Chairman, Willett Advisors, LLC
President, Business Roundtable; Former Governor of Michigan (1991-2003, R-MI)
Member, Council of Economic Advisers, The White House
Senior Advisor, U.S. Global Development Lab, U.S. Agency for International Development
In conversation with Mira Patel, Senior Advisor at U.S. Global Development Lab, U.S. Agency for International Development, John Engler, President of Business Roundtable, Steven L. Rattner, Chairman of Willett Advisors, LLC, and Jay C. Shambaugh, Member of the White House Council of Economic Advisors, discuss the role of the U.S. government in fortifying economic competitiveness in international markets. The experts consider the competitive challenges confronting U.S. manufacturing businesses, how trade policies influence global competitiveness, the need for change in federal spending priorities, and the potential impacts of corporate tax reform.
PATEL: All right, welcome, everyone. Thank you for coming. Today we’re having a Council meeting on U.S. economic competitiveness. And I’d love to leap right into this conversation, but just wanted to remind everyone that this meeting is on the record and is being livestreamed on CFR.org.
Today we have three distinguished panelists.
Governor John Engler is the president of the Business Roundtable, which is an association of chief executive officers from leading U.S. corporations that have produced $7.4 trillion in annual revenue and employ over 16 million people. And he’s a former three-term governor of Michigan, and previously served as the president and CEO of the National Association of Manufacturers.
Steve Rattner is the chairman of Willett Advisors, which is an investment arm of Mayor Bloomberg’s private and philanthropic assets. And he previously served as a counselor to the secretary of the treasury, and led the Obama administration’s successful effort to restructure the auto industry.
And Jay Shambaugh is a member of the Council of Economic Advisers at the White House. And he’s currently on leave from George Washington University, where he’s a professor of economics and international affairs.
These issues have become prominent in the election debates as of late, both in the United States and around the world. And CEO—GE CEO Jeff Immelt actually recently laid out the challenges, saying big companies are distrusted, governments and global institutions are failing to address the world’s challenges, and globalization is being attacked as never before. The Council’s been focused on this through the Renewing America initiative, which reviews the role of government in creating conditions for a more competitive economy through education, workforce retraining, infrastructure, tax reform, and technological innovation. And we actually have the author of the latest book out of the Council, Ted Alden, here with us today, called “How America Stacks Up.” And copies of the book are available outside.
So to set the stage, let’s approach competitiveness through two frames. I think there’s the ability for companies to compete in the globalized economy, and a second way to think about competitiveness is the frame of nations, and in particular the competitive advantage of the United States as a business location. So what makes the U.S. an attractive investment for established companies? And how can we all better create conditions to build a resilient and productive economy, which will lead to better jobs and opportunities for the next generation?
Governor Engler, I’d like to start with you. If you could share with us, I would love your perspective on some of the competitive challenges that are currently facing U.S. manufacturers—whether it’s the dollar, worker skill levels, regulation—and in particular what you see and what BRT’s companies would need to make the U.S. a better place to invest.
ENGLER: Well, thank you, Mira. I think the number-one thing that Roundtable member companies would do if we could sort of start ticking off the priorities would be to first change the tax code. We haven’t adjusted the U.S. tax code since the 1980s, when we have a bipartisan agreement that came out of Congress and at that time gave us a highly competitive tax code, a corporate tax rate lower than the OECD nations by a significant amount. Also in the ’80s, we were just a few years into an R&D tax credit, which at the beginning of the ’80s was the best in the world. That today is, while now permanent thanks to the work of the Congress and the president at the end of last year, it still has diminished in its impact down to probably—I haven’t seen the latest rankings—25, 26 in terms of its efficacy and in terms of impacting R&D.
But the key thing is that we have more than $2 trillion trapped offshore that you’d like to bring home. We are unique among the industrialized nations in having a tax policy which directs you to keep your cash offshore. If you’re a German company and you earn money in the U.S., you pay your U.S. tax and you can take the money home or anywhere else in the world. If you’re a U.S. company and you earn money in Germany, you pay your tax in Germany, you can take it anywhere in the world except the U.S. If you bring it back to the U.S., the Treasury’s waiting with their hand out, wanting the differential on taxes, and that differential will vary from company to company.
So you’d fix the ability to bring foreign earnings home, you get the corporate rate competitive, and this could be done at a relatively modest cost. We’ve looked at—the corporate piece is not hard from a technical standpoint; it’s hard politically because large corporations aren’t in favor. You see them being sort of pilloried on all sides during this particular presidential year. So that by itself probably can’t get across the finish line, and there’s been, I think, a disposition at times to use that for different political purposes rather than just fixing the problem. But that is a key competitiveness.
I’d put right behind it, then, fixing immigration and fixing trade, and some of the other agenda items which we think all add up to competitiveness. It’s interesting that immigration is—you know, taxes and trade are part of what I’d call capital, but immigration is that human capital. And today—and you mentioned it in your opening comments—workforce and talent. There’s a global competition for talent, and we aren’t winning that one either, so.
PATEL: Steve, I would love to build on that, that trade issue. Based on your experience with the auto industry, how do you view trade and, in particular, the import competition that that creates for U.S. workers?
RATTNER: Look, I think—I think the cliché about trade is an accurate cliché, which is that it—properly done, it confers enormous benefits on the countries that participate in it as a whole, and brings with it significant negative consequences for people who are adversely affected by the changing mix of where things—where things get made.
And I would just say from my own personal experience, I’ve spent my whole career in services, mostly working with media and telecoms companies, and companies that are really not part of what we call the tradeable sector. And so, when I got involved with autos, it was a real eye-opener to me in many, many respects. And I could sort of spend the rest of the hour talking about it, which nobody wants me to do.
But one of the things that really—that really was a shock to me is the extent to which other companies—other countries, rather, have developed the expertise to produce the same things we produce just as well as we produce them, in terms of efficiency of labor and so on, but at much lower labor costs. And I can give you some numbers that are now somewhat out of date, but go back to when we were doing all this. But a typical O-line (ph)—when I say O-line (ph), I mean paid under the traditional compensation arrangements—worker at GM or Ford or Chrysler made about—before we restructured it, made about $65 an hour all in, about half cash wages and about half benefits. The non-unionized workers in the South, principally—although we introduced some lower wage points among the big three—made about half of that, also about half in cash and half in non-cash benefits. GM—not some other company, but GM—paid its workers in Mexico $7 ½ an hour, it paid its workers in China $4 ½ an hour, and it paid its workers in India a dollar an hour. And I’ve been to plants in China, and I’ve looked at the numbers in Mexico, and the fact is—and GM will tell you—that their productivity from those plants is just as high, if not higher in some cases, than it is here. And so it’s not a shock that if you look at the output from car factories in the U.S. versus Mexico over the last any period of time, but five, six, seven years, it’s gone up here, our industry has recovered, but it’s gone up much, much faster, and hiring has gone up much, much faster, in Mexico. And so that’s just a reality of life.
And I don’t have—there’s no magic bullet to change that. But what I think we—I think what we have to do is recognize a couple of things. One, that there are some sectors in which we’re going to be able to compete more effectively than others. And those, in my mind, would be ones with high skill qualities, high intellectual content. But even there, for example, they’re now assembling Learjets in Mexico and CitationJets in China, again, things that we never thought probably were going to happen. And secondly—so I think we have to recognize what we’re good at and what we’re not good at.
I think we have to do—I think we have to make sure we do the right things for the people who are left behind. And I think there, notwithstanding some very constructive proposals by the Obama administration and some constructive steps, which we can talk about, I think we have done far less for these workers that are displaced than is—than we should have. And I think we can see the consequences of that not only in the wage figures—and you look at what’s happening to wages of people in the manufacturing sector in this country, which have been going down in real terms pretty consistently—but you can also see it in our politics. And I don’t think I probably need to say any more about what I mean by all that. I think you can imagine it.
So I think trade—I think trade is an important part of our future. I think we have to be realistic about what we can achieve in manufacturing. I think we have to recognize that not all trade are things you make. Education can be trade, if somebody comes here from overseas to be educated. Health care can be trade, if somebody comes here from overseas to get treated at the Cleveland Clinic. And not try to create some unrealistic idea of what—of what the job composition of this country can look like going forward.
PATEL: Jay, do you want to respond, to the perspective of the president and the administration on this issue of competitiveness and what the White House is thinking in terms of bolstering our strength in that area?
SHAMBAUGH: Yeah. I mean, I think when—it’s funny. For me, especially, outside of my role right now at the White House but as an academic, the word “competitiveness” is always a little odd, I think, to international economists, because it seems to set the global economy up as very zero-sum as opposed to something where you think it benefits to all. And so I often think of it—and I think Steve just pointed out, talking about productivity—as more a game of productivity, of what are we doing to make the economy more productive.
And in that sense, it’s not that we’re trying to be more productive than Canada in any sense. It’s not that we care, looking across it, too. It’s we want to be more productive because being more productive is how you lift living standards over time.
And so, in that sense, I think it goes very quickly to the questions of what can you do to do that. And, you know, there are things in education you can do that lift skills, that make people more productive. When I look at the president’s proposal for community college for all, if you look back at economic history, the U.S. was the first place to do public education widely, the first place to do—to try to push people all the way through high school widely, and we had the best-educated workforce in the world. And we’ve kind of quit pushing on that lens. And if you got everybody into at least two years after high school, that would be the kind of thing that would actually fairly quickly lead to a more-educated workforce and to higher productivity, because you’d had that higher labor quality.
You’ve also got areas where you can do more on innovation. I think business tax reform is a big spot that you could try to make sure that you’re doing enough to have the right incentives for R&D, because that’s such a crucial part of improving innovation and things like that. Whether it’s also—you can have basic research that’s being funded by the government to try to do that, or it could be patent reform and things like that.
I think, personally, some of the stuff we’ve been doing recently on competition—not competition with other countries, but trying to make sure—there is a new executive order on trying to study competition, make sure that agencies are thinking about competitive landscapes of industries so that there’s more competition in there, more entry, so that new firms are getting into industries, because they’re the firms often that are innovating and, again, kind of pushing forward productivity.
But lastly—and I think this is the one that probably plays more to the business tax reform—is the question on investment. So one of the reasons productivity growth has been slow in the U.S. is because capital deepening has slowed down, and a lot of that is a hangover from the crisis still. That’s starting to fade away. But some of that also goes back to demand. And this is where it’s both demand in the U.S. needs to be growing fast enough, but you know, when I think about competitiveness, one of the things that always gets me is, you know, I want Canada to grow faster. I want nothing more than faster growth in Europe and faster growth in Japan because I think it’s—slow growth in Europe and Japan has actually been part of what has slowed down investment in the United States, because firms look not just at their own domestic base, but the world. And so I think all of those things would be ways we could push.
But I—just the last thing to say, as sort of Steve said, I think the notion that we do not do enough to catch the people that are getting hit by shocks, whether they’re trade shocks or technology shocks or just bad-luck shocks, I think is definitely true. And losing people out of the labor force is one of the worst things we can do for them as individuals, but for the economy, too.
PATEL: So if we view trade through the lens of enhancing the U.S. as a business location, does TPP hurt or help? Is it that—you had mentioned these innovative companies, they have better frameworks for doing their business. But then you could look at the downsides of, you know, Japanese companies being able to make far cheaper cars with Chinese auto parts.
SHAMBAUGH: I mean, I can say I think TPP unambiguously helps U.S. firms. I think it makes—it makes it easier for U.S. firms to export to a big and growing market.
I think one part of that that’s important is globalization is happening. That’s a fact. The question is, under what rules does globalization happen? And it is absolutely in our interest and U.S. firms’ interest to have globalization happen on the terms that we’re writing, as opposed to terms that we don’t have a hand in writing. And so, in that sense, I think, beyond the fact that there’s lots of stuff with trade facilitation and clearing out customs lags and things like that that just makes it easier for U.S. firms. U.S. agriculture benefits massively from TPP because U.S. ag is highly productive, and opening up markets to it does really well. So I think—I think you absolutely see a huge benefit from TPP.
RATTNER: But isn’t it—didn’t I just read—I think it was ITC came out with a study that said TPP—to the point about winners and losers, that TPP would benefit the economy as a whole all the ways you talked about, but that manufacturing—there would actually be fewer manufacturing jobs as a result of TPP than otherwise?
SHAMBAUGH: So I think there are two things that are important there.
The first is, when they run models like this, they assume full employment at the start and the finish, so if any sector grows a different sector has to shrink, and it’s almost just an automatic fact of the way you run the model. That’s not particularly helpful.
But I think, to that point in general, it is important to note that it’s a question of how fast is it growing. So they still have manufacturing growing and being bigger in the future than today, you know, regardless of TPP. It’s a question of a very small differential in growth rates.
But the last thing is they left out, frankly, a lot of the big benefits to trade that you see in some of the other academic studies on TPP, where better firms within a sector are going to do better because they can get to new markets. And that’s where you get more productivity growth out of trade, is the best firms are the ones that start exporting. They hire more workers; you’ve got more workers working at the places that have better managers, better technology, better capital; and that winds up being good.
So I think, on average, even the ITC study, that had limitations, said TPP is good for the U.S. I think the place that I would agree is any shock, whether it’s trade or technology, is going to have some reallocation. And that reallocation needs to be managed right, because if you don’t manage it right you wind up both with political issues, and you wind up just losing people and leaving them behind.
ENGLER: I think if you’re a high-tech economy such as we have, you put a great value, and we should put a greater value—and this agreement moves strongly in that direction—on protecting your intellectual property. If you’re going to make the investment in R&D—and our companies, just the Roundtable member companies, represent about two-thirds of all the private-sector R&D that’s done annually, so just the 200 companies have that big a footprint. But to continue to do that—and that’s sort of the fight within the TPP over biologics and the length of the protection because of the expense there and the investment, can you recover it if you can’t protect your patent rights beyond a certain period.
Well, we have the same thing in all kinds of aspects of manufacturing and all—and I think even in services, in software, and how we—and so this agreement breaks a lot of new ground in these areas, and it’s really important, and I think that’s been under-recognized. And it creates some mechanisms for resolving disputes when there’s an allegation that there has been a violation. So all of that is there and very helpful.
The other aspect about manufacturing, Steve, which has been sort of a bugaboo of mine since I was over at the National Association of Manufacturers, I think we’ve got a—we’ve talked to the Census Bureau about this, and it’s a great one for Commerce maybe to take up, but I don’t think we count very well anymore. I mean, the secretary of agriculture is here, and agriculture is growing in the United States. It’s an important part of our economy. There’s a lot fewer people on the farm, but there’s a whole lot of people in the agricultural world that are not only doing the science on the front end, but on the processing and the shipping and the marketing and all that on the back end.
Well, something similar has happened in manufacturing. In the old manufacturing plant that might have been four stories high, some of those floors were filled up with people who were doing engineering or they were doing marketing, they were doing sales. A lot of that’s been sourced today differently. They were running the transportation. Almost nobody’s doing their own transportation. FedEx will take care of all that for you. Well, that’s counted as a service. We don’t get to count that in the manufacturing sector. And I would argue that there’s a significant part of what is out there today as the service sector that is absolutely dependent on and integral to manufacturing, and in the old days would have been counted as manufacturing. So the—so the heavy job losses in manufacturing, no question there’s fewer people on factory floors, and robots are going to make that the case.
And to Steve’s point, I mean, the one thing that’s striking about auto plants, when I was governor, we—Michigan was—the first blow to Michigan’s auto industry, when I was a young legislator, was when General Motors said they were going to put the Saturn plant down in Tennessee. And then we went all of those years, until the 1990s, when we finally got two new auto plants put in Lansing, Michigan. And they tore down the old Oldsmobile factory that we used to build the Oldsmobile there. They discontinued the brand. They built two new plants, and one of them was their very successful Cadillac. But you were struck when you walked into that new plant, where are the people? There was nobody there. They were building a lot of cars, but the automation that had been put in that plant, that was how they were competing those wages.
And I remember also at the Manufacturers going to Alabama and—you know, I think Michigan in the ’70s and ’80s would have said, well, you can’t build cars in Alabama. I go down there, there’s 100,000-plus autoworkers in Alabama. What do they know about building cars? But that’s where the growth had been taking place. And so there’s been a lot of disruption, some domestic and some global.
The one thing that we can’t escape in all of this, if people are going to survive that disruption, then it’s how do we get the skills? And I would argue I think—I think Steve’s right that more could be done for people who are dislocated for trade. But frankly, more needs to be done for anybody who’s dislocated from a job, period. It’s not just trade, because technology has disrupted an awful lot of jobs, and that was U.S. technology disrupting a U.S. job. I mean, and so we don’t have the flexible workforce that we once prided ourselves because we’re not getting them retrained.
And one of the challenges there is that we used to be able to sop up a lot of fairly unskilled workers. Today’s economy can’t do that. And so, if you’re 50 years old and suddenly are out on the street with some skills that you learned over a 25-year period in a job, that might be not at all translatable to coding something or doing something in technology. And so we’ve got to rethink that.
And part of it, as you’re fighting poverty, is you got to turn the supply chain off. We got to do a lot better job with our K-12 system because we can’t have an America where 36 percent of the kids, after four years in a government school, are able to read proficiently. That’s what the number is today. That’s what America’s report card is: 36 percent. The other 64 (percent), guess what? They’re not going to do well, or they’re not going to do as well as they’re capable of doing. And when they hit upper grades, they’re the likeliest to drop out. If they manage to get through school and get enrolled in college, they’re not very likely to finish.
RATTNER: Look, I don’t—can I say—I don’t—I don’t disagree with any of that. I would just—I would just say that those hundred thousand or however many there were autoworkers who went from Michigan to Alabama are making about half as much as they were making back in Michigan. Now, we could—we could argue that, because of unions or whatever reason, they were overpaid in Michigan, and this is just the market working. But we do, again, have to recognize that this has real effects on people.
I’m not an expert on how job classifications are counted and categorized, but what I do know is that—and this may be a little surprising, because everybody reads stories about the manufacturing renaissance in America—that growth in—employment in manufacturing since the end of the recession has actually been slower than growth in overall jobs in America—i.e., manufacturing is losing share of employment. Manufacturing is also losing share of GDP. And I’m not here to be the guy who says the sky is falling, but I’m just trying to be realistic about what I think—what I think is achievable going forward, and make sure we don’t sort of go off and set priorities that are a bad use of government resources or private resources, or simply get people to expect things that can’t happen.
I wanted to just add one thing to your original list of things we should be doing, and I want to slightly disagree with you just to make this an interesting conversation.
RATTNER: And I think you’ve touched on much of it, but let me put it together.
I think the other place where a lot of work can and should be done, that would really help our competitiveness, would be on our federal spending priorities. We’ve basically been in a position where, since all the austerity stuff started seven or so years ago, we’ve been—essentially had very much across the board, I think I would argue, unthoughtful budget policy on the spending side. And the result is that the spending reductions or smaller increases that have occurred have come out of discretionary spending because we haven’t had really any consensus around addressing the entitlements program. And so things like R&D and infrastructure and education, things you mentioned—I don’t think—you may not have mentioned infrastructure, but I’m going to put that on the list if you didn’t—
ENGLER: It should be on the list. I didn’t get to it, but yeah.
RATTNER: Yeah. So all those things are places where I think the government has a role, and where I think the government for all the, again, obvious political reasons we’ve been dealing with, I think has been—has been derelict in its duty, and where I think it can play a much more positive force in enhancing our competitive position.
The one place I’m going to have to disagree with you is on corporate tax reform. So, one, I agree completely we have to have corporate tax reform. We are—we are not competitive. But the problem we have is that we’re in a kind of global race to the bottom. Every country is lowering its corporate tax rate. Even the U.K., I think, is down to 21 or 20 percent, depending upon how you classify it.
ENGLER: They’ll go to 18 (percent) is what’s in their current law for the out years.
RATTNER: OK. Thank you, right.
And so I think we have to think about, how do we—and so the—one of the things is that the share of corporate tax revenue as a percentage of total federal revenue has been going down, down, down, down, down. And so I think it gets back to a little bit of a fairness question of how do we ensure that all the participants in our society pay their fair share. I mean, we can cut our tax rate to 18 percent. We can cut it to 12 ½ percent, which is I think Ireland’s tax rate. I think Canada’s 4 percent. We can do all that. But at some point we’re then putting the burden on other people, and we have to find some middle ground that’s fairness.
And then the very small point that I would disagree with you about is the $2 trillion. It’s not ideal that the $2 trillion is sitting overseas, but I honestly don’t believe—for reasons we can talk about and debate—that it’s having a material effect on investment in this country, because what happens is Apple has all this cash trapped somewhere else, and so they go out and they borrow $5 billion in the U.S. to either give it back to their shareholders or build plants or whatever it is they’re going to do with it. Money is fungible. And while it’s a—while there’s some inefficiencies associated with the $2 trillion, I don’t think it’s on the top 10 list of things I worry about in terms of what’s holding back our competitive position.
ENGLER: Well, I would argue that, that being the case, then, why shouldn’t we let them hold the debt and we’ll keep the equity here, rather than the reverse, which is what we’ve got today? The equity’s out there and we get to borrow.
I do think—
RATTNER: What do you mean, equity’s out there?
ENGLER: Well, in other words, the 2 trillion (dollars), the real cash is there, and then Apple can borrow.
RATTNER: Yeah, but that’s—
ENGLER: I get it.
RATTNER: But that’s just sitting in a JPMorgan bank account in London. What’s the difference?
ENGLER: Here’s the difference, is that at some point, if I bring that home and I’ve got to plus that up—and let’s just use a 20 percent rate in the country where I earned it—I’ve got to pay 15 percent more, I’m going to do what Microsoft did. I’m going to—because if I compound that with the immigration problem, I can’t get my talent here, can’t get the money back, what are you telling me? Go to Vancouver, build your R&D center there with that cash so you don’t have to pay the extra 15 percent, and use the open immigration law to get the best talent in the world there. That’s our policy today, and that’s the rational decision based on the laws of the United States. That’s what we’re telling people. That’s not what I think we should be saying, but that is, in fact, our policy.
RATTNER: Yeah, I would go through it a little differently. I would say the reason they’re building a plant in Vancouver is because Canada as a 4 percent tax rate and we have a 35 percent tax rate. Again, I think the money can be moved around. I think the problem is our corporate tax rate has made it unattractive for people to build plants here. I think that you and I would agree on that.
SHAMBAUGH: And I think there is—there is a way, though, to also try to do this that doesn’t just encourage a race to the bottom purely, right? And I think there—so I think the kind of broad outlines the president put forward on business tax reform, one of them is you set some sort of minimum tax rate firms are paying abroad, and as long as they’re paying more than that you’re not paying the gap between 20 and 35 (percent). Well, first of all, you’d lower the 35 (percent) because you’d broaden the base. But also you would say locating somewhere with a 4 percent tax rate, we are going to collect the gap to that, but if you locate in a normal tax country then, as long as you pay your tax there, we’re not going to hit you here. And that would—could, in some sense, be the first move of many countries trying to set a standard, where you say everyone’s going to tax you on if you locate in a tax haven, but we’re not going to tax you on income in a normal country, and that can try to break the cycle. Because I agree, you don’t want to see corporate taxes just fall to zero as a share of the economy; you just want to make sure that it’s not an incentive not to locate production in the United States.
ENGLER: Well, actually, as the guy on the panel here who’s going to represent the working people, I would like to see it go to zero. I’d get rid of the corporate tax because, as the economic studies show, that’s a tax on labor. Where does the corporate burden go? It goes on—it goes on the worker. They bear the biggest brunt of the corporate tax. So it’s just a question—it’s just another way to collect taxes, but a(n) inefficient way which actually penalizes labor.
Now, interestingly, what the Europeans are up to, they say, well, look, U.S., if you’re not going to bring the money back home, let’s us look at this on a country-by-country basis and see if we can’t have a way to take a few of those dollars off the table; we’ll keep them in our treasuries. And that’s our—that’s our current fight right now, is that, you know, so we’re at some risk of that. I would—I just think the tax thing is a fairly easy one.
I want to—I want to spend a moment on the point that Steve raised, because this is where we’re in absolute violent agreement. And interestingly enough, it’s the one area where the two presidential—the two leading candidates, at least, you know, seem to be at least willing to talk about, and that’s infrastructure. And that’s one area where we’re dramatically underinvested as a nation. And, in fact, there’s a fairly large amount of that that has just a flat-out ROI on the existing proposition without additional—it doesn’t need federal subsides. Now, you often need a federal permit, and that sometimes is harder to get—easier to get a subsidy than a permit in some cases.
But it’s why you see the building trades going berserk over the UAW and the AFL-CIO kind of getting in bed with Tom Steyer, because they understand that on the radical environmental left they don’t want to build anything. They don’t want to put a shovel in the ground. They don’t want to—they don’t want to disturb any soil. But if you’re going to build a new bridge where there was an old bridge, why do we spend five years on an environmental permit? Build the bridge. But we’ve got work to do on our ports. We’ve got work to do on everything from, you know, certainly roads and bridges, which I think are the—actually the hardest one.
Right now, we have in the Congress a bill out of the House that would create a federally chartered corporation to run the air traffic control system. This is something that started actually—Vice President Gore was involved in this in the Clinton administration. It’s had bipartisan support and secretary of the treasury, supported by the air traffic controllers, the largest pilot union, and we’re not getting it done.
And Steve’s point is an interesting one because we—why isn’t it getting done? Well, we’ve got some people on the right who think, gee, could there be federal spending involved? (Laughter.) Well, I don’t know. We don’t—we think this a, you know, standup deal that, you know, a private—a federally chartered corporation is—it works. We’ve got appropriators who say, I’m going to lose power if I can’t appropriate the money, but you saw what happened when we had sequestration: they folded like a cheap suit on the air traffic control system when they closed a couple of towers. And then you’ve got some on the—kind of on the left saying, well, because you have a small AFL-CIO union that’s opposed, because their jobs might be disrupted by the new system, because we use the best World War II technology that we have available to us today. And we actually could upgrade that the way others in the country—in the world have done.
So we’re getting—and we had—we had one member who said, well, I’m not—I’m not for it because it might work. It’s really hard to argue against that logic. (Laughter.) OK, yeah, we think it’s going to work. But anyway, and the administration’s neutral because there is a—there is actually a split, although we think we’ve got more labor support for it than not. But that would probably be a $30 billion project. We get a brand new air traffic control system and complete it in three years. The FAA won’t get it done by 2020, and the National Academy says when they looked at it, if they build it the way they’re building it, when they get it done, it won’t do what was promised to do in the first place.
I mean, that’s the kind of stuff—we have to disrupt the status quo in the government to let us get at how we fix these things. The grid could be upgraded and hardened. That ought to be paid for by rate payers. But we can’t figure out how to get across five states with a power line. And Tom and I know that you tell the governors you got six months to work it out or a federal decision will take care of it, virtually all of us would—OK, we’ll get it done and figured out.
PATEL: Well, I always appreciate opening it up to questions when the panel’s in violent agreement about something.
SHAMBAUGH: Just to echo the violent agreement: strongly in favor of more infrastructure, just if that wasn’t clear.
PATEL: (Laughs.) Excellent.
So, at this time, I’ll invite members to join the conversation with their questions. And as a reminder, this meeting is on the record. Please wait for the microphone and speak directly into it. Stand, state your name and affiliation, and please limit yourself to one question. And it would be fantastic if you could keep it concise in order to allow as many members as possible to speak.
Q: Ted Alden from the Council on Foreign Relations.
Thank you for a very rich discussion. And I was actually delighted to see you come out on corporate tax and infrastructure, which in the book we just came out with and Mira mentioned, those are the two areas that we argued ought to be the easiest to resolve, but even those ones don’t turn out to be all that easy to resolve. I mean, education is hard—fixing education is hard—
ENGLER: I think a few of them actually can go together too, by the way, if you an have interest in them.
Q: Yeah, no, and they could—they could quite naturally.
And my question actually is for Jay Shambaugh and if anybody else wants to respond in. You said it’s good for us if other countries grow. No question about that. You know, if other countries are growing faster, that’s more opportunities. Do the sources of the growth matter? And this kind of gets into the currency and export driven—you know, China—the percentage of Chinese growth that’s coming out of domestic consumption is very low compared to other countries. Does it matter to us whether China or Germany are growing through exports or whether it’s domestically driven? Should we care about the sources of those growth?
SHAMBAUGH: So, the short answer is usually we don’t care as much, but right now we care more. And the reason for that is in a—in a world where you—where you see interest rates basically at zero around the world, and you see effectively every major central bank under their inflation target and trying to lift demand and lift growth, then there is this kind of—I don’t want to say predatory—but there is this aspect where demand is in finite supply, in a sense.
And when Germany runs a(n) almost 9 percent current account surplus, that means they’re making a lot more stuff than they’re consuming and investing, and it would be better for the world—certainly better for Europe—if they were to rebalance that to some extent. I don’t think this is the most important issue on Earth, but I think the places in the world that could lift global demand themselves, because there are large countries that have room to do so, it would be helpful if they did. And I think that’s the idea.
I think in normal times, you care a lot less because you assume that central banks, and interest rates, and exchange rates adjust across the world, and what you really care about is your own productivity growth, and a lot of the other stuff will wash out. I think there is a slightly special case now, is the issue.
RATTNER: All right, we’re done.
SHAMBAUGH: Yeah. (Chuckles.)
PATEL: Steve, I think you had something to say just before we leaped into this question period. Love to return to that, if you want to share.
RATTNER: I was going to—I was going to make—yeah, I was going to go back to corporate taxes and say, very simply, that I’d be perfectly happy to cut corporate taxes by any amount you want to as long as you offset it by eliminating the preference for dividends and capital gains, because if you want to—if your—if your argument is you want labor to be—why should labor and capital be taxes differently, that’s a place where we are at the moment: taxing labor and capital quite differently.
ENGLER: Well, we’ll have to have a long conversation about that, because there—but there are some opportunities to have a much more competitive tax code—a simpler tax code. And what we’ve got today is a mess and it’s way out of date.
RATTNER: Well, that’s all true. I mean, as I’ve said, we’ve not had comprehensive tax reform in 30 years and it’s like a garden: you have to keep tending it, and watering it, and weeding it. Otherwise, people find ways around it and we’re certainly at that place.
And great, a question in the middle.
Q: Thank you. Mohammed Khaishgi from The Resource Group.
I had a question as, I guess, in the context of the tech sector, where, I guess, there’s consensus that the innovation and the creativity that the U.S. represents with all of the—with all of the, I guess, assets it possesses is—cannot be rivaled anywhere else in the world, or at least most places in the world. To what extent—on the presumption that the tech sector provides some sort of a leading indication of what the mainstream economy is going to look like in the future—to what extent do you think that portends kind of—maybe positive thoughts about the competitiveness of the U.S. sort of going forward?
SHAMBAUGH: One thing I would say just quickly is, I mean, I think it is a positive sign. Like, if you sit there and say, what are the key components of productivity, innovation is one of them. And I think as we were talking beforehand, the U.S. tends to score very well on measures around that.
I think we’ve been studying a lot concerns about slower productivity growth at the CEA, and we always joke that, now if you were to go around Silicon Valley and tell people productivity growth has been low, they would look at you as if you’re insane and say, how is that possible? We’re creating so many new things constantly. And so, sometimes it takes a while for innovations in one space to spill more broadly across the economy. There was the famous quip in the late ’80s: I see computers everywhere, but the productivity statistics. And then, boy, they hit the productivity statistics. And so, at—you know, that’s the optimistic case is that some combination of hangover from the financial crisis and a number of other things has kept some of the great innovations from spilling more broadly. But I think it’s always dangerous to buy the optimistic case too wholeheartedly, and to always keep an eye on some of the other things you worry about.
ENGLER: Go ahead, Steve.
RATTNER: Well, I spend a fair amount of time out in the bay area and there’s no question that the tech sector is one of our enormous competitive strengths. And if you—if you look—if you look at all the core technology services that we all use and people around the world all use, the vast, vast, with a few—only a few exceptions, are American companies. And I think that can only be good for us.
But it leads me to a related point, which is—I also sort of learned in my auto experience, and I say to people—when people say, gee, it’s really great, you saved General Motors and all the stuff. And I say, well, we saved the companies, but I’m not as sure whether we saved the jobs. And they’re really two different things. And, you know, it’s great that General Motors is very successful, and makes cars all over the world, and is competitive. But I think what ultimately—what we ultimately care the most about are jobs here, and what ultimately drives our GDP are jobs here. And so, it’s not enough to have a great American company that’s competitive around the world against other foreign—against foreign companies. But if they’re not making and doing it here, then we really haven’t gained all that much in terms of what I think we’re really trying to accomplish.
ENGLER: And I think today, the technology of the car, I know it’s more expensive and greater cost for the technology than it is for the steel or the aluminum that’s in a car.
One of the other areas where I think there’s been a, you know, a bit of a disconnect, especially in recent years, we’ve just had three years where small business formation has fallen below small business closure. And small business has always been one of those little engines that would take that disruptive technology or that new idea and try to go blow something up. (Laughter.)
And if we’re—and we have—and what—something that hasn’t been said here today, but there is a massive regulatory overhang that has been created, you know, where—three years, four, I think, now, 80,000 plus pages of new regulations. So, I mean, we’re getting—we’re getting more government than we really want here. And in some cases, you know, some of the companies that maybe belong to the Roundtable, they can bake that into their cost of business. It’s expensive, but the small person says, I’m not even going to try; I’m getting out of here.
SHAMBAUGH: So, one thing—just to respond, because I completely agree: the concern, you know, we often refer to as business dynamism on the decline. I mean, one thing that is the case is when you look at the research, it’s been declining for 30 years. And that’s one of these trends that is so important to try to push back on because I agree entirely that if you don’t have enough startups, that does make it harder to get those innovations to pivot over. But I also think it’s a—it’s a longer trend than anything recent that we have to be thinking about pushing back on.
RATTNER: And I think it’s part of a maturing—there’s so many hands, I don’t want to say much—but I think it’s part of a maturing economy. In other words, who’s going to start a company to compete against Walmart or something like that? You’ve got very established companies. I just know that when I go to the Valley and to San Francisco, the dynamism, the entrepreneurship, the innovation is really extraordinary.
So, we’ll start in the back.
Q: Thea Lee with the AFL-CIO.
Thanks for an interesting discussion. And I think that the point that Ted raised and that Steve mentioned a little while ago is important, that the—what we aren’t really dealing with here is job creation in the United States, income distribution. And, you know, Jay, you said earlier that the key is productivity. But productivity’s been rising for a couple of decades and wages at the median level have not been keeping up—real wages. And so, that’s really a question of bargaining power and it’s a question of policies.
And I agree with all of you that, you know, infrastructure is a key and investment in infrastructure. But I think that you do come into a dilemma there with the tax issue. And if you say that the key thing, John, about, you know, that we need to do for competitiveness is to get—take corporate taxes to zero, how are we going to pay for the infrastructure that we need? Are we going to raise personal income taxes? Are we going to go to a value-added tax? You know, one of the things I think has been frustrating for the labor movement when we talk about corporate tax reform is this idea that you need revenue neutral or you need to cut taxes for corporations. And I agree with Steve: you need to figure out how everybody’s paying their fair share because we’re all using the resources that government provides. And neither education nor infrastructure is cheap. So, I guess I want to hear, you know, in terms of the tax reform, and competitiveness, and corporate taxes, how does that fit in with the burning need that we have to invest in the future?
And then I also think—I feel like you all have not discussed enough the issues about unfair trade practices and how other countries’ actions—whether it’s in currency manipulation or violation of labor standards and environmental standards—how that impacts the United States as we try to figure out how our businesses can succeed and create good jobs here in the United States.
ENGLER: I think—I’ll take a—take a shot at part of that just on the broader tax reform question first. We’ve never taken the position that we need to have some net reduction. What we needed and thought this was almost kind of a, you know, fiscally sustainable approach to do this where we’re, you know, willing to give up—and think it actually makes smart tax policy to give up certain elements of the tax code in order to get the rate down—get a flatter, broader base. And we—and we think that makes sense.
Unfortunately, a lot of the other people who want to go along for the ride have a little different view and don’t have any way to pay for the relief they’d like to have. But that’s not true with the corporate taxpayers. I think the job creation here, when you talk about funding infrastructure, I think there’s a lot of infrastructure that, frankly, I mean—I mean, I look at the Mississippi River. Half the commerce in the country can move on the Mississippi. There are already revenue streams that exist for shipping, for using locks and dams, for recreation purposes. We’ve got a(n) almost unlimited capacity right now, I think, as a country to absorb 40-, 50-year bonds on these kinds of projects. What we can’t do in this case get by the Army Corps and the laborious process to get things done.
Again, Governor Vilsack knows full well, but, I mean, there are recreation, agricultural, industrial, flood control. I mean, there’s all kinds of issues there. But that is a 30-year project that—it’s many, many billions of dollars, and—but we don’t have the way to manage these under the current dispersion of authority across the governments at the federal level and up and down. And I think you’re going to—it’s going to take new mechanisms, and we’re all going to have to stand up and say, you know, if we’re going to dredge a harbor somewhere, it was a harbor before, it’s still going to be a harbor, but by dredging it, we make it, you know, much more commercially successful. So, I just think we have not committed ourselves and had the national leadership. This goes back—this is not a—this is going back quite some time now. The governors are trying, but we don’t have the revenue sources at the state level alone. You need to get access to the federal tools.
PATEL: In the front.
Q: Thank you. I’m Paula Stern.
I feel like this conversation about competitiveness is kind of looking backwards even though we should be looking forward. And I’d like to ask you to think about productivity in the context of the gig economy, in the context of the fact that we’re in a digital age, we’re leaving the manufacturing age, and what it is that a national leadership should be doing to reshape both our retraining programs as well as deal with the safety nets that are actually required to assure that you get the productivity out of a gig economy. Could you address that?
I appreciate—the auto industry is very important and manufacturing’s very important, but the numbers are shrinking in the manufacturing sector. And I’d really love to hear the benefit of all three of y’all’s very thoughtful experience on what we should be doing going forward.
SHAMBAUGH: So, I mean—one thing I would just say really quickly, and it comes back to the previous question as well, is that productivity is a necessary but not sufficient condition for broadly shared rising living standards, right? So, you need more output per hour worked to make living standards go up, but to make sure they go up for everybody, you need to both make sure that that’s showing up in wages on the one hand, and you need to make sure that any kind of increase in productivity—whether it’s technological, trade, whatever it is—is going to have people following who are going to be shifting. They’re going to be reallocating, they’re going to be dislocated. And I think most of the research over the last 20 years has suggested that’s a place where we don’t do as well as many other countries. We don’t do as well on retraining. We don’t do as well at making sure people don’t fall out of the labor force. And I think those aspects are really important.
On the specifics of it being a digital economy or a gig economy, I think those do, you know, I think—I think those raise particular challenges in terms of how do you deal with them in terms of older style programs that were supposed to catch people. I think certainly things like, I mean, we put in the 2017 budget wage insurance that, you know, is the kind of thing where to try to make sure people who are dislocated find themselves back into a job, and even if it’s at a lower wage for a while, the government’s going to help, things like that. The gig economy itself, because it’s all self-employed, some of the programs, you know, what does it mean to be unemployed if you’re self-employed, things like that get—that I think get a lot more challenging and probably longer than I can talk about right now, but I’ll—
RATTNER: I’ll just add a couple points to the—first, what always strikes me when I do go out to the Valley area is that while I am—I’ll grossly exaggerate or generalize a bit, while I suspect that a huge percentage of the people who, you know, who are all very young, of course, who I’m interacting with are probably voting more on the Democratic side, they’re also almost libertarians. Their kind of view of life is if government would just get out of our way, you know, we would innovate and we would create this great world. So, they have—they have a somewhat different perspective.
So, I’m not going to repeat everything that Jay said, which I agree with. I would just add a couple—a couple of thoughts.
One is, I think, you know—I’m not sure what, you know—people talk about the gig economy meaning more the sharing economy, what—you know, being an Uber driver or this that, or they also mean the tech world. I’m not sure which one you’re—Paula, you’re talking about. But let me just—but I think when we talk about—
Q: I’m talking about the self-employed, the—
RATTNER: OK. Well, let me address that because that’s where I was going. I think when you talk about a world in which more people are self-employed, or are contract employees, or working part-time, which I think is, on balance, a real plus for the economy. It’s more flexibility. I don’t know how many of you ask an Uber driver when you get in, one, whether they like their job or not. But I do, and I think the vast preponderance would love the opportunity to be able to do that. But I do think it probably necessitates some updating of our—some of our labor rules around things like overtime and how contract employees are treated. I think it requires some updating or some rethinking of how benefits are conferred and making benefits more portable so that people can do a little of this and a little of that and still have healthcare, or still have a pension, or still have whatever it is they need for security. And again, I just—I think this is a place where there are a lot of good ideas around, but we just haven’t done very much.
ENGLER: I’ll put one piece in there that I think is essential, and that’s we spend $650 billion as a year on—as a nation every year on K-12 education. We are not getting our money’s worth. And we cannot have the lack of performance that we have there and hope to succeed in any of the things we’re talking about here. Because even if we get into infrastructure, which—one of the things that we didn’t mention, but I would mention it, it is a tremendous opportunity to do massive job training because we don’t have the workers to do the infrastructure that we’d like to build. They’re just not there and ready to go. We have 5 million—some say 5.8 million—jobs unfilled in the country today. And—you know, those are jobs that, for the most part, we don’t have the skills lined up with where the vacancies are.
Now, oddly enough, as a country, we seem to be less mobile today. Information moves everywhere, but people don’t seem to move very much like they once did. I heard one that got to ask this question about—a member of Congress from South Dakota who said, look, we’ve got all these jobs; why won’t they move there? Well, weather, maybe? You know, I don’t—you know, but that’s just they don’t want to—anyway.
Education, though, we—and I’ll give you a statistic: Detroit public schools, because they’ve been in the news lately, and I’m not there, but I try to—I follow a little bit, and 5 percent of the children who take the NAEP test, the national reading test on reading, 5 percent can read proficiently after the fourth grade. Ninety-five percent cannot. I mean, that’s just—that’s just stunning. But I gave you the number for the nation: 36 (percent)—I mean, 64 (percent) cannot. Nearly half the minority children in the country are living in poverty today. Well, what’s the way out? I mean, education has to be that ladder—has to be.
Q: Beverly Lindsay, University College London.
Governor, I actually have some follow ups to what you were just stating, and particularly with reference to Michigan and Pennsylvania, which I’m more familiar with. University of Michigan has some of the highest tuitions in the country of public universities and so does Penn State. But at the same time, as you mentioned, there’s a need to train or retrain people who will be—who are displaced workers. Students are graduating with 30(,000 dollars), 40(,000 dollars), 50(,000 dollars), $75,000 in debt from undergraduate degrees, 125,000 (dollars) or more with Ph.D. level degrees. How do you manage, or how do you balance the educational needs in terms of methods of payments and return to those who need retraining versus the 18- to 24-year-old traditional students or the 30- or 32-year-old earning the Ph.D.?
ENGLER: Well, you have to unbundle all of that. I’ve got a daughter who’s going to be a senior at Michigan next year, so I’m fully aware. I thought, you know, as a former governor, maybe there should be something—(laughter)—break. My break is because I’m out here now, I get to pay nonresident tuition—(laughter)—which is not very cheap at all.
But I think you’re—that the training, what we—what we need to do is be very clear that not everybody needs to go to college, first of all. And there’s tremendous jobs in the economy today. One of our staffers just in Iowa Falls runs a company. Tom, you may know the guy, but they do a lot of repair work on—they climb the poles for the electric wires. Those jobs, you—you know, high school degree, and training, and you’re making 65(,000 dollars) to $70,000 right away, almost. And when you get the kind of storms you’ll have, I mean, they can be making $8,000 on a weekend with the triple time. So, there’s tremendous—there’s lots of opportunities out there. And I think one of the challenges is we’ve got a lot of people that are ready to be trained to start at middle management. That’s probably not a realistic aspiration.
To the—to the cost, the other thing that I think—this is where I think employers are starting to really think this through, is that it’s—I think hiring in the future is going to be much more about competencies than it is about your degree, about what you studied, or where you studied at. And it’s you look at me and said, can you do this? And what standards? The American Welding Society’s very clear on what standards you need to follow to be a good welder and there’s an exit test at the end. You pass that, you can weld anywhere in the country. That’s not the case with a, you know, a degree from some school somewhere. There’s very different outcomes. Cyber is real hot today, so everybody’s got a cybersecurity program. But there’s vast differences in what gets taught in those programs and vast differences in the way they’re valued once people understand. And we’re working to bring transparency to that so that a student—I think the worst thing we could do with any student, whether displaced worker or young person, is have them go into a program because the advertisement is really good and said, man, come here, do this, and you’ll be that, only to find out the market has a zero interest in that or doesn’t value that program at that school.
SHAMBAUGH: If I could just follow up on that.
I think that’s why some of the work that people are trying to do here in terms of things like the college scorecard; to just try to get more information into the hands of people if it—to the extent that education and retraining have always been important but continue to be more important, to make sure that people know, if they’re going to take out a loan, that it’s actually going to turn into a higher income later on. And so, there are a lot—there’s trying to from Department of Ed—trying to get a lot more information out to people.
And, for that matter, if there are—if you’re running programs like, say, a cybersecurity program that no one who graduates ever gets a job and they never get anything from it, where you don’t give them access to loan programs in those—in those programs because you don’t want some student borrowing a bunch of money to go to a program and either not completing or not getting a job when they leave. Because that’s who we’re really worried about are the people who are going to either poor programs or who don’t graduate. And those are the people who really get hit hard, and we need to take steps to protect them. And we’re trying to.
PATEL: Yes, in the back.
Q: Governor Engler, Jack Janes from Johns Hopkins.
A couple of years ago, we did a program on the German apprenticeship program. And I know Mr. Rattner’s also familiar with Germany; I was actually going to direct my question to Mr. Shambaugh. There is a system in place in Germany that does pretty well here. And one of the key factors is that a company like Opel or Siemens is training of thousands of people regardless of where they flow around the country later on. I’m not sure that is the case with many American employers here. What are you doing, looking around in the White House, to see where people have a successful formula here and possibly being able to adopt it in the United States?
SHAMBAUGH: So, I think, frankly, we spend a lot of time looking around the world at—to try to see what has worked. I actually remember back when I was at CEA in 2009 and 2010 spending a lot of time looking at what choices Germany had made in terms of how they—what was happening with their workers. I do think, you know, this is one place where I think U.S., you know—every education system is different. The U.S. system is, so trying to entirely transplant a system from country to another may not work. But I think it’s one where at least many people, myself included, think U.S. community colleges can fill a similar role to what, or at least a parallel role to what you see in Germany in some cases.
I think it is, honestly, why you saw—I don’t know if it’s been one or two years ago—the president proposing to make community college free, and to try to—and we continue to try—both the vice president and his wife have been very involved trying to get involved with the community colleges, have them partner with firms and companies in the area to try to make sure that you’ve got people, A, able to get into these programs. It may not take them to a four-year degree. It may not be what they want. Or it may give them the avenue to one if it is what they want. But it will also open up a lot of opportunities for training. So, I think there is a lot of attention on that. And I think there’s a lot of scope to do more here, and that’s why it’s been in proposals. They haven’t passed. But I think it would be helpful.
RATTNER: I’ll just add an anecdote to buttress the point, but not necessarily solve the problem. But when Volkswagen opened a plant in Chattanooga about five or six years ago—2,000 jobs—they got thousands of applicants even though the jobs were only paying at the time $14 1/2 an hour, which is a—which is a working class wage, not a middle class wage. But what Volkswagen found was that the workers really weren’t qualified. They really couldn’t do the job, and they didn’t even—and nor could they even necessarily find the people to train them to do the job. So, the actually ended up bringing people from Germany to come over and train them to do the job, which I think illustrates the problem, although, as I said, doesn’t provide necessarily a solution.
ENGLER: Yeah, see, now that was exactly the part I was going to build on, that one of the things that U.S. business has got to do a far better job of is helping to explain to the trainers, to the educators what it is we need. And they have to do a better job of listening to that. And there’s plenty to go around here on both sides of not figuring this out.
We do know that for governors today in recruiting a plant to come to their state, more important than tax incentives or, you know, maybe not the new road or the railroad siding, but right up there with that is how—who’s going to work here, who’s going to train them? And I don’t—I don’t think there’s a deal that’s done where it doesn’t include the training program right alongside. And the training program in those cases are tell us what you need, and we’ll train the workers for you.
When Governor Perry was trying to lure Boeing, he thought they were—they were possibly willing to move to Texas. Well, to try to compete, he even went so far—and I thought this was highly creative—he said, which professors in which universities, because some of their jobs are very high tech, in the materials area matter most? We’ll try to bring those professors to this university so that we can set up the higher level programs to go right along with the training programs. Very creative strategy. They didn’t win the deal, but I had not heard of that done and I was envious I hadn’t thought of it. (Laughter.)
PATEL: Well, and with that, we will leave that at the last word.
Thank you so much to our panelists for the discussion and to all of you for your questions. (Applause.)