08/10/2010 09:30 am ET Updated May 25, 2011

Creating Jobs -- Two Better Ways To Do It

In mid-April in this blog, I took exception to Robert Reich's op-ed in the Financial Times which I thought completely misread the massive job-creation predicament we are in when he declared that the economic recovery largely rested at the doorsteps of America's small businesses, specifically "companies with fewer than 100 employees".

Last week I repeated my concern after President Obama went to a submarine sandwich shop in New Jersey to highlight his efforts to support small business growth. I wrote that the United States is not going to create anything close to the 22 million jobs we are 'missing' today by making a shop with just five employees the 'model' for future job growth, not when the State of Michigan alone lost more than 230,000 jobs in 2009 on top of the hundreds of thousands it and 45 other States lost in the prior ten years.

This love affair with pumping up small businesses started when Ronald Reagan became president, but it came about only because big(ger) business had established -- or so we thought -- a largely non-erodible industrial foundation for the country. It was thought that such a foundation would withstand and in fact prosper from the globalization that was coming down the pike. To put this in context, for the first half of the last century, manufacturing constituted about 35% of the nation's GDP. Even after our GIs returned home from World War II and military production ceased, manufacturing in 1947 still made up 26% of GDP. And it never went below 21% until 1980, when it began its persistent decline to the very low 11% level it stands at today. Of course with this decline millions of good American jobs were shipped overseas.

Twenty-two million new jobs, which is what we need for our workforce to be "fully employed" - i.e., no more than a 5% overall unemployment rate - is the almost incomprehensible equivalent of having to create 140 new Boeing Companies or 90 new General Motors. The simple truth is that there is no way on God's green earth to create this many jobs without the massive - and primary - involvement of 'big manufacturing business'. By contrast, the administration's alternative of emphasizing small businesses has the potential to create only several million jobs in the medium term.

To dig out of the jobless recovery we are mired in, we need to promote large-scale investment in American manufacturing, make the U.S. marketplace more welcoming and profitable for American manufactured goods, and make American exports more competitive.

The best place to start -- for progressives and conservatives alike -- is with a stable tax system that encourages investment, growth and jobs; that least distorts economic decision-making; and that best promotes the competitiveness of U.S. corporations in the global marketplace. Such a system should have at its core a value-added-tax, or VAT, of the sort that least 139 nations, including all of the major developed nations, already have. As it is, because America does not have a VAT, imported goods are often cheaper than American-made products.

Poll after poll shows Americans preferring by solid margins good paying jobs here at home to cheaper-priced imports, and even a willingness to pay more for U.S.-made goods. However, it is unfair to ask American consumers to prop up American manufacturing when such disproportionate competitive advantages are flowing to overseas manufacturers. Those competitive advantages result in cheaper prices of their goods exported to the U.S. The advantages those offshore manufacturers enjoy include more favorable tax structures, massive and often illegal subsidies flowing their way, and the abysmal labor and environmental practices they employ.

It's going to take years to balance out the latter two advantages -- i.e., subsidies and labor and environmental abuses - especially during a resistant Obama administration - but we can at least give American manufacturers, and in turn American consumers, the benefit of a globally competitive tax system.

Our current corporate income tax system inspires large-scale tax evasion while generating surprisingly little revenue. The U.S. stands almost alone with one of the highest corporate income tax rates in the world, which provides an incentive for companies to move production out of the United States and play games with shell corporations. In the process, both the American economy and American workers are losing.

A value-added tax is a consumption tax, like a sales tax. But because a VAT is collected at each stage of the production of a product, it avoids the problem of 'cascading' sales taxes on top of sales taxes - it's also a lot harder to "game" or evade than an income tax. However, its greatest appeal is how it would significantly benefit American manufacturing by counter-balancing, so to speak, the benefits which now flow only to overseas manufacturers.

Specifically, the way a VAT tax system works is that exports from VAT countries of goods that are also sold domestically get full rebates of any VAT taxes while imports into VAT countries are subjected to VAT taxes at the border. As the only major trading partner currently without a VAT, however, our manufacturers are being penalized at the same time that foreign exporters into the U.S. are being advantaged. In effect, a VAT tax system functions as trade subsidies for exporters and trade tariffs for importers.

Most of the six to ten million jobs we've lost to other nations in just the last decade are gone for good. Even so, if we used a VAT to replace a large part or all of the corporate income tax - with the very positive result that both the cost of doing business in the U.S. and the incentive for offshoring production would shrink - it should at a minimum be easier to hold on to the jobs we still have and to create new ones. A narrow-based VAT could also serve to substantially reduce the employer portion of the payroll tax, which would stimulate businesses to start hiring again.

A modest VAT on the order of 5%, with thoughtful exemptions and offsets for all but the wealthiest of individual consumers, could materially reduce both corporate income (from, say, 35% to 25.6%) and payroll taxes (from, say, 6.2% to 4.5%). In doing so, it would materially spur investments, help America grow its way back to good economic health, and significantly reduce the deficit.

As we make our tax system more globally competitive, we also need to address the other area where every other G-20 nation has a big edge, which is government procurement.

The American public clearly wants to buy goods specifically manufactured in America -- and I don't mean goods sold by American companies that are manufactured elsewhere or assembled from foreign-made parts. Unfortunately, they are not joined in this conviction by our own federal government, even though U.S. government purchases comprise a staggering 20% of our nation's GDP, making it the biggest consumer in the world.

The Obama administration seems unwilling to flex our government's bulging purchasing muscle to help create American jobs, while comfortably acquiescing to the interests of the multinational corporations and foreign manufacturers which every day cram their products into our government warehouses. The exception, which is only thanks to the persistent demands of the Department of Defense over many years, is that goods and services deemed to be "militarily critical technology" (or MCT) are mostly required to be domestically sourced. If we have a strategic security interest in domestically sourcing vital military goods, why don't we have an equally strong strategic economic interest in all-of-government domestic sourcing?

To their credit, concerned Members of Congress are now considering legislation to promote American-made materials. House Democrats, notably, are working on an agenda designed to promote American manufacturing called the "Make It in America" agenda to help close the trade deficit and boost clean energy exports. They contend, with ample evidence supporting them, that the United States needs to do more to level the playing field with foreign countries that have strong export numbers.

This is a good start, but it needs to go much further.

"Buy American" provisions of one form or another have been around since the 1930s, and it is not opportunistic, unfair or inappropriate, as some have said, for us to have strong ones now, especially now. Given that government procurement represents such a large part of our GDP, these requirements would be very stimulative to the overall national economy, while having little or no impact on the cost of goods that are sold to families and individual consumers.

In sharpest possible contrast to America's almost complete lack of any buy-domestic requirements is China's recently promulgated "Indigenous Innovation Production Accreditation Program" which limits all Chinese central and provincial government procurement to companies that have "indigenous" -- or Chinese -- "innovation". And if this isn't blatant enough, embedded in the IIPA Program are China's two so-called 'trade advantages', namely, (1) regulations to block non-Chinese firms from selling their products to Chinese government agencies and (2) rules that force Western companies to give up technological secrets in exchange for access to China's markets. With these highly discriminatory restrictions and demands working against us, it is little wonder that China alone is now responsible for fully 80% of the entire U.S. trade deficit in manufactured goods,

I am not proposing that the U.S. copy the extreme procurement practices of China or, for that matter, the unfair buy-domestic practices of any nation. However, we should demand that:
  • Congress immediately establish buy-domestic and other domestic investment requirements for federal procurement and for grants to states and local governments to the fullest extent allowed under our various trade agreements and the WTO;
  • Until China makes WTO-compliant its IIPA Program, the U.S. government not enter into the bilateral investment treaty with China which China is seeking; and
  • The administration, through a joint effort among Treasury, Commerce and Defense in conjunction with Congress, assess and then limit the risks to the United States of planned investments by China and any other nation in our militarily and otherwise critical technologies and companies.

Creating jobs is of vital importance to our country's well-being, and it calls for the same intense focus and political commitment in the next two years that over the past eighteen months we saw devoted to health care and financial regulatory reform. And it's long past time for our government to stop equating a job in a sub shop selling sandwiches to a job in a manufacturing plant making real products for domestic consumption and export.

Leo Hindery, Jr. is Chairman of the US Economy/Smart Globalization Initiative at the New America Foundation and a member of the Council on Foreign Relations. Currently an investor in media companies, he is the former CEO of Tele-Communications, Inc. (TCI), Liberty Media and their successor AT&T Broadband. He also serves on the Board of the Huffington Post Investigative Fund.