Making excuses for unemployment: The myth of a “skills gap”

It has taken ten years of expansion, but the US unemployment rate has finally fallen below 4 percent.  However, this low rate of unemployment presents a somewhat misleading picture of labor tightness.  For example, both the labor force participation rate and employment to population ratio remain significantly below previous highs, making clear that the economy is far from full employment.

The current labor force participation rate of prime age workers, those 25-54 years, is a case in point.  It remains below the previous peak rate in 2008, and even further below the peak rate at the turn of the century.  We would need an additional 1.2 million employed prime age workers to match the 2008 labor force participation rate and 2.5 million more to match the turn of the century rate.  Still it appears that at the present moment unemployment is no longer a major political issue.

That said, since we can be confident that this expansion will end and unemployment will once again become a serious problem, it is worth revisiting how mainstream economists and government policy makers treated the high rates of unemployment that marked the first five years of this expansion. In brief, and perhaps not surprisingly, most tended to explain away the slow decline in the unemployment rate by blaming workers themselves.  More specifically, they cited a “skills gap.”

As Matthew Yglesias describes:

Five or six years ago, everyone from the US Chamber of Commerce to the Obama White House was talking about a “skills gap.”

The theory here was that high unemployment reflected a structural shift in the labor market such that jobs were available, but workers simply didn’t have the right education or training for them. Harvard Business Review ran articles about this — including articles rebutting people who said the “skills gap” didn’t exist — and big companies like Siemens ran paid sponsor content in the Atlantic explaining how to fix the skills gap.

However, as Yglesias notes, the skills gap story doesn’t hold up.  Yes, business did complain for years that they found it hard to hire workers with the experience and skills they wanted.  But the fact is, as three economists demonstrate in their recently published paper, there was no real skills gap.  Rather, business just took advantage of the high rates of unemployment to jack up their skill requirements.  And as the unemployment rate gradually fell, they lowered them, which ended talk of the skills gap.  In short, employment problems are system generated, not worker caused.

The study

In “Upskilling: Do Employers Demand Greater Skill When Workers Are Plentiful?,” the economists Alicia Sasser Modestino, Daniel Shoag, and Joshua Ballancee used a proprietary dataset of 36.2 million online job postings aggregated by Burning Glass Technologies (BGT).  BGT “aggregates detailed information daily on more than 7 million online job openings from over 40,000 sources including job boards, newspapers, government agencies, and employer sites.” It also extracts details from the posted advertisements, allowing analysis according to 70 job characteristics, including job title, employer name, location, and the level of education and years of experience required. About half of the BGT postings include employer name.  The authors tapped the BGT dataset to carry out three different tests to determine whether employer job requirements, specifically education and experience requirements, changed in response to changes in the supply of available workers over the years 2007 to 2014.

They first tested whether education and experience requirements grew more in states and occupations that experienced greater increases in the supply of available workers, measured both by state unemployment rates and by state labor supply/labor demand ratios.  Then they carried out the same test, but this time looking at individual firms and their job requirements for specific job titles.

For both tests, the authors also used several control variables, including “the share of the state population with a bachelor’s degree in 2000 and the average age of the state population in 2000 to account for both heterogeneity in the pre-existing pool of skilled labor available to employers, as well as the initial share of openings requiring a particular skill in 2007 to account for heterogeneity across state × occupation cells.”

As a final check of their work, the authors made use of a “labor shock” that was uncorrelated with underlying economic trends: the drawdown of troops from Iraq and Afghanistan between 2009 and 2012. The authors examined “whether state × occupation cells receiving larger numbers of returning veterans correspondingly experienced a greater increase in their skill requirements.”

The results

In the first test the authors examined whether changing labor market conditions influenced “the share of postings requiring a bachelor’s degree or greater and the share of postings requiring at least four years of experience.”  And they found a strong relationship:

within a six-digit detailed occupation, a 1 percentage point increase in the state unemployment rate is associated with a 0.64 percentage point increase in the share of job postings requiring a bachelor’s degree and a 0.84 percentage point increase in the share of job postings requiring at least four years of experience. How large is the upskilling effect in terms of economic importance? In the context of the most recent downturn, our results imply that the nationwide increase in unemployment rates between 2007 and 2010 raised education requirements within occupations by 3.2 percentage points and raised experience requirements by 4.2 percentage points, respectively. Relative to the observed increases in skill requirements . . . during this period, our estimates suggest that changes in employer skill requirements due to the increased availability of workers during the business cycle can account for up to 30 percent of the total increase for education and nearly 50 percent of the total increase for experience.

Their findings of a strong relationship between labor slack and increased skill requirements are illustrated in the following two figures.

The second test also found a positive relationship between employer skill requirements and labor market slack even when limited to a consideration of the same job title at the same employer in the same state.  As the authors state:

Controlling for firm × job-title pairs within a state, we find that a one percentage point increase in the state unemployment rate raises the share of jobs postings requiring a bachelor’s degree by 0.505 percentage points and the share of job postings requiring at least four years of experience by 0.483 percentage points.

As for the labor shock of returning veterans, the authors again found “a strong, significant, and positive relationship between the sharp increase in the supply of returning veterans and the rise in employer skill requirements for both education and experience.”

The takeaway

The claim of a skills gap was widely embraced by those looking to deflect attention from capitalism’s growing inability to generate adequate employment even during years of economic expansion.  If the problem is a skills gap, then the responsibility for solving the problem rests on the shoulders of workers themselves, who will have to do a better job of keeping up with the times.  However, as Yglesias notes in his article summary, “the skills gap was the consequence of high unemployment rather than its cause. With workers plentiful, employers got choosier.”

Unemployment rates will rise again, and papers like “Upskilling: Do Employers Demand Greater Skill When Workers Are Plentiful?” are helpful for preparing us to challenge those whose arguments serve to defend a system that has grown ever more unresponsive to majority needs.

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They’re at it again: Selling the US-Mexico-Canada Agreement

The headlines once again misrepresent the aims and consequences of a US free trade agreement, in this case repeating the International Trade Commission’s claim that President Trump’s US-Mexico-Canada agreement (USMCA) will boost US growth and employment.

The International Trade Commission is required by law to evaluate the economic consequences of the USMCA, which is supposed to replace the North American Free Trade Agreement (NAFTA), before Congress can debate whether to approve it.  According to its report, which was released on April 18, 2019, the agreement can be expected to “raise U.S. real GDP by $68.2 billion (0.35 percent) and U.S. employment by 176,000 jobs (0.12 percent)” and “would likely have a positive impact on U.S. trade, both with USMCA partners and with the rest of the world.”

While supporters of the agreement happily repeat the Committee’s conclusion “that, if fully implemented and enforced, USMCA would have a positive impact on U.S. real GDP and employment,” the fact is that the predicted gains are miniscule.  Moreover, given the flaws in the Commission’s admittedly sophisticated modeling, there is no reason to take the results seriously.  Finally, a careful examination of the many chapters in the proposed agreement makes clear that its real aim is to strengthen contemporary globalization dynamics, enhancing corporate power and profits at the expense of majority living and working conditions in all three countries.

Putting the projected “gains” in perspective

The Commission assumed that the US economy’s complete adjustment to the agreement would take six years.  It then used a computable general equilibrium model to simulate how the terms of the agreement would change US markets and compared the “equilibrium” outcome at the end of the adjustment period with baseline results that assumed no significant change in US economic policies or global agreements over the same period.

On the basis of such modeling, the Commission concluded that six years after the implementation of the agreement, the US economy would be $68.2 billion bigger than if the agreement had not been approved.  That is, as the Commission acknowledges, a one-time gain of 35/100 of one percent in real GDP.  Current US GDP is over $21 trillion; $68 billion is a rounding error in an economy of that size.

As for the projected growth in employment, the one-time gain of 176,000 jobs relative to the base line forecast translates into an increase in employment after six years of 12/100 of one percent.  That gain in employment is roughly equal to the number of new jobs added in a month of moderate economic growth.  The Commission’s model produced similar miniscule gains for other variables, including US wages.

In short, if we take these predictions seriously, the obvious conclusion is that there is little to gain from approving this agreement.  Of course, that is not the Commission’s position.  However, there is little reason to take these results seriously.

Dodgy methodology

It took a lot for the Commission to produce even these minimal games.  More specifically, it took a dodgy methodology that is biased towards policies that promote globalization.

The Commission organized its work as follows: it first sought to model the economic consequences of “eight groups of USMCA provisions: agriculture, automobiles, intellectual property rights (IPRs), e-commerce, labor, international data transfer, cross-border services, and investment.” Then, it took the provision specific results of each group and used them as modeling inputs for the economy-wide computable general equilibrium model it used to produce the overall estimates cited above.

Since not all the provisions changed current policies, the Commission divided the eight groups into two categories.  The first included the “set of provisions that would alter current policies or set new standards within the three member countries, and that would therefore be expected to modify current conditions after USMCA enters into effect.” This included provisions affecting agriculture, automobiles, IPRs, e-commerce, labor, and investment decisions related to the investor-state dispute settlement mechanism.

The second category included provisions that “would reduce policy uncertainty. These commitments would primarily serve to deter future trade and investment barriers, thus offering firms some assurance that current regulations and standards, which may or may not be expressly governed by current policies, will not become more restrictive.” Included in this category are provisions that would affect international data transfer, cross-border services trade, and investment decisions related to market access and nonconforming measures.

Significantly, it was the Commission’s determination of the gains from those provisions that would reduce policy uncertainty, by restricting the possibility for future government regulation of corporate activity, that proved decisive.  As a Public Citizen Eyes on Trade blog post pointed out,

Most of the [overall gains reported by the Commission] are derived from a highly dubious new research methodology, which assigns an invented positive economic value to terms that reduce “policy uncertainty” by freezing in place environmental, consumer protection, financial and other safeguards. If the ITC had not done this, the report would have projected a negative outcome. All $68.2 billion of the deal’s supposed economic gains arise from simulating the impact of removing trade barriers that do not exist. In other words, the gains are generated not through the removal of trade barriers directly, but through the elimination of the possibility of new future regulatory policies, which are deemed to be potential trade barriers. Absent this fabrication, the revised NAFTA would have been projected to lower the United States’ GDP by $22.6 billion and reduce the number of jobs by 53,900.

The problems only multiply when these separate results are used as inputs in the Commission’s economy-wide model.  This model, as noted above, is a computable general equilibrium model.  As such, it seeks to process all the ways the changes generated by the agreement interact to change market behavior before eventually producing – over a six-year period in this case — a new equilibrium outcome for the economy.  As one might imagine, this kind of modeling is quite complex and to ensure a result it requires some very significant assumptions.  Among them are:

  • The assumption that product markets are “perfectly competitive (implying zero economic profit for the firm).”
  • The assumption that there is “full capacity utilization of capital.”
  • The assumption that there is no unemployment.
  • The assumption that “global trade balances remain constant.”

In other words, while we may want the Commission to investigate whether a new trade agreement might cause a worsening of trade balances, or unemployment, or deindustrialization, or monopolization, the Commission’s model, by assumption, asserts that these are non-problems.  As a result, the model has a clear pro-trade agreement bias.

Thanks to these assumptions, if a country drops its trade restrictions, market forces will quickly and effortlessly lead capital and labor to shift into new, more productive uses.  It is no wonder that mainstream economic studies, which rely on computable general equilibrium modeling, always produce results supporting ratification of free trade agreements.  In light of this, it is striking how small the estimated gains were for this trade agreement.

The real winners

So, one might ask, what is really going on here?  Well, the agreement enjoys strong corporate support precisely because a number of its chapters include provisions responsive to the interests of leading US multinational corporations.  What follows are just a few examples drawn from the report.

The agreement includes provisions that require harmonization and thus a reduction in food safety standards, force governments to negotiate new standards with industry representatives, set deadlines for import checks, require that new standards be based on scientific principles, and that safety standards be applied “only to the extent necessary to achieve the appropriate level of protection” and “not [be] more trade restrictive than required.”

The agreement also includes a number of market access provisions to promote cross-border trade in services and financial services.  More specifically, the agreement’s market access provisions “are aimed at removing quotas and other barriers that impede the entry of services suppliers into foreign markets.” The Commission believes that “the broadcasting, telecommunications, and courier services sectors in the United States are estimated to gain the most, followed by the commercial banking sector in all three countries.”

The agreement also includes provisions “which would strengthen protections in major IPR categories such as trade secrets, regulatory data protection, patents, trademarks, copyrights, and civil, criminal, and administrative enforcement.”  The pharmaceutical industry will be one of the biggest beneficiaries.  For example, the agreement includes a “patent resolution mechanism that requires notice to patent holders, and an opportunity for relief, when a generic manufacturer seeks to rely on an originator’s test data for marketing approval without the patent holder’s consent.”

The USMCA would be the first U.S. free trade agreement with a chapter on digital trade.  Among other things, it would prevent governments “from restricting cross-border flows of financial data, which would require data to be stored or processed locally” and would “forbid them to adopt restrictive data measures in the future.”  This provision would be especially valuable to U.S. computer services and digital platform services firms. “Other key Digital Trade chapter provisions include a ban on import duties or other discriminatory customs measures on digital products (e.g., e-books, videos, music, software, and games), and prohibition of legal discrimination against digital products produced or created in other signatory countries.”

The agreement also includes a chapter that restricts the ability of governments to use state-owned enterprises to meet public needs by requiring that they be “regulated impartially, and do not benefit from special treatment and unfairly infringe upon the activities of private firms.”

The list goes on.  No wonder that major business associations are expressing strong support for the agreement. As the New York Times reports:

Industry groups called for the pact’s quick passage into law. Linda Dempsey, the vice president for international economic affairs at the National Association of Manufacturers, said that the deal was “a win for manufacturers.”

Jordan Haas, the director of trade policy at the Internet Association, said the report underlined that the deal’s digital trade provisions were “critical to America’s future economic success” and “mean jobs and opportunities in every state.”

There is a lot at stake in this struggle.  We need to stop calling for progressive reform of the agreement, a call that only leads to popular confusion about what drives US government policy.  Instead we need to build a movement that simply says no to NAFTA in any form.

The Uneasy US-China Relationship: What Lies Ahead?

The US and China are the two dominant poles in the global economy, as illustrated in the figure below which traces the global trade in parts and components. And they have a very uneasy relationship.  However, despite current tensions, it is unlikely that either side will succeed in dramatically changing it.  The main reason is that the relationship has been heavily shaped by the activities of leading multinational corporations, including from the US, and their interests in maintaining it can be expected to set limits on the actions of both governments.

China-US tensions

Xi Jinping, the president of the People’s Republic of China and head of the Communist Party of China, is actively pursuing policies that he hopes will reduce the country’s dependence on foreign multinational corporations and western markets.  Toward that end, he has promoted an industrial modernization program called “Made in China 2025” which aims to make the country a global power in 10 strategic industries, signed new trade agreements, created new regional institutions such as the Asian Infrastructure Investment Bank, launched new global initiatives such as the Belt and Road Initiative, and strengthened the country’s military.  This effort is often described in the western media as an attempt at decoupling from the west.

The US government for its part sees these efforts as a challenge to US dominance and has taken steps to block them and to isolate China.  For example, the US has levied tariffs on Chinese exports to the US, and has demanded that China do more to respect US intellectual property rights and open up more domestic markets to US firms.  It has also sought to stop other countries from using Chinese technology, especially in their wireless networks, and from participating in Chinese organized regional organizations and initiatives.  It also seeks to include a so-called “poison pill” clause in the US–Mexico–Canada free trade agreement which would limit the ability of Canada and Mexico to sign trade agreements with China without US approval.  The US hopes to insert such a clause in other trade agreements in order to force countries to choose whether to have closer economic ties with the United States or with China. It has also greatly expanded its military activities in areas surrounding China, for example, in Vietnam and the Philippines.

While the differences between the two governments are serious, and represent conflicting elite interests, there are other important factors that need to be considered in evaluating likely future developments.  One of the most important is the profit considerations of multinational corporations.

The continuing importance of multinational corporations in China

Foreign direct investment has played a key role in boosting Chinese growth and creating a regional production system in which East Asian and Southeast Asian countries sell parts and components to China-based firms for final assembly and export outside the region, especially to the US and Europe.  As an Asian Development Bank study explains:

The pattern of inward FDI to Asia reveals firms’ motivation of entry that is different from that into the rest of the world. . . . Foreign affiliates in Asia established by FDI tend to be engaged more in trade and investment for the purpose of reexporting intermediate and/or final goods to the countries outside the host country (vertical and export-platform FDI) than those in other regions.

Rapid expansion of FDI to EEA [emerging East Asia] has been closely associated with the establishment of regional production networks by multinational companies, especially with the PRC as the region’s main assembly and production hub to create positive spillovers on the rest of the regional economies. Indeed, based on the number of foreign affiliates in Asia that both import and export, the PRC is the most popular host for vertical and export-platform FDI with various parent economies [as shown in the table below].

This positioning by foreign firms in China, as both importers and exporters, means that China, and emerging East Asia more broadly, remain tied to the global economy, and in particular the US economy.  The continuing strength of this relationship is highlighted in the following figure from the Asian Development Bank study.  The high correlation of 0.85 between the growth in US non-oil imports and the growth in exports by emerging East Asia (which includes the PRC) in the period after the Global Financial Crisis, makes clear that there has been relatively little decoupling since the crisis.

In addition, foreign multinational corporations continue to produce China’s most technologically advanced products and exports.  Chip making is a good example of the former.  Historically, the semiconductor industry has concentrated on producing relatively standard computer chips that could be used for multiple purposes.  However, increasingly the electronics industry is demanding new, more powerful and specialized computer chips for use in devices involving artificial intelligence, self-driving cars, and the many products tied to the “internet of things.”

China continues to import most of its chips, but as a Stratfor article notes, foreign firms dominate semiconductor manufacturing in China as well, and especially of the most advanced chips:

the biggest players are often international companies with domestic subsidies. South Korea’s SK Hynix and Samsung are the two largest by revenue, followed closely by the United States’ Intel and Taiwan’s TSMC. But the two Chinese companies in the top six — Huahong Group and SMIC — are generations behind leading non-Chinese companies. And while Chinese tech giant Huawei has become a major player in designing certain chips, those powering the company’s latest generation of high-end smartphones were, in fact, built by TSMC.

As for exports, Sean Kenji Starrs, writing in the Socialist Register 2019, provides the following table listing the top ten exporters from China.  As we can see, electronics are China’s most important export product.  However:

The overwhelming majority of China’s top electronic exporters are foreign firms (especially Taiwanese and South Koreans – only Huawei makes the top ten) Samsung and LG perform their own final assembly in China but Western TNCs (including increasingly Japanese) prefer to outsource their lower value production to Taiwanese firms operating in China.

In short, it will be very challenging for the Chinese government to dramatically end its reliance on foreign multinational corporations or restructure its trade relations, without seriously jeopardizing Chinese growth (which is already falling fast) and the country’s political stability.

US multinational corporations and China

It is well-known that many leading US multinational corporations, including firms like Apple, Nike, and Walmart, depend on China-based production for their US sales.  What is less well-known is that many US multinational corporations occupy highly profitable positions in Chinese domestic markets.  For example, 2017 marked the sixth consecutive year that China was the top market for General Motors in terms of both sales and profit. Starr lists several other important examples: Google has a Chinese market share in smartphone operating systems of over 70 percent. Microsoft has a 90 percent market share in desktop operating systems. Boeing has a 45 percent market share in airplanes.  Coca-cola has a 63 percent market share in carbonated soft drinks. Starbucks has a 55 percent market share in coffeeshops. Cisco has a 55 percent market share in ethernet switches.

Moreover, as the economist Prema-chandra Athukorala shows in the table below, US multinationals operating in China, also use the country as a profitable platform from which to export to other countries.  In fact, in 2013, “the value of goods exported to the rest of the world by US MNE affiliates in China was US$37.5 billion, which was almost three times the value of their exports to the United States.”

Thus, China is extremely important to the operation and profitability of leading US firms.  And any US administration would have to think very carefully about the economic and political repercussions if it were to pursue policies that triggered a serious disruption in existing economic relations with China.

In sum, it is clear that both governments operate subject to real limits set by powerful multinational corporations, limits that will likely constrain China’s push for decoupling as well as the US drive to isolate China.  That said, it is important to keep in mind that there is an even more powerful force that could undermine the stability of the relationship and the contemporary global economy: the growing contradictions at work in both countries that have led to massive inequality and workplace resistance, ever slower growth and financial imbalances, and the likelihood of recession in the United States.

The Trump Administration: Lots of Noise But Nothing Changed For US TNCs

President Trump has long pointed to the US balance of payments deficit as a sign of US economic weakness. Of course, his nation-state focus, and claim that trade deficits with countries such as China and Mexico are the result of unfair trading practices that benefit foreign business and workers at the expense of US business and workers, is misleading.  These deficits owe much to the operation of US corporate controlled cross-border production networks, which have boosted US corporate power and profits largely at the expense of workers in all three countries.

Criticizing past administrations for selling out America, President Trump has pursued a series of policies—renegotiated trade agreements, tariff wars, public shaming of corporate disinvestment, and tax reform—all of which are supposed to help rebuild the US economy by encouraging US firms to modernize and expand their US operations. These policies have all failed to achieve their stated aim.  In fact, they have, largely by design, only served to strengthen existing corporate dominated patterns of international production and value capture.

As a result, there has been little change in US trade patterns.  The US trade deficit in goods, as shown below, has continued to grow every year of the Trump presidency.

Strengthening TNC power and profits

After first threatening to dissolve NAFTA, President Trump eventually pursued a rewrite of the NAFTA agreement.  However, his proposed changes to the agreement primarily speak to corporate needs, especially the new chapters that increase protection for intellectual property rights and promote greater cross-border freedom for electronic commerce and digital trade.  Similarly, the Trump tariff “war” against China appears primarily aimed at forcing the Chinese government to tighten regulations protecting US intellectual property rights and open new sectors of its economy to US foreign investment, especially the finance sector.

President Trump has also engaged in occasional twitter “wars” against corporate decisions to close or relocate abroad part of their operations.  Initially, corporate leaders felt pressure to modify or delay their decisions.  Now, no doubt reassured by the general policy direction of the Trump administration, they no longer appear worried about his periodic outbursts.  For example, both GM and Harley Davidson recently announced plans to shut domestic plants in favor of overseas production and have largely ignored Trump’s tweets critical of their globalization activities.

Much has been written about these efforts, but little about the consequences of the last policy, tax cuts, on US TNC decision-making.  The “Tax Cuts and Jobs Act” Act, signed into law on Dec. 22, 2017, was promoted as a way to encourage US transnational corporations to bring back funds held outside the country and boost their domestic investment.  However, as a Bank of France blog post by Cristina Jude and Francesco Pappadà makes clear, this initiative, like the others, has done nothing to change US corporate behavior, although the lower tax rates make it more profitable.

Jude and Pappadà focus on profit hording and profit shifting.  Profit hording refers to the accumulation of “non-repatriated earnings” by US TNCs.  Economists estimated that US firms held approximately $2.5 trillion outside the country at the end of 2017 and the Trump administration predicted that a large share would be brought back thanks to the one-time lower tax rate included in the 2017 act.  Apple alone is said to hold $252 billion in offshore accounts.

Although economists speak of corporate earnings held abroad, in fact most of those earnings are held in the US.  However, as long as those funds are not used for certain purposes, such as paying dividends to shareholders, financing domestic acquisitions, guaranteeing loans, or making investments in physical capital in the US, they can be invested in the US tax free.

As we can see in the chart below, US companies did respond to the one-time lower tax rate by “repatriating” some funds.  Dividend payouts went up, which resulted in a period of negative “reinvested earnings” in foreign affiliates.

However, as Jude and Pappadà explain:

Despite the permanent cut of the standard corporate tax rate from 35 percent to 21 percent, the adjustment of repatriated dividends and reinvested earnings appears limited to the first and second quarters of 2018. Indeed, dividends decrease substantially in quarter three, whereas reinvested earnings return to positive as they were before the tax reform.

The response of US companies to the corporate tax reform mainly consisted in the partial repatriation of previously accumulated stocks of earnings (around 20 percent of the total) due to the temporary lower tax. This firms’ behavior is similar to the one observed in 2005 when another law granted US multinationals a one-year tax holiday to repatriate foreign profits at a 5.25 percent tax rate.

Thus, the tax change produced a one-time shift in a relatively small share of the non-repatriated earnings held by leading US TNCs, with stock owners the primary beneficiaries. Moreover, this shift did not change the overall size of income receipts from US foreign direct investment, as the increase in dividends was offset by the negative reinvested earnings.

If the “Tax Cuts and Jobs Act,” is to have a long-lasting effect on the US trade balance, it needs to stop the corporate practice of tax shifting, which is how TNCs generated the huge sum of money held as non-repatriated earnings.  Profit shifting refers to the corporate strategy of using various means such as transfer pricing, often achieved using intellectual property rights over patents and trademarks, to book profits generated from US activities in a lower-tax jurisdiction.  As Jude and Pappadà point out, “six small jurisdictions (Bermuda, Ireland, Luxembourg, the Netherlands, Singapore and Switzerland), which count for less than 1 percent of the world’s population, hold 63 percent of the overall profits earned abroad by US multinationals.”

Google is, as Tim Hyde explains, one of the firms that makes good use of this strategy:

it is able to claim billions of profits in Bermuda each year (corporate tax rate: 0 percent) even though it has no office building there and not even any employees on the island. . . . this is legitimate because the rights to Google’s search and advertising technologies are technically owned by a subsidiary called Google Holdings housed in Bermuda, thanks in part to a trick called the Double Irish Dutch Sandwich. Other Google subsidiaries pay billions in royalties to the Bermudian company Google Holdings for the rights to use its technology, which was originally invented by Google employees in California and sold to Google Holdings in 2001. Those billions of profits are reclassified as Bermudian rather than American or Irish and thus not taxed.

If US firms booked their earnings in the US, rather than in a foreign tax haven, foreign direct investment receipts would decline, net US service exports would increase, and the overall trade deficit would narrow.

An Oxfam study of profit shifting by leading pharmaceutical companies shows just how important this strategy is to US TNCs and how much we lose from it:

Abbott, Johnson & Johnson, Merck, and Pfizer—systematically stash their profits in overseas tax havens. As a result, these four corporate giants appear to deprive the United States of $2.3 billion annually and deny other advanced economies of $1.4 billion. And they appear to deprive the cash-strapped governments of developing countries of an estimated $112 million every year—money that could be spent on vaccines, midwives, or rural clinics.

Pharma corporations’ “profit-shifting” may take the form of “domiciling” a patent or rights to its brand not where the drug was actually developed or where the firm is headquartered, but in a tax haven, where a company’s presence may be as little as a mailbox. That tax haven subsidiary then charges hefty licensing fees to subsidiaries in other countries. The fees are a tax-deductible expense in the jurisdictions where taxes are standard, while the fee income accrues to the subsidiary in the tax haven, where it is taxed lightly or not at all. Loans from tax-haven subsidiaries and fees for their “services” are other common strategies to avoid taxes. . . .

Further opportunities for avoiding taxes involve locating corporate brand or patents in tax havens, and fees for marketing, finance, or management services. For example, a pharmaceutical corporation may bill much of its R&D costs on products consumed around the globe to a subsidiary in a tax haven where R&D rights are registered, even though not a single researcher is based there. That immediately creates a cost in the country where the product is consumed, which minimizes the tax bill, and an artificial profit in the tax havens, where almost no taxes are paid in return.

As a result of this practice:

Pfizer posted losses on US operations of 8 percent in 2013, 25 percent in 2014, and 31 percent in 2015. The pattern has continued, with Pfizer posting losses of 32 percent in 2016 and 26 percent in 2017. Meanwhile, Pfizer’s international operations earned 56–58 percent in 2013–2015 and even more in the two years since (64 and 72 percent). The story is similar though less extreme for Abbott and Johnson & Johnson.

The pharmaceutical industry is no outlier.  According to a study by three economists, Thomas Tørsløv, Ludvig Wier, and Gabriel Zucman, “close to 40 percent of multinational profits were artificially shifted to tax havens in 2015.”

And, as the chart below reveals, there is no sign that passage of the Tax Cuts and Jobs Act has produced any change in US TNC profit-shifting activities.  As Jude and Pappadà discuss:

in Chart 2, we observe a change in the composition of foreign direct investment income, but the balance remains stable at its pre-reform level. Moreover, this is not associated with an increase in net exports of services. In particular, the decomposition of the services trade balance in Chart 3 shows that there has not been any increase in intellectual property charges, for which profit shifting is more relevant. At the moment, it is too soon to assess the full impact of the reform as US multinationals may take time to adjust the location of their assets and activities. However, the profit shifting decisions of multinational firms do not seem to be affected so far.

In sum, for all of Trump’s bluster, his administration has done nothing to produce a change in TNC business practices or improve the health of the US economy.  In fact, quite the opposite is true, as almost his initiatives have been designed, above all, to expand the reach and profitability of leading US corporations.

China Has An Unemployment Problem

China has an unemployment problem.  There are lots of articles and commentary about the Chinese economy, especially recently with attention focused on China’s declining rate of growth.  But have you noticed that there is rarely any mention of China’s unemployment rate?

Chinese growth is falling

China’s fourth-quarter 2018 GDP growth fell to 6.4 percent year-on-year, the slowest rate of growth since the global financial crisis. It brought full-year growth down to 6.6 percent, the slowest yearly rate of growth since 1990.  And predictions are for a significantly slower rate of growth in 2019, perhaps down to 6.3 percent.

The government has certainly pursued a number of policies over the last decade in an attempt to keep growth robust.  This includes the massive post-crisis, investment-heavy stimulus program; the more recent Belt and Road Initiative, and on-going highly expansionary monetary policy. But, the growth-generating effects of these and other government policies has steadily diminished.  As Victor Shih points out in a recent New Left Review interview:

In 2016, China needed three times as much credit to call forth the same amount of growth as in 2008. The scale of debt creation required to keep the economy moving forward has increased massively, and People’s Bank of China loans to domestic financial institutions rocketed from 4 trillion ren­minbi at the end of 2010 to 14 trillion renminbi by November 2017, a three-and-a-half-fold increase in the space of seven years. Total debt has grown from 163 per cent of GDP around 2009 to 328 per cent of GDP today, and this figure will likely continue to grow for the foreseeable future.

Strikingly few discussions of China’s declining growth trajectory include mention of the country’s unemployment rate.  One possible reason is that China’s official unemployment rate has been remarkably stable at roughly 4 percent for decades, seemingly unaffected by the economy’s ups and downs.  Unfortunately, this official rate is worthless as an indicator of the China’s labor market conditions.  In reality, China likely has a serious and growing unemployment problem.

China’s faulty measure of unemployment

As we can see from the chart below, taken from a National Bureau of Economic Research (NBER) report on trends in unemployment in China, the country’s unemployment rate has been low and quite stable.  It rose gradually from the early 1990s to the early 2000, as the government pursued a program of privatization and marketization, and then remained largely unchanged, hovering around 4 percent, from the early 2000s to 2013.

In fact, the official rate has remained much the same over the following years. In April 2018, the government introduced a new measure of unemployment, one that it said would be more accurate. According to the new measure, the country’s unemployment rate fell to 3.82 per cent at the end of September, from 3.83 per cent at the end of June.

This stability is rather startling, considering that over the period 2002 to 2018 China’s growth rate has fluctuated considerably.  It is why Christopher Balding, in a Bloomberg article, captured the opinion of most analysts when he said:

China has long been criticized both for its obsession with GDP statistics and their quality: Pressuring cadres to meet growth targets has encouraged a risky buildup of debt and, at times, the outright fabrication of numbers. If anything, though, the quality of China’s official employment data is even worse — and the inaccuracies could have equally dangerous repercussions.

There are many problems with the government’s past and current measure of unemployment.  Perhaps the most important is that it is a really an “urban registered jobless rate.”  The urban designation is significant because of China’s household registration system (Hukou), which identifies a person by their place of birth.  Migrant workers who come to an urban area in search of work do not have an urban registration and are thus denied the benefits enjoyed by the urban Hukou population, including subsidized housing, health insurance, unemployment insurance, and minimum living standard subsidies.  China’s unemployment rate only measures the rate of unemployment of those with an urban registration.

Another problem with the official measure is that until the April 2018 revision, an unemployed urban worker had to register with their local employment service agency to be counted as unemployed.  Unemployed workers often skipped registering because the process is time consuming and the benefits small and time limited to a maximum of two years.  The revised measure is said to be based on government surveys rather than registration, but the reliability of the surveys is in doubt.

In addition, as the authors of the NBER report point out:

the total labor force, which is the denominator in the calculation of unemployment rate, is also subject to error for many reasons. One recent article that reviewed the quality of Chinese labor statistics claimed that the official unemployment rate is “almost useless.” Another important and related labor market indicator – the labor force participation rate – is not even reported in official statistics.

Accepting the urban Hukou framework, the authors made their own calculation of urban unemployment using China’s Urban Household Survey (UHS) which covers all of urban China and has been administered by China’s National Bureau of Statistics since the 1980s.  Their calculations yield, as shown by the sold dark line in the following figure, an urban rate of unemployment that is far higher than the government’s official measure (dotted black line).

The authors summarize their results as follows:

The rate averaged 3.9 percent in 1988-1995, when the labor market was highly regulated and dominated by state-owned enterprises, but rose sharply during the period of mass layoff from 1995- 2002, reaching an average of 10.9 percent in the subperiod from 2002 to 2009.

What is striking is that the high rates of unemployment from 2002 to 2009 occurred in years when official GDP growth was over 9 percent a year.

Of course, any meaningful measure of unemployment has to include all urban workers, not just the ones with an urban registration classification.  China’s migrant workforce tops 280 million according to official estimates.  The country’s four megacities, each with a population of over 10 million – Shanghai, Beijing, Guangzhou and Shenzhen — have huge migrant populations. For example, migrants make up more than 40 percent of Shanghai’s population, 37 percent of Beijing’s population, 38 percent of Guangzhou’s population, and 67 percent of Shenzhen’s population.

While not all migrant workers are in the labor force, most are since their migration was, more often than not, motivated by a search for employment.  And as the Chinese economy transitioned away from one anchored by state production for domestic use into one rooted in private production, increasingly for export, migrant workers became central to its operation.  For example, migrant workers dominate the manufacturing workforce at most foreign-owned export firms. They also comprise the majority of urban construction workers.

While it is true that the period of privatization was harder on state workers than migrant workers, the more recent years, marked by the country’s post-crisis slowdown in growth and exports, have definitely taken their toll on the migrant workforce.  In light of the high NBER unemployment estimates for urban Hukou workers highlighted above, it is not unreasonable to imagine an overall urban unemployment rate close to 15 percent if we include migrant workers.

It’s getting worse

As noted above, Chinese growth is slowing.  Adding to policymakers’ worries is the fact that export growth has also been trending down; exports in December 2018 fell 4.4 percent from a year earlier, with demand in most major markets weakening.  And these trends are definitely reflected in changes in company payrolls and hiring plans.

According to a report in The South China Morning Post,

Demand for labor at China’s importers, exporters, and related manufacturers fell by 40 per cent in the last quarter of 2018 from a year earlier, showing the trade war with the US has taken its toll, a survey released on Friday revealed.

The China Institute for Employment Research (CIER) at the Renmin University of China in Beijing found jobs in export-oriented regions, including Dongguan in the Pearl River Delta and Suzhou in the Yangtze River Delta, were hit hard.

A CNBC story highlights survey results showing planned layoffs in manufacturing but goes on to add:

The job losses don’t appear to be relegated to just the manufacturing sector.

“We haven’t seen this degree of jobs weakness since the (stock) market panic of Q1 2016,” Leland Miller, chief executive officer of China Beige Book, said in an email. The firm publishes a quarterly review of the Chinese economy based on a survey of more than 3,300 Chinese firms.

“In Q4 employment growth weakened across every major sector, with the ‘new economy’ — retail and services — seeing the most substantial deterioration,” Miller said. “To call it broad-based is an understatement: job growth slowed in every region we track except the Northeast.”

Regardless of official unemployment figures showing stable and even declining rates of unemployment, all signs point to the fact that unemployment is high and trending upwards.  And, that, certainly from a worker perspective, means that China has a serious unemployment problem.  Whether Chinese leaders have the commitment or capacity to offer a meaningful response, given the interests they represent and the constraints within which they operate, remains to be seen.

Capitalist Globalization Is Not Unwinding: TNCs Continue To Increase Their Power and Profits

The Great Recession of 2008 marked the end of a lengthy period of international economic growth and rapidly increasing international trade.  Now, some ten years later, economic activity, including trade and foreign direct investment, remains far below pre-crisis levels with little sign of revival.  In fact, with growth falling in Europe and Japan, and many third world countries struggling to deal with ever larger trade deficits and worsening currency instability, the weak recovery is likely on its last legs.

Some analysts now question whether the transnational corporate created globalization system, which the United Nations Conference on Trade and Development (UNCTAD) calls hyperglobalization, is in the process of unwinding.  While real tensions, compounded by US-initiated trade conflicts, do exist, UNCTAD’s 2018 Trade and Development Report provides evidence showing that the system still serves the interests of the core country transnational corporations that established it and they continue to strengthen their hold over it.

Global trends: slowing growth and international trade

As panel A in the figure below shows, the years 1986 to 2008 were marked by strong global growth and export activity, with so-called “developing countries” accounting for a significant share of both, thanks to the spread of Asian-centered, cross-border production networks under the direction of core country transnational corporations. It also shows the decline in global growth and tremendous contraction in trade in the post-crisis period, 2008 to 2016.

It is this contraction in global trade, along with the decline in foreign direct investment, that has fueled discussion about the future of the current system of globalization, and whether it is unwinding.  However, trends in the export elasticity of economic output, illustrated in Panel B, are an important indicator that the system is evolving, not fraying, and in ways that benefit core country transnational corporations.

The export elasticity is a way of measuring the effect of exports on national economic activity; the greater the elasticity the more responsive national production is to exports.  What we see in Panel B is that the export elasticity of developed countries rose in the post-crisis period, while that of developing countries continued its downward trend.  This trend highlights the fact that core country transnational corporations continue to craft new ways to capture an ever-greater share of the value created by their production networks, and more often than not, at the expense of working people in both developed and developing countries.

Transnational corporate gains

Exports are dominated by large companies, overwhelmingly transnational corporations.  As the authors of the Trade and Development Report explain:

recent evidence from aggregated firm-level data on goods exports (excluding the oil sector, as well as services) shows that, within the very restricted circle of exporting firms, the top 1 per cent accounted for 57 per cent of country exports on average in 2014. Moreover, while the share of the top 5 per cent exceeded 80 per cent of country export revenues on average, the top 25 per cent accounted for virtually all country exports.

Moreover, as we can see in the figure below, the share of exports controlled by the top 1 percent of developed country and of G20 firms has actually grown in the post-crisis period.

Studies cited by the Trade and Development Report found that concentration is even greater than the above figures suggest. One found that “the 5 largest exporting firms account, on average, for 30 per cent of a country’s total exports.” Another concluded that “in 2012, the 10 largest exporting firms in each country accounted, on average, for 42 per cent of a country’s total exports.”

The next figure looks at earnings for a group composed of the 2000 largest transnational corporations, a group that includes firms from all sectors.  Not surprisingly, their earnings closely track global trade and have recently declined in line with the downturn in world trade.  However, as the table that follows makes clear, that is not true as far as their rate of profit is concerned.  It has actually been higher in the post-crisis period.

In other words, despite a slowdown in world trade, the top transnational corporations have found ways to boost what matters most to them, their rate of profit.  Thus, it should come as no surprise that transnational capital remains invested in the global system of accumulation it helped shape.

Transnational capital strengthens its hold over the system

A powerful indicator of transnational capital’s continuing support for the existing system is the steady increase, as highlighted in the figure below, in new trade and investment agreements between countries of the so-called “north” and “south.”  These agreements anchor the existing system of globalization and, while negotiated by governments, they obviously reflect corporate interests.

In fact, these new agreements have played an important role in boosting the profitability of transnational corporate operations.  That is because they increasingly include new policy areas that include “increased legal pro­tection of intellectual property and the broadening scope for intangible intra-firm trade.”  This development has allowed core country transnational corporations to secure greater protection and thus payment for use of intangible assets such as patents, trademarks, rights to design, corporate logos, and copyrights from the subcontracted or licensed firms that produce for them in the third world.  These new agreements have also made it easier for them to shift their earnings from higher-tax to lower-tax jurisdictions since the geographical location of services from most intangible assets “can be determined by firms almost at will.”

According to the authors of the Trade and Development Report,

Returns to knowledge-intensive intangible assets proxied by charges for the use of foreign [intellectual property rights] IPR rose almost unabated throughout the [global financial crisis] and its after­math, even as returns to tangible assets declined. At the global level, charges (i.e. payments) for the use of foreign IPR rose from less than $50 billion in 1995 to $367 billion in 2015. . . . a growing share of these charges represent payments and receipts between affiliates of the same group, often merely intended to shift profit to low-tax jurisdictions. Recent leaks from fiscal authorities, banks, audit and consulting or legal firms’ records, revealing corporate tax-avoidance scandals involv­ing large TNCs, have made clear why major offshore financial centers (such as Ireland, Luxembourg, the Netherlands, Singapore or Switzerland) that account for a tiny fraction of global production, have become major players in terms of the use of foreign IPR.

The growing use of this tax avoidance strategy by US transnational corporations, as captured in the figure below, highlights its strategic value to transnational capital.

Social costs continue to grow

The globalization process launched in the late 1980s transformed and knitted together national economies in ways that generated growth but also serious global trade and income imbalances that eventually led to the 2008 Great Recession.  The weak post-crisis recovery in global economic activity is a result of the fact that without the massive debt-based consumption by the US that helped temporarily paper over past imbalances, the globalized system is unable to overcome its structural tensions and contradictions.

However, as we have seen, transnational capital has still found ways to boost its profitability.  Unfortunately, but not surprisingly, their success has only intensified competitive pressures on working people, raising the costs they must pay to maintain the system.  An UNCTAD press release for the Trade and Development Report emphasizes this point:

Empirical research in the report suggests that the surge in the profitability of top transnational corporations, together with their growing concentration, has acted as a major force pushing down the global income share of labor, thus exacerbating income inequality.

It is of course impossible to predict the future.  A new crisis might explode unexpectedly, disrupting existing patterns of global production.  Or workers in one or more countries might force a national restructuring, triggering broader changes in the global economy.

What does seem clear is that current economic problems have not led to the unwinding of what UNCTAD calls hyperglobalization.  In fact, the Trade and Development Report finds that “many advanced countries have since 2008 abandoned domestic sources of growth for external ones.”  The current system of globalization was structured to benefit transnational capital, and they continue to profit from its operation.  Unless something dramatic happens, we can expect that they will continue to use their extensive powers to maintain it.

The Trump Tax Plan Proves A Bonanza For Business

Every time a progressive policy captures the public imagination, like the Green New Deal, opponents are quick to raise the revenue question in an effort to discredit it.  While higher taxes on the wealthy and leading corporations should be an obvious starting point in any response, until recently elites have been remarkably successful in winning tax reductions, spinning the argument that cuts are the best way to stimulate private investment and create jobs.  And they have enjoyed a double gain: not only do the cuts benefit them financially, the loss of public revenue encourages people to think small when it comes to public policy.

However, there are signs that the times might be changing.  Alexandria Ocasio-Cortez’s proposal to tax annual incomes over $10 million at a marginal tax rate of 70 percent has won significant public support. Strong popular opposition in New York to a plan to heavily subsidize a new Amazon headquarters forced the company to withdraw its proposal. And then there is the negative lesson of the Wisconsin fiasco, where the state showered Foxconn with massive tax and other subsidies in an effort to land a new manufacturing facility, only to have the company walk-back its commitments after significant state expenditures.

But there is still important education as well as political work that remains to be done to win majority support for the kind of tax reform we so desperately need. President Trump’s “Tax Cuts and Jobs Act,” which was signed into law on Dec. 22, 2017, is one example of what we are up against.

The “American model”

President Trump’s signature tax law included significant benefits for the wealthy as well as most major corporations.  Looking just at the business side, the law:

  • lowered the US corporate tax rate from 35 percent to 21 percent and eliminated the corporate Alternative Minimum Tax.
  • changed the federal tax system from a global to a territorial one.  Under the previous global tax system, US multinational corporations were supposed to pay the 35 percent US tax rate for income earned in any country in which they had a subsidiary, less a credit for the income taxes they paid to that country. However, the tax payment could be deferred until the earnings were repatriated.  Under the new territorial tax system, each corporate subsidiary only has to pay the tax rate of the country in which it is legally established; foreign profits face no additional US taxes.
  • established a new “global minimum” tax of 10.5 percent that is only applied to total foreign earnings greater than a newly established “normal rate of return” on tangible investments in plant and equipment (set at 10 percent).
  • offered multinational corporations a one-time special lower tax rate of 8 percent on repatriated funds that were held overseas by corporate subsidiaries in tax-haven countries.

Of course, President Trump sold these changes as a means to rebuild the American economy, predicting a massive return of overseas money and increase in domestic investment.  As he explained:

For too long, our tax code has incentivized companies to leave our country in search of lower tax rates. My administration rejects the offshoring model, and we have embraced a brand new model. It’s called the American model. We want companies to hire and grow in America, to raise wages for the American workers, and to help rebuild American cities and towns.

The same old story

Not surprisingly, the so-called new American model looks a lot like the old one, with corporations–and their managers and stockholders–gaining at the public expense.

Corporate investment has not been limited by a lack of money.  Rather, corporate profits have steadily increased while investment in plant and equipment has remained weak.  Instead of investing, corporations have used their surplus to finance dividend payments, stock repurchases, and mergers and acquisitions. Instead of stimulating new productive investment, the tax cut only gave firms more money to use for the same purposes.

The new territorial tax system, which was supposed to promote domestic investment and production, actually continues to encourage the globalization of production since it lowers the taxes corporations have to pay on profits generated outside the country. The new global minimum tax does much the same.  Although its supporters claimed that it would ensure that corporations pay some US tax on their foreign profits, as structured it encourages foreign investment.  The minimum tax rate remains far below the US domestic rate, and the larger the capital base of the foreign subsidiary, the greater the foreign profits the parent firm can shield from taxation.

As for the one-time tax break on repatriated profits, the fact is that most of the money supposedly held abroad was already in the country, sitting in accounts protected from taxation.  Moreover, since firms remain reluctant to invest, the one-time break only served to give firms the opportunity to channel more money into nonproductive uses at a special lower tax rate.

Tax realities

According to the Treasury Department, corporate income tax receipts fell by 31 percent in fiscal year 2018.  As a Peter G. Peterson blog post explains:

The 31 percent drop in corporate income tax receipts last year is the second largest since at least 1934, which is the first year for which data are available. Only the 55 percent decline from 2008 to 2009 was larger. While that decrease can be explained by the Great Recession, the drop from 2017 to 2018 can be explained by tax policy decisions.

The Tax Cuts and Jobs Act, enacted in December 2017, is responsible for the plunge in corporate income tax receipts in 2018. Those changes include a reduction in the statutory rate from 35 percent to 21 percent and the expanded ability to immediately deduct the full value of equipment purchases. The Congressional Budget Office points out that about half of the 2018 decline occurred since June, which includes estimated tax payments made by corporations in June and September that reflected the new tax provisions.

Ben Foldy, writing for Bloomberg news, highlights the spoils that went to the banking sector:

Major U.S. banks shaved about $21 billion from their tax bills last year — almost double the IRS’s annual budget — as the industry benefited more than many others from the Republican tax overhaul. . . .

On average, the banks saw their effective tax rates fall below 19 percent from the roughly 28 percent they paid in 2016. And while the breaks set off a gusher of payouts to shareholders, firms cut thousands of jobs and saw their lending growth slow. . . .

Tax savings contributed to a banner year for banks, with the six largest surpassing $120 billion in combined profits for the first time. Dividends and stock buybacks at the 23 [largest] lenders surged by an additional $28 billion from 2017 — even more than their tax savings.

The stability and profitability of global corporate networks

US firms also continue to take advantage of overseas tax havens.  As Brad Setser, writing in the New York Times, points out:

despite Mr. Trump’s proud rhetoric regarding tax reform . . . there is no wide pattern of companies bringing back jobs or profits from abroad. The global distribution of corporations’ offshore profits — our best measure of their tax avoidance gymnastics — hasn’t budged from the prevailing trend.

Well over half the profits that American companies report earning abroad are still booked in only a few low-tax nations — places that, of course, are not actually home to the customers, workers and taxpayers facilitating most of their business. A multinational corporation can route its global sales through Ireland, pay royalties to its Dutch subsidiary and then funnel income to its Bermudian subsidiary — taking advantage of Bermuda’s corporate tax rate of zero.

The chart below makes this quite clear, showing that US profits are disproportionately booked in countries where there is little or no actual productive activity.

In fact, as Setser notes, “the new [tax] law encourages firms to move ‘tangible assets’ — like factories — offshore.”

The chart below, from a Fortune magazine post, provides an overview of the large cash holdings of some of America’s largest corporations and the share held “outside” the country.

Economists estimated that US firms held approximately $2.6 trillion outside the country and the Trump administration predicted that a large share would be brought back, funding new productive investments, thanks to the one-time lower tax rate included in the 2017 tax reform act.  Government officials and the media talked about this money in a way that gave the impression that it was actually sitting outside the country. But it wasn’t.

Adam Looney, in a Brookings blog post, clarifies that:

”repatriation” is not a geographic concept, but refers to a set of rules defining when corporations have to pay taxes on their earnings. For instance, paying dividends to shareholders triggers a tax bill, but simply bringing the cash to the U.S. does not. Indeed, nearly all of the $2.6 trillion is already invested in the U.S. . . .

U.S. multinational corporations can defer paying tax on profits they earn abroad indefinitely by agreeing not to use the earnings for certain purposes, like paying dividends to shareholders, financing domestic acquisitions, guaranteeing loans, or making investments in physical capital in the U.S. In short, the rules prohibit a company from using pre-tax money in transactions that benefit shareholders. No one believes this is rational or efficient, and it is certainly onerous for shareholders, who would rather have that cash in their pockets than held by the corporation. But those rules don’t place requirements on the geographic location of the cash. Multinational firms are allowed to bring those dollars back to the U.S. and to invest them in our financial system.

Indeed, that’s exactly what they do. Don’t take my word for it, the financial statements of the companies with large stocks of overseas earnings, like Apple, Microsoft, Cisco, Google, Oracle, or Merck describe exactly where their cash is invested. Those statements show most of it is in U.S. treasuries, U.S. agency securities, U.S. mortgage backed securities, or U.S. dollar-denominated corporate notes and bonds.

Of course, these firms could easily have used their tax deferred dollar assets as collateral to borrow to finance any investment projects they found attractive.  Their lack of interest in doing so provides additional evidence that low corporate rates of investment are not due to funding constraints.  Rather, corporations have only a limited interest in undertaking productive investments in the US.

Thus, it should come as no surprise that the one-time tax break resulted in a one-time, modest, “repatriation” and that the money was largely used for financial rather than productive purposes. The New York Times reports that:

 JPMorgan Chase analysts estimate that in the first half of 2018, about $270 billion in corporate profits previously held overseas were repatriated to the United States and spent as a result of changes to the tax code. Some 46 percent of that, JPMorgan Chase analysts said, was spent on $124 billion in stock buybacks.

The flow of repatriated corporate cash is just one tributary in what has become a flood of payouts to shareholders, both as buybacks and dividends. Such payouts are expected to hit almost $1.3 trillion this year, up 28 percent from 2017, according to estimates from Goldman Sachs analysts.

In sum, thanks to the Trump tax plan, trillions of dollars that could have been used to transform our transportation and energy infrastructure, industrial structure, and system of social services are instead being transferred to big businesses, who use them for speculative activities and to further enrich their already wealthy managers and stock holders.

Given current realities, we can expect growing popular interest in and support for new public initiatives like the Green New Deal and a new progressive system of taxation to help finance it.  Hopefully, exposing the workings of our current tax system and the lies our government and business leaders tell about whose interests it serves, will help speed this development.