Declaring War against Corporate America

by Inya Ivkovic, MA

The first 100 or so days into Barack Obama’s presidency, and already it feels as if the worst of the financial and credit crisis is
behind us. The culture of innovation and amazing resilience of free enterprise appear to have resurrected hope in our world. The first to spring to life, not surprisingly, were stock markets, reacting positively even when bad news was simply not as bad as it could have been. But is this enough to revert the pendulum, is it a mirage, or is there something more dangerous lurking underneath the surface?

Predicting economic “fortunes” in the past year or so has become a risky business, mostly due to Washington’s populist approach to dealing with the credit and financial crises. Obama’s “New Deal” may have become popular with ordinary Americans, but Corporate America vehemently begs to differ. In fact, Corporate America believes Washington has declared war against it.

Whenever a corporation seeks bankruptcy protection, secured bondholders are typically ranked ahead of unsecured creditors and common investors, as well as unions. But when Chrysler came knocking on the White House’s doors, the government decided to push the company’s unions, also perceived as the cement blocks around its neck, ahead of everyone, giving them the majority of Chrysler’s stock. Hedge funds tried to block that, but were quickly labeled as greedy and identified as the ones stalling the recovery process in the manufacturing sector. At that point, there was little to be done except to retreat, fearing even greater fallout from Washington’s bullying rhetoric. But that’s what you get for trying to fulfill your fiduciary responsibilities to your investors and for keeping Chrysler alive for far too long.

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If only this were where the story ends. During economic crises, regardless of their breadth and width, attacking businesses that are not only surviving, but doing better than most, could be perceived as in bad taste at best or, at worst, potentially detrimental to the entire recovery process. Alas, this was not a deterrent for the U.S. Justice Department’s top antitrust hounds to be unleashed on the U.S. top performing enterprises, joining the same EU pack that has slapped a $1.58-billion antitrust fine against Intel recently. But that’s what you get for being more innovative and capable than your competitors.

The U.S.’ number one competitive advantage is the fact that America is home to huge and stable international corporations. And it is not the manufacturing sector that is driving its economy, but the creation of new technologies, expertise in branding, and the ability to control the value chain from the design stage to assembly stage to sales and marketing stage. This is how a consumer can buy a Dell computer online in Canada that had its parts manufactured in China and assembled in India. The manufacturers’ margin in the supply chain could be between two percent and four percent, while the sales markup for Dell could range from 20% to 40%.

Can you guess then how much workers in China and India are paid compared to Dell employees in the U.S.? It doesn’t take a PhD in math to figure out that the best paying jobs are always in the country where a company is headquartered. Still, Washington appears to have something against this, so it has proposed changes to the tax system where home-based companies would not only face higher corporate and personal tax rates, but would also lose eligible tax deductions paid to host countries of their foreign subsidiaries. But that’s what you get for having the competitive advantage at home.

Granted, in any crisis, there will always be at least one group unhappy with measures taken to counteract an adverse business cycle. Pleasing every single segment of an economy has always been an exercise in futility. But here is what worries me to no end. I’m a realist who understands that the government needs to raise taxes to earn higher revenues to keep on subsidizing our ailing economy. And I understand that the playing field should be level for all.

However, being this antagonistic towards one’s own enterprises and their investments carries an underlying threat of potentially monumental proportions. After all, what is to stop U.S. enterprises from setting up shop somewhere else? Washington should remember that the U.S. is not the only so-called “stable” region in the world. There are plenty of others, such as Canada or countries of the European Union. Perhaps that’s where the American Dream could thrive again and perhaps that’s where the U.S. economic and political supremacy would meet its reluctant demise.