Destroying American Jobs?

Last week, the WSJ ran an interesting op-ed by Matthew Slaughter entitled “How to Destroy American Jobs.” In case you’re not familiar with Mr. Slaughter, he is currently associate dean and professor at the Tuck School of Business at Dartmouth. He writes a lot about international trade, investment and U.S. global competitiveness.

The thesis of his latest op-ed is that the Administration’s plan to increases taxes on U.S.-based multinationals will destroy rather than create domestic jobs. This is especially interesting in light of the current (but seemingly competing) Administration plan to create jobs domestically in the next year.

The tax proposal he references is part of the Administration’s latest budget (Table S-8 on pg. 161; reproduced below). It calls for $122.2 billion in tax increases on U.S.-based multinationals over the next decade.

There are some very useful takeaways from this piece. Among them:

Mr. Slaughter on why the assumptions behind the Administration’s plan are wrong:

• “The fundamental assumption behind these proposals is that U.S. multinationals expand abroad only to ‘export’ jobs out of the country. Thus, taxing their foreign operations more would boost tax revenues here and create desperately needed U.S. jobs. This is simply wrong. These tax increases would not create American jobs, they would destroy them.”

On how exactly hiring abroad stimulates more U.S. hiring?

• “When parent firms based in the U.S. hire workers in their foreign affiliates, the skills and occupations of these workers are often complementary; they aren't substitutes. More hiring abroad stimulates more U.S. hiring. For example, as Wal-Mart has opened stores abroad, it has created hundreds of U.S. jobs for workers to coordinate the distribution of goods world-wide. The expansion of these foreign affiliates—whether to serve foreign customers, or to save costs—also expands the overall scale of multinationals.”
• “Expanding abroad also allows firms to refine ther scope of activities. For example, exporting routine production means that employees in the U.S. can focus on higher value-added tasks such as R&D, marketing and general management.”

On empirical evidence that foreign-affiliate expansion tends to expand U.S. parent activity:

•  “Consider total employment spanning 1988 through 2007 (the most recent year of data available from the U.S. Bureau of Economic Analysis). Over that time, employment in affiliates rose by 5.3 million – to 11.7 million from 6.4 million. Over that same period, employment in U.S. parent companies increased by nearly as much – 4.3 million – to 22 million from 17.7 million.”
• “Even as IBM has been expanding abroad, last year it announced the location of a new service-delivery center in Dubuque, Iowa, where the company expects to create 1,300 new jobs and invest more than $800 million over the next 10 years.”
• “Procter & Gamble calculates that one in five of its U.S. jobs – and two in five in Ohio – depend directly on its global business.”

On how these taxes would compound the current labor problem (given how the private sector of the U.S. economy has already contracted):

• “The current U.S. federal statutory corporate tax rate of 35% is the highest among all 30 Organization for Economic Cooperation and Development countries, far above the OECD average of about 23%. Raise the international tax burden on U.S. multinationals by limiting foreign-tax credits, for example, and you will further reduce their ability to compete abroad. This, in turn, will reduce employment and investment in U.S parent companies.”
• “Since the slowdown began in December 2007, private-sector payrolls have fallen precipitously. Today there are 2.4 million fewer private-sector jobs than 10 years ago. Moreover, in all four quarters of 2009, gross private-sector investment fell so low that it did not even cover depreciation. For the first time since at least 1947, the U.S. private capital stock shrank throughout an entire year.”

On how many multinationals create high-paying domestic private sector jobs:

• U.S.-based multinationals and U.S. affiliates of foreign-based multinationals “accounted for the majority of the post-1995 acceleration in U.S. productivity growth, the foundation of rising standards of living for everyone. They tend to create high-paying jobs – 27.5 million in 2007.”
• “Consider that in 2007, the average compensation per worker in these multinational firms was $65,248 – about 20% above the average for all other jobs in the U.S. economy.”
• “These firms undertook $665.5 billion in capital investment, which constituted 40.6% of all private-sector nonresidential investment.” 
• “They exported $731 billion in goods, 62.7% of all U.S. goods exports.” 
• “And these firms also conducted $240.2 billion in research and development, a remarkable 89.2% of all U.S. private-sector R&D.”

Other academic research in support of Mr. Slaughter’s position:

• “Academic research, including most recently by Harvard's Mihir Desai and Fritz Foley and University of Michigan's James Hines, has consistently found that expansion abroad by U.S. multinationals tends to support jobs based in the U.S. More investment and employment abroad is strongly associated with more investment and employment in American parent companies.”