This year’s election will be all about putting corporate America on trial. We’ve seen that in the nonstop attacks on Bain Capital, and also in the heated anticorporate rhetoric of the Occupy movement.
And say this for the prosecution: There is no denying that corporate profits are reaching stratospheric levels while employment levels are essentially stagnant. If you own a piece of Home Depot or Whole Foods or Amazon, congratulations, 2011 was a banner year for you. But if you’re a typical American worker, well, that’s another story.
The Commerce Department recently found that personal incomes were $265 billion lower over the years 2008, 2009 and 2010 than had originally been assumed, while corporate profits were $343 billion higher. Indeed, corporate profits now represent 12.6 percent of GDP — the highest number in 60 years.
When corporate America thrives and households struggle, people start getting resentful and calling for more stringent regulation to curb the power of profit-hungry American firms. We’ve seen ambitious efforts to increase the regulation of telecommunications, the labor market, the environment and much else.
It turns out that this “anticorporate” agenda of ramping up regulation is actually pro-corporate. Stringent regulations tend to protect incumbent firms from their greatest fear — innovative start-ups that could drive them out of business.
To understand why, we first need a better sense of corporate America’s recent success. After the late 1990s tech bubble burst, firms started tightening their belts. They learned to exploit productivity-enhancing technologies and stepped up efforts to outsource and offshore non-core functions. A weak job market at home means that firms are in a position to drive a hard bargain on wages and salaries, which partly accounts for sluggish household income growth in recent years. Growing markets abroad helped U.S. firms grow even as America’s economy shrank.
In lieu of reinvesting the resulting profits, these businesses chose to stockpile cash. They could make big capital investments to expand production, or dream up entirely new products and processes — but instead they are sitting back cautiously on their money piles, waiting to see what new taxes and regulations are coming next.
Some, particularly on the right, argue that uncertainty about the policy environment under President Obama is crippling U.S. firms and making investors and executives gun-shy. But of course uncertainty about the broader economic climate was a fact of life long before 2008.
A more convincing hypothesis is that firms believe America’s future economic prospects are bleak and that investing domestically is simply a bad bet. Both of these perspectives have led business lobbyists and politicians across the spectrum to call for giving corporate America a boost. Government has dangled all kinds of goodies and giveaways — investment tax credits, employer-side payroll tax cuts, research and development subsidies, corporate tax holidays — in front of U.S. firms to get them to invest.
And of course the firms love it. Tax breaks and subsidies look suspiciously like free money. It’s true that taxes will eventually have to increase to pay for this windfall, but by then, today’s executives will have retired to Palm Beach or the sun-dappled Cayman Islands. Suckling corporations on tax breaks and subsidies leads to firms that can’t survive without tax breaks and subsidies — and that will say and do anything to postpone the day when Uncle Sam tries to wean them.
But nursing firms tenderly is only one way to spur firms to invest. A better way is to threaten them. Not with antitrust actions or NLRB rulings, though — instead, by making them face their strongest and most feared competitors in open combat.
Google, Apple and other technology giants, for example, have spent billions of dollars on software patents to defend themselves against pointless litigation. Shoestring entrepreneurs can’t even begin to do the same, so many new tech firms are never established. The Food and Drug Administration keeps innovators in the life sciences locked in regulatory hell, which is a huge boon to existing drug companies. We limit access to the public airwaves to a handful of big telecom companies, even though we have the technology to open this resource to upstarts. On a smaller scale, licensing restrictions limit choices for customers and employment opportunities for would-be small business owners.
The cost of complying is high. These regulations are a moat that surrounds corporate America and protects its profits.
Since 2006, the number of new “employer businesses” — start-ups that are more than a one-person operation — has fallen by 27 percent. This is toxic for economic growth. New firms are the ones that introduce entirely new ways of doing business. And according to the Kauffman Foundation, which studies entrepreneurship, start-ups are starting smaller and staying smaller. The weak economy is obviously part of the picture. But so is the decades-long creep of incumbent-protecting regulations, and the furious effort to tighten patent protections and other barriers to entry.
Unleashing entrepreneurs will force rich and powerful incumbents to spend money on inventing new products and processes that will help them maintain their edge. Lounging timidly on a mountain of cash will no longer be an option when new firms show up to compete and siphon away hefty profits.
An economy that invents more new products and processes will be a wealthier economy — and one that creates more jobs. Until we stop protecting established firms and inhibiting start-ups, we can expect slow growth, high unemployment and ever-increasing resentment toward corporate America.
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