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Obama's Populism versus McCain's Free Trade

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In the wake of their recent presidential primary victories in Wisconsin, Barack Obama and John McCain appear destined to wage a fight for the office of President that not only will pit an advocate for "change" against a defender of many of George W. Bush's discredited policies (especially his war in Iraq and his tax cuts for the rich), but also pit a young, vibrant (perhaps cocky) 46 year old black upstart against a hot-headed, expletive-spewing war hero and old white man (previously disgraced as one of the Keating Five and now, perhaps, once again by revelations of past romantic ties with lobbyist Vicki Iseman, for whom he wrote letters to government regulators) who will be 72 years old by the time he's sworn into office. The election seems destined to become a choice between America's future and America's past.

With this contest in mind, it seems appropriate to contrast Senator Obama's economic populism and Senator McCain's steadfast defense of free trade in the context of a new book by David Cay Johnston, Free Lunch: How the Wealthiest Americans Enrich Themselves at Government Expense (and Stick You with the Bill).

America's highly productive work force has contributed greatly to the country's immense national wealth. According to David Cay Johnston, "For each dollar per person in 1980, the economy in 2006 generated $1.68." [p. 10] Yet, notwithstanding the wealth they've created, the average income of the bottom 90% of Americans actually has withered -- from a peak amount of $33,001 in 1973 to a modest $29,143 in 2005 (after adjustments for inflation).

If you look at the bottom 50% of the population, the picture is even worse. In 1980 their average income was a pathetically low $15,464. Yet, by 2004 it had fallen to $14,149. Sure, their taxes were lower in 2004. But all that did was reduce the amount of income they were losing each week from $25 to $15. The question is: "Why should they be losing income when the country's wealth has been growing by leaps and bounds?"

Mr. Johnston provides part of the answer: "Autoworkers have begun working under new contracts in 2007 that cut the wages by as much as $13 per hour. That is a pay cut of more than $26,000 annually. Compounding the pain are cuts in retirement benefits and health care. Together these throw workers who had reached the middle rungs of the income ladder back down into the lower half." [p. 44]

Such givebacks are not an accident. They come in the wake of "tens of thousands" of jobs lost to "the rigged game the politicians, and their donors, call 'free trade.'" [pp. 43-44]

Rigged game? Yes, in addition to the obvious inducement to relocate factories overseas -- the immense difference in wages and benefits that might cost a factory in Indiana $40 per hour for labor, but only 25 cents in China [p. 46] -- the U.S. Congress and U.S. Presidents, at the behest of corporate socialists and their lobbyists, have rigged the tax laws to subsidize the already lucrative business of shipping U.S. jobs abroad.

Mr. Johnston explains how it works in China. "After President Nixon's visit to China in 1972, American oil companies sought to explore there. Right off, they asked the Chinese to enact a corporate income tax."

"With a Chinese corporate income tax," argues Johnston, "the taxes they [U.S. corporations] owed to the United States would go down for two reasons." First, "American business profits earned overseas are not taxed so long as the money stays offshore." Second, "the United States allows American companies to reduce taxes on their profits by the amount they pay to foreign governments. This is not the usual deduction worth 35 cents on the dollar, but a dollar-for-dollar credit." [p. 40]

(Note: It was Andrew Mellon, in his capacity as Treasury Secretary during the 1920's, who "persuaded Congress to adjust the corporate income tax to give oil companies - and any other companies earning profits overseas - the dollar-for-dollar credit against taxes due to Washington." [p. 41])

Moreover, "the corporate income taxes paid in China are not like those in the United States. Instead of going for the general support of the government, money paid to Beijing is often used to benefit the company that pays. Taxes may finance a new road or a railroad spur or police presence and other services the company requires."

"But wait, there's more."

"A company with operations in the United States and another country can borrow money at home, deducting the interest and thus lowering its American taxes. At the same time it can earn interest on untaxed cash it keeps overseas. So when an American company closes a factory here and moves it to China, provided it meets some technical rules, it can deduct the interest charges on its United States tax return while building up profits offshore that may never be taxed." [pp. 41-42]

Thus, Mr. Johnston's sobering conclusion: "Under current government rules, destroying American jobs and creating jobs overseas is the single most effective way for manufacturing companies to increase profits. From the point of view of shareholders and executives, any policy other than moving equipment and jobs offshore as fast as possible is a waste of corporate assets." [p. 47]

As to the common assertion by free trade advocates that it brings new investment to the United States, Mr. Johnston notes that such investment is not helping to create jobs here. "The net effect of insourcing by foreign-owned companies [between 1990 and 2003] was the elimination of 3.4 million American jobs. While insourcing creates some jobs, the constant pressure to move even those jobs offshore is the inevitable result of how our current government rules encourage this labor arbitrage." [p. 47]

Speaking in Houston on February 19, 2008, Senator Obama declared: -- "I want to take away those tax breaks to companies that are shipping jobs overseas. We're going to give them to companies that invest right here in America." Senator McCain did not address the issue during his February 19 victory speech, but he's on record for asserting: "It sounds like a lot of fun to bash China and others, but free trade has been the engine of our economy. Free trade should be the continuing principle that guides this nation's economy." [2007 Republican debate in Dearborn, Michigan Oct 9, 2007]

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Walter C. Uhler is an independent scholar and freelance writer whose work has been published in numerous publications, including The Nation, the Bulletin of the Atomic Scientists, the Journal of Military History, the Moscow Times and the San (more...)
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