Will the U.S. stay globally competitive? It depends

May 19, 2010

Jim Owens, chairman and chief executive officer of Caterpillar Inc., is "concerned that the U.S. is not on a path to sustain the global economic competitiveness our country has sustained for a long time."

Speaking at the Economic Club of Phoenix, Owens talked about the kinds of policies that the U.S. needs in place in order to stay a "great country." Some current U.S. policies, he said, put the country at risk of declining.

Caterpillar has been called a "bellwether" and "microcosm" of the U.S. economy. If indeed so goes Caterpillar, so goes the nation, then short term the national forecast is 75 percent chance of sun, 25 percent chance of more rain. Owens is mostly optimistic that the natural economic boost that has always followed recessions will buoy his company back to pre-recession sales levels in three years.

Over the long run, though, Owens is concerned about U.S. competitiveness, and as the head of one of the world's largest capital goods manufacturers who began his career as an economist and serves on the President's Economic Recovery Advisory Board, Owens knows a thing or two about the subject of competitiveness.

Remaining competitive in the new global economy -- in which developing nations like China and India are growing at least twice as fast as the U.S. -- depends in part on national policies. "Caterpillar's global future -- and the future of the U.S. economy -- depends on the policies made here at home," Owens said.

Tax policy

No matter the policy they're considering, lawmakers should understand the effects that their decisions will have on American businesses and on the country's ability to remain a global economic leader. That's certainly true in the area of tax policy, Owens said, where the U.S. and international tax codes create incentives for businesses to base their holding companies in countries like Switzerland where they can minimize taxes.

On the surface, that sounds like a form of cheating the U.S. tax system, Owens acknowledged, but he said that if he pays taxes at a higher rate than the companies that have based their holding companies in Switzerland (or other lower-tax locations), he'll no longer be able to compete.

"If you tax me at a higher rate than other companies are taxed at, then I can't compete with them anymore. And you don't want that, because me being in those global markets allows me to export there, and that creates jobs here in the U.S.," Owens explained. He added that "more than half" of the people who work for Caterpillar in the U.S. are employed there because it is a global company.

So Owens advocates a tax system akin to what "almost every other major trading nation has." It's a territorial tax system that taxes multinational companies on the profit they earn in that nation.

"Like every other country does, the U.S. should be trying to attract foreign direct investment here, where foreign companies can employ U.S. citizens and pay U.S. taxes." Moving to a territorial tax system would help do that, Owens said. It would also "make it much more likely that U.S. companies would reinvest their money here instead of looking for opportunities in other countries."

More broadly, Owens said that policymakers need to look at the U.S. tax code through a global lens, and consider reform by thinking about "How do we position the U.S. economy to compete in the world?"

Fiscal policy

As with tax policies, Owens said that he is concerned about the negative effects of future fiscal policy actions (or lack thereof) on the ability of the U.S. to remain globally competitive.

It was clearly necessary, he said, for the federal government to spend hundreds of billions of dollars on stimulus programs to keep the U.S. economy out of a depression. But over the long term, policymakers must align the government's expenditures with its income. "Deficits do matter," he said, and those that the U.S. has already run up will only get far worse.

"Medicare, Medicaid, Social Security, and the new health care program are largely unfunded entitlement programs that, coupled with the coming wave of retiring Baby Boomers, will push the deficit to untenable levels," Owens said. He called those programs "train wrecks" that will become increasingly difficult to fix.

Owens said that with the exception of desperate-times measures like the most recent stimulus bills, the U.S. should not run deficits. And instead of pouring money into and racking up debt on unfunded entitlement programs, Owens said that the government should focus its efforts on investing in infrastructure.

He called high-quality infrastructure the "backbone" of America's ability to compete in the global economy. Yet roads, bridges, dams, power lines, water treatment plants and telecommunications systems across the U.S. are in desperate need of repair. "In 10 years China will have better infrastructure than the U.S.," Owens said. It's another example of how the U.S. is falling behind while developing nations are moving rapidly forward.

Trade policy

Owens sees good reasons to be pessimistic about U.S. trade policies, too. Earlier this year, lawmakers announced a proposal to withdraw from NAFTA and spoke about including stronger "Buy American" provisions in stimulus measures. President Obama imposed new tariffs on tires from China. And Congress continues to ignore calls to approve already-negotiated Free Trade Agreements with South Korea, Panama, and Columbia.

Those are the policies. Yet the reality, Owens said, is that trade is a "win-win proposition." Responding to the free-trade critics who contend that protectionism is the answer to America's woes in the wake of the global financial crisis, Owens said, "We can't protect ourselves to greatness."

He offered some evidence, too, that freer trade benefits Americans where it matters most -- in their pocketbooks. The average American family, according to Owens, is $10,000 a year better off because of the liberalization of trade that has occurred since the end of the Second World War. They stand to gain an additional $5,000 a year if the U.S. moves forward with the freer-trade policies that are currently on the table.

"The trade unions have convinced everyone that trade is a bad thing," Owens said. "It isn't." Trade is good, according to Owens, not only for the average American family, but for American businesses and for American consumers as well.

"If policymakers want Caterpillar to offer American consumers a lower-quality tractor at a higher price, then they should put up trade barriers," Owens said.

Freer trade policies, in contrast, "ensure American businesses the opportunity to compete to sell their products around the world. They help to ensure that American manufacturers stay competitive" because they can't hide behind a veil of national protection -- they know they have to compete on the global stage with companies from Germany, Japan, China, and everywhere else.

Owens made the importance of global trade to the U.S. economy clear. "Trade accounts for more than a quarter of the U.S. GDP," he said. One in five of the best-paying American jobs is attributable to free trade. At the same time, 95 percent of the world's customers are outside of the U.S. Developing countries like China and India are growing huge middle classes that represent a gold mine of new customers for competitive businesses.

So U.S. policymakers need to ask, then, how the laws they pass (or don't pass) impact American businesses' ability to compete. It's a question, Owens said, that will affect not only American businesses' economic competitiveness, but the United States' leadership on the world stage, as well. "We need to be globally competitive to maintain our global economic and political leadership."

Creating opportunities

At the end of the day, for Owens it's all about jobs. "What I'm really focused on, quite frankly, is that the wealth of nations is a function of the opportunities we create for our children and our grandchildren. If we don't have great jobs for people here, we're no longer going to be a great country. And America can't be a world leader without a great economy."

America's reign as a "great country" is all about competitiveness, Owens said. Yet despite the very clear importance of American competitiveness in the global economy and the clear effect that U.S. policies have on that competitiveness (and, by extension, on U.S. jobs), Owens said it's a subject hardly discussed in Washington, D.C.

The kinds of misguided policies Owens described aren't for lack of smart people in government, he said. "But who elected them? Not the business community. It's the labor unions that put feet on the streets," and they're against the kinds of policies that, according to Owens, would foster America's economic competitiveness.

"A protectionist, nationalistic voice is overriding good rational economic policy," Owens said. "That's my biggest concern."

The only way to change that -- and to assuage Owens' concern about the ability of the U.S. to remain a "great country" -- is for CEOs, academics, and other leaders to "get out and talk to people and convince our policymakers that these kinds of policies are really critical. It's time for us to roll up our sleeves and help the public understand the consequences of policymakers' decisions."

Bottom Line:

  • For American companies -- and for the country itself -- remaining competitive in the new global economy depends in part on U.S. tax, fiscal, and trade policies.
  • U.S. policymakers need to look at the tax code through a global lens, and consider reform by thinking about "How do we position the U.S. economy to compete in the world?"
  • The government should focus expenditures on high-quality infrastructure, what Owens called the "backbone" of America's ability to compete in the global economy.
  • Trade is a "win-win proposition." It's good for the average American family ($10,000 richer as a result), for American businesses, and for American consumers as well.
  •  For Owens, the "wealth of nations" is all about jobs. "If we don't have great jobs for people here, we're no longer going to be a great country."
  • Policies are increasingly likely to decrease U.S. competitiveness abroad. Why? According to Owens, "A protectionist, nationalistic voice is overriding good rational economic policy."
  • It's time, according to Owens, for business and academic leaders to "roll up their sleeves and help the public understand the consequences of policymakers' decisions."