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Bring overseas dollars home

It is time to bring the dollars home.

One of the most discussed aspects of economic life in America is the amount of capital on U.S. corporate balance sheets. But according to research by Moody's, as much as half of U.S. companies' $1.24 trillion in cash balances is in the form of overseas earnings (between $500 billion and $700 billion). Much of this money is trapped, due to America's onerous 35 percent corporate tax rate. But this money wants to come home — and we need it to.

While the 2007-09 recession was dreadful, at least America was positioned to respond. Whether in the form of TARP, stimulus spending, accelerated money supply creation or bailouts for major auto companies, the U.S. was able to act. Though the responses were far from perfect, economists and others seem to agree that the financial crisis and its aftermath would have been worse but for the presence of decisive action by both the federal government and the Federal Reserve.

Unfortunately, America finds itself on the brink of yet another economic downturn. At the same time, virtually all levels of government are struggling simply to maintain current service levels, and state and local government spending cuts have generally become net drags on economic growth. Given the recent downgrading of U.S. debt by one credit agency, and ongoing interest in further spending cuts at the federal level, another 2009-like stimulus package is unlikely, despite the White House's apparent intention to pursue one. Meaningful reductions in already extremely low interest rates also appear unlikely.

In this context, it would be irresponsible not to take advantage of the available capital generated from business demand in various corners of the world. The sponsors of H.R. 1834, otherwise known as the Freedom to Invest Act of 2011, understand what is at stake. The bipartisan bill would change our tax laws to provide for a temporary reduction on taxes on overseas income earned by multinational companies headquartered here in the U.S. However, those benefits would be reduced substantially if companies taking advantage of this opportunity failed to maintain current employment levels.

For perspective: A repatriation holiday in 2004 brought nearly $362 billion back to the U.S. Given the amount of corporate profits abroad today, the newly proposed tax change could bring even more money back to these shores, potentially re-stimulating growth and allowing America to escape the jaws of another recession — and it could be done without adding a penny to the nation's $14.3 trillion debt.

Another recession would be terrible. Financial markets have yet to fully recover from the downturn, leaving many American households with diminished financial wealth and flexibility. The housing market has been mired in its own idiosyncratic recession, with the mantra "it's better to be a renter" spreading across the nation as if it were true. Worst of all, the baseline for the next recession would be an unemployment rate already above 9 percent. In December 2007, when the recession began, the nation's unemployment rate sat at just 5 percent.

Even before the most recent economic setbacks, which take the form of financial market volatility and correction and fears of sovereign default, the economic recovery was in trouble. A recent paper by Jeremy J. Nalewaik from the Federal Reserve concludes that economic output tends to transition to a slow-growth phase at the end of expansions before falling into recession. In other words, a slowing economy is a reasonably good predictor of recession — and the U.S. economy has slowed profoundly.

Although the U.S. economy expanded at a 3.8 percent annual rate from fall 2009 through summer 2010, it has averaged only about 1.6 percent growth since then. During the first and second quarters of 2011, annualized growth was just 0.4 percent and 1.3 percent, respectively, and many economists expect second quarter GDP to be revised downward due to a larger than expected trade gap. Some economists calculate that the U.S. economy is presently more than 15 percent below full output, by far the worst number since the Great Depression. The economy is now at stall speed.

There is no better time to bring $1 trillion home. The Freedom to Invest Act would help to forestall another recession, provide a needed kick-start to our economy, avoid worsening the nation's debt, and it won't cost taxpayers a dime.

Anirban Basu is an economist and chairman and CEO of Sage Policy Group in Baltimore. His e-mail is abasu@sagepolicy.com.

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