Big Business Is Good for America
Why Vilifying Corporations Misses the Point
Article Summary and Author Biography
Rather than dousing large corporations with vinegar -- as the Occupy Wall Street protesters urge -- Washington should smother them with honey. Doing so would loosen their purse strings to fund new investment, bolster the economy, and create jobs.
GARY HUFBAUER is Reginald Jones Senior Fellow at the Peterson Institute for International Economics. MARTIN VIEIRO is a research analyst at the Peterson Institute.
Snapshot
Unlike other movements, the rallies across the United States have no distinct constituency, put forward few policy proposals, and have a shifting configuration of supporters. They are something new. These are "we are here" protests.
Video
A conversation with George Packer, Robert C. Lieberman, and Gary Clyde Hufbauer.
Even though the Occupy Wall Street protests seem incoherent at times, one main theme is clear: anger at big business. On this count, the occupiers are aligned not only with Hollywood portrayals (predating even the 1941 classic Citizen Kane) but also with mainstream Americans. A majority of respondents to a recent Gallup survey said that they believe big business has too much power. The sentiment held across party lines. The reasons seem simple enough. Business leaders often rank in the top one percent of income earners. Meanwhile, unemployment remains over nine percent -- and is much higher among minorities and young people -- yet corporations are sitting on trillions of dollars in unspent cash.
But this backlash is based on three common misconceptions about major U.S. corporations. The first is that Wall Street and big business are the same thing. When asked separately about "major corporations" and "financial institutions," the same percentage of Americans, 67 percent, agreed that each cluster had too much power. Discontent with Wall Street is understandable. Its practices led to wild lending and the sale of trillions of dollars' worth of toxic assets to unsuspecting investors. When the house of cards crumbled in 2008, the George W. Bush administration was forced to bail out Wall Street.
But none of this explains why Americans are equally displeased with major corporations. The only non-financial bodies that received bailouts were major automobile companies, but their rescue is not the object of much popular protest. The United States is actually less friendly to business than many other countries are -- even the supposedly egalitarian ones such as Canada and Sweden. Washington imposes the second highest corporate tax rate among OECD countries, behind only Japan. And unlike nearly every capital in the world, Washington requires multinationals based in the United States to pay home taxes on profits earned abroad.
The second misconception confuses large corporations and millionaires. The Republican presidential candidate Mitt Romney's famous words -- "Corporations are people, my friend" -- are legally correct. Corporate personhood is a long-established legal principle. But Romney was referring to the people who work for and own corporations: the employees and shareholders. And few of them earn incomes of $1 million a year or higher. Indeed, calls for higher taxation of millionaires, including corporate chieftains, should not be conflated with calls for higher taxation of corporations. Raising the effective tax rate on major U.S. corporations would only worsen their global disadvantage. This would hurt the U.S. economy and do very little to extract money from the pockets of Warren Buffett and his billionaire peers, or, for that matter, from CEOs such as Jeffrey Immelt, the head of General Electric. In fact, if the goal is to tax wealthy individuals, Warren Buffett's plan to ensure that millionaires face higher tax rates on their personal income than middle-class Americans is the way to go. This idea was embraced by President Barack Obama in his mid-September deficit reduction plan. Democrats have it wrong when they seek to raise tax rates both on big business and on wealthy individuals. The Republicans' mistake is to advocate lower tax rates both for wealthy individuals and for big business. The right prescription is to slash tax rates on business and to modestly raise tax rates on the rich.
The United States is less friendly to business than many other countries are -- even the supposedly egalitarian ones such as Canada and Sweden
The third common misconception has to do with the role of big business in innovation. In an earlier era, Americans romanticized the family farm. Today, we celebrate small places with big ideas. It is true that Steve Jobs built the first Apple computer in his garage and that Mark Zuckerberg typed the original lines of code for Facebook in his dorm room. But the genius of Jobs, Zuckerberg, and many others was in turning their ideas into highly competitive global enterprises. Apple now employs 46,000 full-time employees -- and it is the combined energy of those employees that delivered the iPod, the iPhone, and the iPad.
At the turn of the twenty-first century, the National Academy of Engineers ranked the greatest achievements of the previous century based on how each innovation improved people's quality of life. Major U.S. corporations -- the Edison companies, General Electric, AT&T, and General Motors -- played significant roles in the development, production, and distribution of the majority of these achievements.
It is safe to say that without its major corporations the U.S. economy would not be, and would not remain, the largest and richest in the world. Big businesses invest significantly more in research and development than smaller firms. And they are far better placed to capture economies of scale and scope, which is crucial to making U.S. goods and services competitive abroad. Large companies account for more than 70 percent of U.S. exports. The same economies benefit U.S. consumers, too. Despite the vilification of Walmart, for example, the arrival of a Walmart Supercenter to a neighborhood leads to a 25 percent decrease in the average grocery bill for local residents.
Beyond R&D performance, sales abroad, and bargains, big business offers what the United States needs most: jobs, and many of the best in the country, at that. The largest firms pay about 50 percent more and provide 10 percent more working hours per week than small companies. These firms provide jobs to almost a third of the American work force.
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