Last week, the world held its breath in anticipation of Apple's product announcement. When we finally managed to see the goods, we saw that CEO Tim Cook had knocked one out of the park. In fact, he hit for the cycle. The iPhone 6 answered every criticism of the current model. The 6 Plus filled a giant phablet hole in Apple's lineup. Watching master designer Jony Ive extol the virtues of the new Watch, I actually felt proud to be living in the golden age of consumer products. Of course, this stuff actually has to be built. Where and how that will happen wasn't mentioned; either because Apple didn't feel that it merited attention or because they didn't want us to think about it.
Apple has demonstrated that Cupertino is home to the dream team of industrial design. California remains the center of the electronic products and software development universe as well a nexus of culture and fashion. The Golden State still attracts the best from around the globe. You'd think that would generate prosperity for all the state's citizens. Not so much.
In the U.S. Apple creative efforts are limited to engineering, marketing, retail and tax avoidance. Apple makes great jobs at the top end and bottom end. Apple's futuristic new head quarters will be home to graduates of Northumbria School of Design, Stanford's Engineering school and Ivy League MBA programs. Meanwhile, Apple stores will remain packed with hip and pierced nerds in blue shirts who make more than their peers at Wal-Mart, but will never buy a California home. What should have been a million middle class U.S. manufacturing jobs were transferred to China's squalid system of indentured servitude.
Is this Apple's fault? I'm outraged over Apple's poor corporate citizenship but as a shareholder I love the firm's 10Q. Apple has both the intelligence and social conscious to know better. It also has the fat margins that would allow it to do the right thing.
However, the primary obligation of a corporate board of directors and of management is to deliver profits to shareholders. It is incumbent upon them neither to run a philanthropic job creation enterprise nor to fund the government beyond their legal obligation. Shareholders could vote out the board or sue the company if they pursued such a wild-eyed corporate mission.
It is government's responsibility to maintain an attractive and competitive tax and regulatory environment that fuels the engine of private sector job creation. The U.S. in general and California in particular have utterly failed at this task. We've done everything possible to drive jobs away, often for no good reason.
All things being equal, Apple and other nominally American companies would be more efficient if they kept production closer to design and weren't shuffling $billions between Irish shell corporations and Caribbean banks. By maintaining the world's highest corporate tax rate we've created an enormous incentive for firms to pursue tortuous mechanisms for offshoring their production and profits, or like Burger King, sneak out of the U.S. entirely.
Of course, small businesses cannot afford to play this game. So, we've also established barriers to entry that favor incumbents and depress the processes of creative destruction and entrepreneurial job creation. Multinationals, fully invested in the status quo, feel compelled to support an entrenched political system that continues to make poor choices for our future. They fund think-tank economists on both the right and the left to theoretically justify our disastrous free trade + high regulation model, despite the overwhelming empirical evidence that it is killing jobs.
What to do?
A reset of corporate taxes to a reasonable rate is long over due. Moving this tax below the cost of avoidance will mean that we actually collect some revenues. This move will also create new jobs in tax brackets where workers are taxpayers rather than consumers of public services.
Like nearly every other country in the world, we should reduce individual income tax rates and replace that revenue with a Value Added Tax (VAT) that subtly favors domestic producers. Though our think-tank economists are determined not to understand how this works, in the real world, the leaders of countries like Germany and South Korea totally get it. At a fundamental level this offers a realignment of incentives aimed at national wealth accumulation. Taxes are disincentives as well as revenue sources. Taxing labor (income) and capital gains (investment) discourages creation whereas taxing consumption encourages investment.
We must also get competitive in the regulatory world. This does not mean racing China back to the 19th century in search of environmental and labor chaos. Even the most ardent libertarian wouldn't want to breath the stuff they call "air" in Beijing or see their kids locked inside one of those factories.
Firstly, it means a change in mindset. Legislators and enforcement agents must be aware that in addition to protecting the public health and environment they have a real obligation to contribute to our shared economic success and understand that their own jobs and their children's futures depend on it. This is how our competitors in Germany and South Korea view things. When regulations are hideously complex (California's overtime laws) redundant (CalOSHA) or burdensome beyond their trivial benefits (desert tortoise protection) they must go. In the long run workers will be wealthier and safer in a state that can afford its government and we won't be forced to eat those desert tortoises.
Secondly, it means simply not permitting firms to offshore pollution or labor violations. In the age of globalization corporations aren't competing against the economic advantages of wanton pollution and labor repression. Our workers are forced to compete with China and they can't, no matter how many part-time, no-benefit retail jobs they work. We must impose tariffs to offset these ill-gotten advantages. As people usually don't vote to abuse themselves or their environment, levying a tax on imports from dictatorships would ameliorate this situation.
Yes, I can hear the apologists screaming, "But consumers would have to pay more for the iPhone!" Yep, and eliminating slavery increased the price of cotton, for a while. Doing things right isn't cheap in the short run. It's time we started thinking about our economic and geopolitical futures when we design the technology of the world's future.
Greg Autry teaches technology entrepreneurship at The Lloyd Greif Center for Entrepreneurial Studies in the Marshall School of Business at the University of Southern California. He will be a speaker at the Manufacturing in the Golden State conference in San Diego on October 16. You can find him on Facebook.