Who Stole the American Dream? (53 page)

The U.S. Chamber of Commerce estimates that $10 billion to $30 billion in government start-up funds could attract up to $600 billion in private investments. Another $1 trillion in private investments could be generated, some economists suggest, from the overseas profits of U.S. multinational corporations, if they were
given attractive terms to bring those funds home and invest them in financing U.S. infrastructure development. They could profit from that investment, while paying U.S. taxes—
a win-win for all sides.

As a parallel move, former CEO Leo Hindery, Jr., and United Steelworkers president Leo Gerard have proposed that the government provide funds to
put five million young people to work on modest infrastructure projects, especially in urban areas. A youth jobs program, similar to the New Deal Civilian Conservation Corps, they assert, would not only reduce the much higher than average unemployment rates among young people, but reduce the risk of idled youth turning to crime. Hiring young people would have a multiplier effect on the economy, economists explain, because young people are known for spending their earnings fast.

Step #2 is a major new national commitment to rebuild America’s capacity to out-invent and out-innovate the world. Despite breakthroughs by companies such as Apple and Google, the United States has slipped in innovation, which has long been America’s bedrock advantage in the world. In 2007, the National Academy of Sciences, joined by leaders in industry and education, reported that
a “gathering storm” from foreign competitors was threatening America’s traditional edge in science, high tech, and innovation. In a second major report three years later, the academy issued an even sharper warning of a “rapidly approaching category 5” disaster.

Scientists date the American slide in research from the Reagan administration’s sharp cuts in government funding for basic research in the early 1980s—from nearly $9 billion in 1979 to $1.4 billion
in 2006, figures adjusted for inflation. The impact has been disastrous on America’s once invincible lead in research and innovation. From a No. 1 innovation ranking in 2000,
the United States fell to No. 4 in 2011, behind Finland, Singapore, and Sweden. Georgia Tech University’s global study of high-tech indicators found that
China in 2008 surpassed the United States in overall “technological standing.” The World Economic Forum
ranked the United States fifth in global competitiveness in 2011.

The trends in patents, a key indicator of innovation, are worrisome. After decades of domination by U.S. firms, universities, and individuals, 51 percent of the U.S. patents awarded in 2009 went to non-American companies. In clean energy development and production, the United States was once the undisputed leader but has been surpassed in production by China, Japan, and South Korea. Without large new U.S. investment, the Information Technology and Innovation Foundation predicts that
the United States will soon be importing “the overwhelming majority” of its clean energy technologies, jeopardizing the U.S. economic recovery and our balance of trade.

Not only scientists and educators, but corporate leaders such as former CEOs Norman Augustine of Lockheed Martin, Craig Barrett of Intel, and Roy Vagelos of Merck support the National Academy of Sciences finding that
it will take dramatically expanded government funding for the United States to bounce back in the R&D race. The private sector and universities will do the work, they say, but they need a big financial shot in the arm from Washington. In 2007, industry leaders urged Congress to appropriate $130 billion over the next decade for government funding of research, innovation, and targeted aid to education, plus tax credits to industry for research and development.

In April 2009, President
Obama provided a kick start. He announced
plans to add $42.6 billion to science and technology research over the next decade and he set up a new Advanced Research Projects Agency at the Department of Energy (ARPA-E). It was modeled on the Pentagon’s DARPA (Defense Advanced Research Projects Agency), which has spawned thousands of important new technologies with commercial as well as defense applications.
Obama put $400 million in his 2009 stimulus package to launch ARPA-E and to fund more than thirty of the most daring new energy projects. But as we saw from the bankruptcy of the solar energy firm Solyndra after it got more than $500 million in government loan guarantees, the
government has to be much smarter in picking the companies it funds and much tougher in overseeing their performance.

Step #3 is to generate a manufacturing renaissance in America—perhaps the boldest step of all, and one that will require not only a series of public-private partnerships, but a reset in New Economy thinking.

To those on Wall Street, in Washington, or within academia who say that the United States does not need an industrial base, General Electric’s CEO Jeffrey Immelt and Intel’s Andy Grove retort that this is dangerous nonsense. “
Many bought into the idea that America could go from a technology-based, export-oriented powerhouse to a services-led, consumption-based economy—and somehow still expect to prosper,” Immelt told the Detroit Economic Club in 2009. “That idea was flat wrong.”

Richard McCormack, editor of
Manufacturing & Technology News
, points to the slow, jobless U.S. recovery as evidence of the fallacy in that thinking. “
Without an industrial base, an increase in consumer spending, which pulled the country out of past recessions, will not put Americans back to work,” McCormack argues. “Without an industrial base, the nation’s trade deficit will continue to
grow…. Without an industrial base, the United States will be increasingly dependent on foreign manufacturers even for its key military technology.”

Immelt, too, insists that technology-based manufacturing must be central to reviving the U.S. economy. His goal is to see manufacturing employment double, from 9 to 20 percent of the nation’s workforce—a target endorsed by the Horizon Project, a task force of former CEOs led by Leo Hindery, Jr., who used to run AT&T Broadband. “
You cannot survive as a nation of such size and complexity with such a small manufacturing workforce as we have,” Hindery asserts. “If you have only 9 percent making things, the only way you can grow is to have credit bubbles.”

In the decade from 2001 to 2011, U.S. employment in manufacturing fell from 17.2 million to 11.7 million, and more than
fifty-nine thousand factories were shut down. The damage was even wider because of the ripple effect. Each job lost in manufacturing cut 2.5 other jobs in the rest of the economy.

“
Close a manufacturing plant, and a supply chain of producers disappears with it,” says Richard McCormack. “Dozens of companies get hurt: those supplying computer-aided design and business software; automation and robotics equipment, packaging, office equipment and supplies; telecommunications services; energy and water utilities; research and development, marketing and sales support…. The burden spreads to local restaurants, cultural establishments, shopping outlets, and then to the tax base that supports police, firemen, schoolteachers, and libraries.”

Reversing the multiplier effect—to make it work for economic expansion—is essential to America’s economic growth, but it is a tough challenge. Rebuilding our industrial base, Andy Grove points out, means being sharp enough to convert American innovations into American-based production for U.S. jobs, and that requires new government initiatives and public-private partnerships.

Take clean energy. Before the recession, the green energy sector was growing faster than the economy in general, and many forecast great job potential. The consulting firm
Booz Allen Hamilton
predicted a jump from 2.4 million jobs in 2008 to 7.9 million jobs in 2013 in construction of green energy projects.
More modest job growth in producing clean energy devices was expected—from a few hundred thousand to 1.7 million jobs. But
the test is whether the United States can move fast enough to ensure that technologies invented in the United States are produced here and not in Asia.

To do that, the Alliance for American Manufacturing wants help from Washington—federal loan guarantees to help finance new energy infrastructure projects, tax credits for clean energy manufacturing, and tax changes that permit up-front expensing on capital investment in plant and equipment. More broadly,
the alliance wants the government to fund a new investment facility to initiate and promote financing for new U.S. energy plants and other domestic manufacturing, and to do it before fragile American start-up firms are driven out of business by government-subsidized competitors in China, Korea, Singapore, and Hong Kong.

One other major change in government policy—and in the actions of American consumers—could bolster U.S. manufacturing, and that is to Buy American. Many in business urge that state and federal governments tighten the “Buy American” requirements for government contracts, consistent with U.S. trade agreements.

In
two recent high-profile cases, the state of California hired U.S. contractors to help rebuild the San Francisco–Oakland Bay Bridge, but the steel was imported from China. And in Washington, the monument to Martin Luther King, Jr., was designed by a Chinese architect, built by workmen from China, and constructed from marble that came thousands of miles from China.

To prevent such episodes in the future, job-first advocates say that both the federal and state contracts should establish tighter “Buy American” standards that require at least 75 percent domestic content in products and services.

Step #4 is to rebalance the U.S. income tax code to reduce its heavy tilt in favor of the super-rich. As nonpartisan economists have reported, the large Reagan tax cuts of the 1980s and the even larger
George W. Bush tax cuts in 2001 to 2003 contributed greatly to the vast economic inequality in America today by generating more than $1 trillion in tax savings for America’s superclass every decade, with only modest benefits to the middle class.

Large majorities of the public favor taxing the super-rich more by letting the 2001 Bush tax cuts for the wealthy expire.
An alternative idea is to let the Bush tax cuts expire for all Americans and then pass a new tax reform to lower tax rates, especially for 90 percent of American families earning less than $138,925 a year—and to simplify the tax code by eliminating loopholes and tax breaks that benefit mainly the wealthy.

Simplifying the tax code will make it easier to enforce. So many exotic tax shelters have been invented by ingenious tax lawyers and accountants to reduce the taxes of the super-rich that former IRS commissioner Charles Rossotti, a Republican businessman, estimated the tax loss to illegitimate tax evasions at $250 billion to $350 billion a year. As a result, Rossotti told me, honest taxpayers have to pay 15 percent more in their taxes.

“Stop Coddling the Super-Rich,” declares Warren Buffett, the famous billionaire investor from Omaha. “I know well many of the mega-rich and, by and large,
they are very decent people. They love America and appreciate the opportunity this country has given them…. Most wouldn’t mind being told to pay more in taxes as well, particularly when so many of their fellow citizens are truly suffering.”

As Buffett has frequently pointed out, the super-rich make most of their money from the stock market and other investments, which are taxed at the 15 percent capital gains rate, much lower than the
tax rate on most middle-class salaries. As we saw earlier, Buffett paid a rate of 17.4 percent on his multimillion-dollar income in 2010, and that was the lowest tax rate in his office. Buffett advocates not only repealing the Bush tax cuts for the super-rich, but imposing a supertax on income over $1 million a year and a super-super rate on income over $10 million a year. Others propose a special tax on corporate stock options to CEOs and other top executives.

Another important move would be to
close the exemption in the payroll tax now enjoyed by the rich. Ordinary employees pay a 7.65 percent payroll tax to fund Social Security and Medicare, but the income from investment gains of CEOs and super-rich investors is exempted from the payroll tax. In fact, multimillionaires pay a much lower payroll tax rate on their salaries and bonuses—as low as 1 percent—because all their income over $106,800, even their salaries and bonuses, is also exempt from the payroll tax. Removing that $106,800 tax cap would not only make everyone pay the same rate, it would go a long way toward
solving the funding shortfall for Social Security and Medicare.

But the simplest, broadest tax reform to achieve a more level economic playing field would be to end the special low 15 percent capital gains tax rate and to tax investment gains at the same rate as wages and salaries (35 percent). Exceptions could be made for assets such as a house, a farm, a small business, or even a stock investment owned for a truly long term, say, for twenty years or more—to compensate for long-term inflation.

A majority of Americans favor raising capital gains taxes to 35 percent or higher, according to a
New York Times
poll taken in January 2012, when the political controversy broke out over Republican presidential candidate Mitt Romney’s 13.9 percent tax rate in 2010 on his $27 million income. Romney is fairly typical of the super-rich since virtually all of his income came as capital gains, which are by far the main source of income for the richest Americans. Those
gains are heavily concentrated at the top. The tiny sliver at the peak of our economy—the top 0.1 percent of all income earners—captures almost half of all the capital gains in America.

All these tax reforms taken together—on capital gains, on payroll taxes, on closing loopholes, and on a special tax on executive stock options—would make the U.S. tax code much fairer, plus it could cut the national debt by $1 trillion over a decade.