Reprinted by permission of Foreign Affairs (Volume 90, Number 6, November/December 2011).
November 2, 2011
© (2011) by the Council on Foreign Relations, Inc. www.ForeignAffairs.com
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 1 percent of income earners. Meanwhile, unemployment remains over 9 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 US 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 nonfinancial 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 US corporations would only worsen their global disadvantage. This would hurt the US 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 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 21st 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 US 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 US 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 US goods and services competitive abroad. Large companies account for more than 70 percent of US exports. The same economies benefit US consumers, too. Despite the vilification of Walmart, for example, the arrival of a Walmart Supercenter into 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 workforce.
Although Occupy Wall Street wants to douse big business with vinegar, to ensure economic growth and competitiveness, Washington should smother it with honey. To be sure, scared by the uncertain economic outlook, nonfinancial businesses are stowing away massive cash reserves. If firms saw promising opportunities, they would be more likely to spend this capital and create new jobs through investments in ideas, plants, and equipment. To move that process along, Congress should pass an immediate cut in the federal corporate tax rate, from 35 percent to 20 percent. Many investment projects that once appeared risky would suddenly look attractive.
Likewise, Washington should promote a whole array of public-private partnerships to refurbish the badly neglected US infrastructure. Successful examples include the design, financing, construction, and maintenance of turnpikes (Austin, Texas), monorails (Las Vegas, Nevada), and light-rail transits (St. Paul, Minnesota, and Hudson-Bergen, New Jersey). Internationally, public-private partnerships reach well beyond hard infrastructure. Cisco Systems launched its Global Education Initiative in 2003. After a successful pilot program in Jordan, educational partnerships are now underway in India and Egypt. Many American school districts could benefit from Cisco's ingenuity.
Occupy Wall Street has galvanized popular opinion, but now is not the time to hobble America's Blue Chip companies.