We can already see the next six months in American politics: Tit for tat. Blow for blow. You’re Richie Rich. You’re Jimmy Carter. This is what presidential elections have been about since 1800. The only difference is that we have YouTube instead of the Pony Express, so the noise is louder and more constant.
But discerning voters need to understand the deep philosophical distinctions between Mitt Romney and President Barack Obama even if they don’t lend themselves to campaign slogans or barbs.
Labels such as “conservative” and “liberal” are worn out. “Right-wing” doesn’t fit Romney, who describes himself as “severely conservative” but isn’t a wing nut. “Left-wing” is an inaccurate description of the president, whose most “leftist” initiative — Obamacare — is modeled on plans proposed by those noted Bolsheviks Bob Dole and Howard Baker.
A more useful distinction may be between venture capitalists and human capitalists.
Romney came up as a private-equity investor. Like his party, he believes in his heart that the way forward for the U.S. is to slash taxes for the wealthy even further so that they have more venture capital to invest in businesses.
Crisis of Capital
Obama came up as a community organizer. Like his party, he believes in his heart that a great nation must invest in human capital through education, health care and infrastructure.
The distinctions get more interesting when it comes to their strategies for creating jobs. Republicans are right that the U.S. needs to lower the corporate income tax rate, which in 2012 was the highest in the developed world. But cutting individual rates in 2001 did nothing for job creation; and by keeping taxes low on dividends, the Bush tax cuts inadvertently helped bring about a crisis of capital investment in U.S. manufacturing, the kind of investment that Republicans claim to champion.
Investment by U.S. companies in new plant and equipment for manufacturing was the lowest in the 2000s of any decade since records were first kept in the 1940s. The net stock of fixed assets in manufacturing grew by only 1.8 percent in the 2000s, versus 25.7 percent in the 1990s.
The venture-capital answer is to just cut taxes further and hope that the market will self-correct and this trend will reverse itself. The human-capital answer is to use the tax code to incentivize investment not just in plant and equipment, but in research and development and workforce training (where companies in the U.S. are investing about half as much as a share of gross domestic product as they did a decade ago).
Who can argue with R&D spending, the main engine of innovation? Both Obama and Romney are for making the R&D tax credit permanent. But Congress, after letting the R&D tax credit expire at the end of 2011, has yet to renew it. In 1992, the credit was the world’s most generous; by 2008, it was only the 24th most generous, and the rate of growth in business R&D spending has lagged that of many national competitors.
“Republicans have the view that if you cut taxes and don’t tie it to anything specific, you can still get real domestic development, but the last decade proves otherwise,” says Rob Atkinson of the nonpartisan Information Technology and Innovation Foundation. Atkinson favors what he calls a “new bargain” with business where taxpayers say “we’ll reward you with lower corporate taxes but you have to invest it in machinery, worker retraining and R&D.”
Getting R&D Right
U.S. companies have been the major drivers in R&D spending (the government’s share of total R&D, which was 26 percent in 2008, peaked in 1964 at 67 percent), but business R&D spending as a proportion of gross domestic product has stayed relatively flat in the U.S. over the last decade. Moreover, just as with capital investment, U.S. companies are spending more of their R&D money overseas: From 1998 to 2008, U.S. corporate R&D overseas expanded at more than 2 1/2 times the rate at home.
Why? Because venture interests aren’t national interests. In Steve Coll’s new book on Exxon/Mobil, former Chief Executive Officer Lee Raymond states the obvious when he says that oil companies are no longer American but global entities. Romney often accuses Obama of not standing up for the U.S. That’s rich coming from a candidate who would slash spending for education and scientific research for Americans to pay for tax cuts for global businesses that invest more and more overseas. Already, fiscal constraints have reduced federal spending on R&D to its lowest percentage of the budget in a half-century.
The rap on targeted investment is that it smacks of “picking winners and losers” or “industrial policy.” But the true industrial-policy advocates are the venture capitalists, who pick clean energy winners (or losers in the case of Solyndra LLC) if they are Democrats and dirty energy winners (through tax breaks for oil companies) if they are Republicans.
It’s the human capitalists who have the better argument, one based on investing in basic research, education and health care, the kind of things that spur long-term growth and competitiveness.
Last week brought a classic example of the differing approaches. The tussle over doubling interest rates for student loans (scheduled for July 1) was a controversy ginned up for the Obama campaign, but it was also an acid test. Democrats wanted to pay for the lower rate with a modest business tax; Republicans responded with plans to scuttle the preventive health-care part of Obamacare, despite much evidence of its efficacy for both people and budgets.
A campaign full of such debates — concocted by the parties or not — would be far preferable to the usual pabulum. That would help us come closer to understanding which capitalist tool is the right one for re-tooling the American economy.