Incentives Needed for Effective Job Creation

In a recent Bloomberg Businessweek article, Andy Grove, co-founder of Intel and a Silicon Valley icon, addressed America’s most pressing challenge: job creation.

His concern is that we are placing too much faith on startups alone to create the millions of new jobs needed in the U.S. His point is that, categorically, startups by themselves are not enough to create a sufficient number of new technology jobs. His answer is to focus on companies in the “scaling up” stage – when new ideas and technologies transition from prototypes to mass production. This makes sense as more jobs are created in the scale-up stage than the initial startup phase of a business. Let us not forget, though, that startups are the foundation of our economy. Without them we would not have a market economy. In the absence of startups, the issue of scaling up becomes moot. Supporting businesses in both stages is important.

The key is to support scaling up that occurs in the U.S., not overseas. When businesses scale up these days, it’s not in places like Silicon Valley or other tech-innovation regions or manufacturing centers across the U.S. It’s happening in Asia because as wages and other production costs rose over the last few decades, American firms moved their production and engineering jobs offshore, mostly in China. This has raised business profitability and enhanced stock prices making management as well as stockholders happy, but, the great American job machine has been hurt by the offshoring of manufacturing-related jobs.

Specifically, the great American job machine has been broken by the offshoring of manufacturing-related jobs. Not surprisingly, a massive computer manufacturing industry has risen in Asia that today employs nearly 1.5 million workers. Today, the giant Chinese manufacturer Foxconn (annual sales: $62 billion) employs nearly 800,000 workers. Foxconn is now larger than the American high-tech giants Microsoft, Hewlett Packard, Intel and Dell.

This story is repeated in the vital and innovation-rich cleantech industry. For example, in photovoltaics (PV – converting solar energy to electricity), an industry pioneered in America from its very inception, we now import a large percentage of panels from abroad. The U.S. employment today in the production of PV panels and films totals only 10,000—a small percentage of total worldwide PV jobs.

The offshoring of jobs has not been win-win for all, particularly American workers. One profound long-term impact that is often ignored is that when we lose manufacturing jobs, we also end up losing development jobs, and ultimately we offshore research. We then lose industry know-how and experience and finally we lose the whole industry. I disagree with what many well-known analysts have been saying for a while: manufacturing doesn’t really matter. I disagree and say: manufacturing matters and it matters a whole lot. We should try our best to keep manufacturing jobs at home. To accomplish this, we need to develop and implement job-retention strategies and policies.

Although I agree with much of Andy Grove’s analysis of the American job situation and the importance of businesses in the scaling up stage, I disagree with his prime policy recommendation relating to the offshoring of jobs overseas. His suggestion is that we levy a tax on products created by offshore labor and keep that money in a separate fund known as the “scaling bank.” This fund would be used as an incentive to support American companies that desire to scale-up their operations to do so in America. This sounds like a good idea but such a policy would likely trigger a trade war and no one would win. I am against such a proposal.
A related question is: would this fund be sufficient incentive to discourage offshoring operations to Asia where lucrative markets in the fastest growing region in the world beckon American companies to establish a foothold? I believe that this fund would quite likely be insufficient to offset the lure of offshore benefits. Of course the outcome depends on the level of taxation.

Instead, I resonate with a recent proposal from Peter Navarro, business school professor at UC Irvine, who suggests lessening the double taxation burden on American multinationals (MNCs). MNCs serve as an important channel for U.S. exports yet currently pay U.S. as well as foreign taxes. Avoiding this double tax burden is an incentive for many MNCs to move their corporate offices overseas. That does not help our economy.

I also suggest offering a tax break tied to job creation for U.S. corporations planning to scale-up their operations. This could be further enhanced by state tax breaks for scaling up efforts that generate new jobs. Finally local and regional economic development organizations could provide other inducements to support scale-up efforts such as faster permitting processes as well as assistance with plant location and expansion processes.

If we are serious about solving our job creation challenge then it is critical that we provide new incentives for businesses to scale up here in the U.S. in order to grow and retain domestic jobs.

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