Political Economy Vs. The Real Economy

By BARTLETT D. CLELAND
Posted 09/27/2010 - IBD

Sen. Harry Reid has decided to end consideration of a bill to stop a massive tax increase on all Americans effective January. Instead he will have the Senate take up the "Creating American Jobs and Ending Offshoring Act," which would, among other things, increase taxes and compliance costs for U.S. companies, forcing them to choose either raising prices or cutting jobs.



Reid wants a vote on this act to be one of the last, if not the last, action the Senate will take before hitting the road for a month of continuous campaigning. If he's successful, U.S. companies would face new penalties for appropriately serving a global market, the driving reason for establishing and then growing international locations.


Reid's move is a reminder that not only are Silicon Valley and Washington, D.C., about as far apart in the continental U.S. as they can be, but they're also about as far apart as they can be when it comes to growing the U.S. economy.


For instance, LinkedIn, the professional social networking site, is looking to grow by seeing and seizing opportunities around the world. The company primarily brings in revenue by licensing its key product, LinkedIn Recruiter, and by selling advertising, to the tune of about $7,000 per user. More people, greater revenue.


Having opened an office in London a couple years ago, the company found that European membership raced from 5 million users to 16 million, or 320% growth in two years, generating more revenue for this U.S. based company. Learning from its experience, and hopeful of more robust growth, LinkedIn is now seeking to open more international offices from Mumbai to Toronto, and perhaps soon Brazil to China.


However, apparently the current Congress sees this global expansion of a U.S. company as a threat, or perhaps they are merely cynically seeking to drum up a threat for short-term political opportunity — more votes in November.


But Congress' inaction is just as bad, allowing our economy to languish and jobs to stay elusive, even while our congressional leaders ignore tax laws that work against our economic well being.


Current tax law penalizes companies wanting to bring home the money they make abroad — money they want to bring to the U.S. to invest here, hire here, expand here. And there is a great deal of money. Hoover's indicates that in addition to the great volume of sales large high-tech multinationals make overseas, many small and medium-sized U.S. high-tech companies may earn up to 96% of their revenues abroad.


So U.S. technology companies are cash rich and want to invest in companies offering promising technologies. A potential flood of unleashed capital in the U.S.? Not likely.


Morgan Stanley reports that technology companies will instead be buying overseas companies with the money that Congress has practically barred them from returning to the U.S.


The result is that the money trapped overseas stays overseas, as do the jobs, the technology and the prosperity. But the economic effects do not end there, as the supporting bankers, lawyers, financiers and new management are sourced from abroad instead of here — more lost opportunity.


With U.S. cross-border technology acquisitions up 168% over the last year, the damage that Congress has wreaked on the economy is becoming clearer by the day.


How many more self-imposed obstacles can our innovation economy withstand? It's hard to tell, but with Congress allowing the research and development tax credit to expire, then declining to renew it, enacting laws that strand revenue overseas instead of allowing that financial capital to flow to the US, and now raising taxes and increasing costs for those US companies trying to compete globally, we may very well be near the point of no return.

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It never ceases to amaze me how clueless liberal Democrats are about the real economy.