Companies to ship jobs overseas.
  • Second, Senator Clinton will close tax loopholes to ensure that companies cannot continue receiving tax benefits for locating abroad. She will disallow companies from engaging in transfer-pricing arrangements where companies avoid taxes by shifting income or assets to low-tax jurisdictions. She will eliminate incentives in the tax code (like the ability to “cross-credit”) that  encourage U.S. companies to shift operations or at least profits to low-tax jurisdictions. And she will eliminate the unfair advantage that foreign insurers located in tax havens have against U.S. insurers competing for U.S. business.

 

The hue and cry we will hear against this proposal—and against anything similar that the others might come up with—will come from those businesses affected by the changes proposed to the tax code and from their supporters in Congress. However, those voices of dissent are, I believe, missing the bigger picture.

While a free market where goods and services from around the world are easily bought and sold, and business can thrive without concern for boundaries and frontiers is an ideal state of affairs, we do not live in such a world. We compete with nations that hold their entire means of production within their own borders, support the work and prosperity of their people over that of the corporate entities that exist within their borders and certainly over the prosperity of other nations. We face stiff tariffs on our own goods and services while at the same time offering “Most Favored Nation” status to those same protectionist nations. The truth is that we are attempting to use the Free Market or Laissez-faire economic philosophy of Adam Smith and David Hume in the face of a world that still uses Mercantilist policies. 

The difference between the two philosophies is fairly straightforward. Generally speaking, Laissez-faire theory holds that private initiative and production should be free of State economic intervention and taxation over and above what is necessary to protect individual liberty, peace, security, and property rights. Mercantilism, which has roots as far back as the Roman Empire, is not directed so much by abstract economic ideas as by concerns for the political, commercial and security issues of the State. Mercantilism is distinctly protectionist, with taxes and tariffs on imports and is often equated with a regulated economy. It has also been equated to warfare—economic, not the shooting kind—and was, in fact, one of the many influences that drove the American colonies of the 18th century to seek independence.

By this definition, Senator Clinton’s proposal would certainly fall under the Laissez-faire banner by bringing jobs back to the United States, thus protecting individual peace and security without resorting to punitive tariffs on imports that would put our products at a further disadvantage. This certainly goes along with her position during a 2007 Democratic National Debate: “People ask me, am I a free trader or a fair trader? I want to be a smart, pro-American trader. And that means we look for ways to maximize the impact of what we're trying to export and quit being taken advantage of by other countries.” That is a good, solid position for a presidential candidate to take, but I have to question her commitment. Back in 2005, she defended the outsourcing of jobs from America. During a trip to India, which is one of the primary beneficiaries of American outsourcing, she said, "Outsourcing will continue. There is no way to legislate against reality.” She then went on to acknowledge the political and economic realities of outsourcing back at home. "I have to be frank," she said. "People in my country are losing their jobs, and U.S. policymakers need to address this issue."

Of course, her most recent proposal is doing just what she said you could not, legislating against reality. Or is it? Is it reality to say that there is nothing that can be done about outsourcing or is it reality to say that our politicians simply lack the political will to do something about it? After all, these companies do tend to fill the campaign coffers of those in power very nicely and money does talk. Call me a cynic, but is there really such a change in political will when one goes from being a sitting senator to being a presidential candidate?  Personally, I doubt it. The big difference is that you are on the stage in a way that you never had to be before and with that bright light on you, you better say something the audience wants to hear.

She knew, back in 2005, that the people were tired of American jobs going overseas and yet only now, on the downhill slope toward the 2008 presidential elections, does she have something cogent to say about it. Only now has she found the will to propose a solution for it, to legislate against what she once called “reality” and bring these jobs home. Is it a sincere position, one she will make into a new “reality?” I don’t know. The cynic in me says it’s all a nice talking point to get one over on Obama and McCain, but that there is little or no substance to it. Of course, even if she is really on the up-and-up and manages to win and works to set her agenda into motion; the odds of it making it through Congress without being substantially weakened or perverted are pretty small. 

Don’t lose heart. The specific proposal—even the fact that it came from Hillary Clinton—is actually irrelevant. The important thing is that the conversation has begun, that the topic is now on the national agenda, where it should have been years ago, and once there, it will not be stifled. That is where you come in as an entrepreneur and small business owner.

Outsourcing jobs overseas hurts people and it hurts small businesses since it cuts into your customer base. Think about it: People who lose their jobs don’t have the disposable income they need to viably support local economies. That, in turn, means that the small businesses dependent on those local economies suffer since fewer customers are available. I urge you to contact your senators and congressmen and let them know that you want—no, demand—that the flood of American jobs going overseas ends. To find your congressmen, go to http://www.house.gov.  To reach your senators, visit http://www.senate.gov. Finally, to reach the President, visit http://www.whitehouse.gov.

Sometimes, when those in the halls of power lose their backbones, it is up to the people to find and return them.